June 14, 1935


William Lyon Mackenzie King (Leader of the Official Opposition)



I hope my right hon. friend will permit me to reply to that. He referred a little earlier to Mr. McFarland being on his back. May I say that the attitude of the opposition toward Mr. McFarland has been just as chivalrous as it has been towards himself. Since Mr. McFarland has been on his back we have been particularly careful to say nothing whatever which could reflect upon him in any way. May I

Grain Board-Mr. Bennett

say that when my right hon. friend was on his back, and when he was absent overseas, we were just as chivalrous with him as any opposition could possibly be with any leader of a government.


Richard Bedford Bennett (Prime Minister; President of the Privy Council; Secretary of State for External Affairs)

Conservative (1867-1942)


1 thank hon. members for the consideration extended but I shall have something to say about the chivalry shown in my absence. There are one or two matters to which I have not referred and what applies to myself applies with equal force to Mr. McFarland. Since I came home Mr. McFarland was in the city but no one suggested that the committee should meet. He was ready and available. But let us proceed to the second point which has been made. There is the evidence, a whole volume of it. It does not all deal with this; but at great length, with all the astuteness and the skill with which eminent counsel could ask questions, those questions were asked and answered; and at the end Mr. McFarland thanked the committee and told them what he was endeavouring to do and why. And the committee seemed to be in a generous mood, so far as their attitude of mind was concerned. The matter rested there.

Now it is said that this bill in an emergency should be temporary in its character. Well, there are some arguments which, if adduced by eminent men, are always listened to with that care which the authority of the source would demand. But there is not a member of this house who does not know that all legislation is subject to the right of repeal at the next session of parliament; and when hon. gentlemen in this house talk about a temporary measure it seems to me they are rather insulting the intelligence of the house when they do not point out that any government may proceed at the next session or even at that session to repeal an act that has been passed either during the current session or the session before. The power of parliament is untrammeled. The power of parliament to deal with matters of this kind may involve vested interests and they may be disregarded. There is no limit to the power of parliament in that regard. What is meant by anyone who stands in his place and suggests that the measure should be temporary? And hon. gentlemen in the next breath say that they will occupy the treasury benches in a few months. Well then, it will be their privilege to repeal this legislation.


William Lyon Mackenzie King (Leader of the Official Opposition)



Would the other house not have to assent also to action taken by this house before the measure could be repealed?


Richard Bedford Bennett (Prime Minister; President of the Privy Council; Secretary of State for External Affairs)

Conservative (1867-1942)


Of course, I take it that the right hon. gentleman will give me credit for knowing that parliament consists of the Senate, the House of Commons and the Governor General. But he cannot rely upon an assumption when he deals with a matter of that kind; he must face the fact that if, as he says, he proposes to occupy the treasury benches in a few short months it will be his privilege to repeal the legislation. That will be his privilege if he is thus situated; and when anyone suggests that the legislation should be temporary he is merely stating what is a commonplace to every student of the constitution, indeed every casual reader of it, namely, the right of parliament to repeal legislation which it has passed at a previous session.

Now I will deal with another matter. It has been said in this house that we should not have compulsory marketing of grain. I will not take the trouble to do more than state what Mr. McFarland mentioned last year, that by the operations that have been carried on by this organization the farmers of western Canada have profited to an extent variously estimated. The question was asked as to how much and he said that different figures had been mentioned, but he suggested that it was probably not less than $100,000,000, though some have said not less than $200,000,000. However, let us leave that for the moment. It is sufficient to bear in mind that I gave the average price received this year as 81 cents as against 64 the year before. I mention that because it has a direct bearing on what has been said. Now I put this to the house. With 225,000,000 bushels at the present time, with a carryover estimated by the hon. member for Macdonald at 170,000,000 bushels, and with a crop that promises at the moment to be some 400,000,000 bushels, as stated by one hon. gentleman yesterday, you must decide one of two things: Shall you have the orderly marketing of that grain, or shall you gratify the exploitation ambitions of certain gentlemen and have a fire sale, throwing it on the market? If you throw on the market the carryover you have, it at once affects your new crop. How are you going to fix the price of the new crop? Must it not be on the basis of making an initial payment, so that the value of the new crop may ultimately be determined by what can be secured for it? And must not all be treated alike, except with respect to sales that may be made domestically at the mills and matters of that sort? Does it not sound reasonable to say that cooperation in this instance means that all must unite together for the common good,

Grain Board-Mr. Bennett

bill. I am therefore quite willing that hon. gentlemen who accede to the second reading of this bill should do so without sacrifice of their rights. If they desire on the third reading to vote against this measure, I shall certainly be glad to afford them an opportunity to do so. I can only add that while the bill can go to a committee, I believe it is said, if once more I might emulate the example of the hon. member for Shelbume-Yarmouth, that the suggestion came from the ex-crown prince of Saskatchewan. But be that as it may, the suggestion is not unworthy of consideration, and when the bill has passed as a matter of form its second reading, I shall move that it go to a select committee of nine members.

I have trespassed somewhat longer than I should on the time of this house in reply, but I want to make clear to all the world the fact that notwithstanding all the discussion that has taken place here during the last few days, so far as this government is concerned, whether its life be long or short, it will not permit bargain sales of Canadian wheat to be made to gratify the ambitions and exploitation tendencies of speculators in any part of the world.


William Lyon Mackenzie King (Leader of the Official Opposition)



With regard to one remark that the Prime Minister made at the close, I do not wish there to be any misunderstanding. I did not quite understand the significance of his reference to some suggestion made by the ex-crown prince, but may I say to him that when the resolution first appeared upon the order paper which was early in March last the position that the Liberal opposition took with respect to it or was going to ask the house to take-and that is three months ago-is the position we have asked it to take in the last few days, namely that of having the bill referred to a committee.

Motion agreed to and bill read the second time.


Richard Bedford Bennett (Prime Minister; President of the Privy Council; Secretary of State for External Affairs)

Conservative (1867-1942)


I move that the bill be referred to a select committee of nine members, composed as follows:

Messrs. Bennett, Alberta; Perley, Saskatchewan; Willis, Manitoba; Porteous, Ontario; Gobeil, Quebec;-

I think that makes five as far as we are concerned, and:

-Ralston; Stewart (Edmonton); Vallance and Lucas.


Motion agreed to.


Hon. C. H. CAHAN (Secretary of State) moved the second reading of Bill No. 85, to amend the Companies Act, 1934. He said: The revision of the Companies Act was commenced about September, 1933, preparatory to the submission of the draft of a new act to the interprovincial conference, which assembled at Ottawa on January 17, 1934. The printed draft of a new bill, as then prepared, was presented to the representatives of the provincial governments who attended that conference from January 17 to 19 inclusive, and, at the request of the attorneys-general of the provinces, the further consideration of this draft bill was postponed till March 1, 1934. During that period the provincial governments were to prepare and forward any suggested amendments to the bill as first prepared. Between January 19, 1934, and April 26, 1934, when the new bill was introduced to this house, printed copies of the proposed bill were widely circulated throughout Canada to economists, accountants, lawyers, universities, companies and corporations; and, after due consideration of all relevant suggestions and their incorporation into the draft bill, a bill intituled An Act Respecting Dominion Companies was introduced to this house on April 26, 1934. This bill was enacted as The Companies Act, 1934 on June 28, 1934. Three months were then allowed to all companies to re-adjust their accounting systems to conform with the requirements of the new act, which came into force by proclamation on October 1, 1934. In the meantime, on February 2, 1934, a select special committee of the House of Commons was appointed by resolution of the house to enquire into and report upon certain matters. By order of His Excellency the Governor General in council, dated July 7, 1934, the eleven members of said select special committee were appointed as a royal commission to continue, complete and report on the enquiry ordered by the House of Commons on February 2, 1934. It is clear, I think, that the resolution of the House of Commons of February 2, 1934, appointing the select special committee, did not authorize the committee to report upon the dominion companies acts, which were then under the consideration of the representatives of the provincial governments, who had participated in the interprovincial conference of January 17 to January 19 inclusive. It is also clear, I think, that neither the order in council, P.C. 1461 of July 7, 1934, appointing the royal commission, Companies Act-Mr. Cahan nor the terms of the royal commission which issued upon said order, conferred any specific authority to investigate, consider or report upon proposed amendments to the Companies Act, 1934. So far as I, as Secretary of State having supervision of the administration of the dominion companies acts, was concerned, I had no knowledge or notice that an enquiry into the terms of those acts or into the administration of those acts was proceeding. So far as the evidence submitted with the report of that royal commission discloses, no general enquiry was made by the original committee of this house, nor by the royal commission, which succeeded to the work of the house committee. I was surprised, therefore, when the report was submitted to the Minister of Trade and Commerce and laid on the table of this house, to find incorporated therein a long list of proposed amendments to The Companies Act, 1934, of the Dominion of Canada. I am very confident that if it had been known that the committee had undertaken such a work of revision even without express authority, many representatives of Canadian companies would have sought leave to appear before the commission for the purpose of making representations on their behalf, which would not be entirely consistent with the recommendations of the commission. In order that these recommendations may be considered fully by this house, this bill has been prepared and is now moved for second reading. But I am authorized to state on behalf of the government that each and every member on this side of the house is free to approve or to oppose each and every section of this bill and to move any amendments thereto which may be deemed advisable or expedient. The bill is placed before the house and it is wide open for consideration by all members. I propose, therefore, to consider in sequence the recommendations of the royal commission on price spreads as shown in the summary to the report of the commission and to direct attention to the corresponding provisions of this bill in order that the house may have before it a clear statement of each and every recommendation made and a statement. by reference to the bill, of the extent to which these recommendations have been embodied in the terms of the bill. The first recommendation for an amendment to the Dominion 'Companies Act was the abolition of shares of no par value or, in the alternative, a requirement that the full consideration received for no par value shares be credited to the capital account. In con-92582-232 sidering the proposal to abolish no par value shares it was ascertained that measures to make that recommendation effective would compel the reorganization of the capital structures of a large number of dominion companies at present engaged1 in industrial and commercial pursuits. If the house or any member so desires I will lay on the table Of the house later the names of some hundreds of these companies that are actively operating from day to day and whose interests are vitally concerned with the summary abolition of no par value shares.


James Lorimer Ilsley



Do I understand that there are some hundreds of dominion companies that have distributable surpluses?

Mr. OABAiN: But please let me get down to the question of distributable surpluses. My hon. friend will have ample opportunity to discuss every phase of the matter. The alternative that is required is that the full consideration received fo.r no par value shares should be credited to capital account, and I shall deal with that in a moment.

Evils may arise, and evils do arise, in connection with all forms of corporate ventures. In my personal experience in the Department of the Secretary of State it would appear that no par value shares, under a strict system of accounting, such as was devised by expert accountants all over Canada and incorporated in the Companies Act, 1934, to which I fear careful attention has not been given either by the commission or the committee, are in fact as clean and as little deceptive as any class of shares issued to the public in this or any other country.

This bill, however, contains provisions in partial compliance with the alternative proposal. Subsection 7 of section 12 of the existing act will be repealed by section 4 of this bill, and hereafter no part of the consideration received by a company in respect of the issue of no par value shares may be so set aside, except it be provided in the original contract for subscription for such shares that a part thereof not exceeding twenty-five per cent may be set aside as distributable surplus. Then subsection 9 of section 12 of the existing act, which permitted directors at any time, with the sanction of a vote of two-thirds of the shareholders, to set aside as distributable surplus a part of the consideration received for the issue of no par value shares, is repealed by section 5 of this bill. Nevertheless it should be noticed that the repealed subsection only permitted such setting aside of such consideration as distributable surplus by the issue of supplementary letters patent, when the

Companies Act-Mr. Cahan

Secretary of State was satisfied as to the expediency and bona fide character of the proposal, and that the rights and interests of creditors were duly protected. I can assure hon. gentlemen that since I assumed the administration of the Companies Act no distributable surplus has been set aside under the section it is now proposed to repeal where the interest of any creditor was affected in the slightest degree, except when the consent in writing of that creditor was given to the setting aside; nor has such setting aside been allowed in respect of any fixed assets nor in any case in which there were not available cash or liquid assets for the purpose of being set aside. Iu that connection I am glad to note that of all the companies to which the report refers not a single exception or criticism is taken with respect to any company incorporated since August, 1930. I have not known, therefore, of any supplementary letters patent issued since August, 1930, giving rise to any injustice or any complaint. Nevertheless this bill, if enacted, will repeal subsection 9 of section 12 of the act, and it will be a matter for the consideration of the house whether, in view of the very severe and stringent restrictions which by the revision of 1934 have been placed upon the setting aside under subsection 9 of section 12 of the present act, the proposed repeal of subsection 9 should be carried into effect.

The second recommendation of the report is that all premiums from the sale of par stock should be placed in the capital or nondistributable account. The consideration, to the extent of 100 cents on the dollar, received from the issue of shares of capital stock having par value, is capital. I do not know, and I have examined the evidence to find out but I have been unable to ascertain, just what evil in fact the committee had in view in making that recommendation, because in my experience I have known of no evils resulting from the issue of such shares at a premium. In fact under the law as it prevails in Canada, and as it has been administered by companies under my personal advice and counsel, the premium on an issue of new shares represents money that is actually due to existing shareholders. It represents a premium upon a new participation in the assets of the company and therefore, in justice to existing shareholders and in accordance with English law, which I think our courts follow, if such shares are really valued at a premium they should first be offered to existing shareholders, to whom such premium belongs, inasmuch as in equity it represents an accretion in value of the

existing assets which are the property of the existing shareholders. No effect is given in this bill to this second recommendation.

The third recommendation is as follows:

3. All increases in surplus or reserves which result from an increase in asset values (as a consequence of write-ups, appraisals, etc) should be regarded as capital surplus; that is, incapable of having dividends charged against them.

I should certainly advise a client of mine that such is the law at present as embodied in the Companies Act, 1934, and the English common law which applies to the administration of that act, but nevertheless in order to carry out this recommendation of the report this bill proposes to enact two amendments as follows:

Section 12 of this bill, to which I shall later refer in another connection; and section 17 of this bill, which amends section 112, subsection (2), clause (g), and subsection (3) clause (c), both of which relate to the preparation of the balance sheet of the company which is submitted to the shareholders.

The fourth recommendation is as follows:

4. Companies should be incorporated only for activities Which they intend seriously to pursue at the time of incorporation. They should be prevented from engaging in activities not directly related to those for which they were incorporated, unless they have previously secured,-

(a) approval of the shareholders, and

(b) supplementary letters patent.

I think that that recommendation is carefully considered and carried into effect in respect to the administration of the present act. In a complicated code such as company law you must leave some discretion to the administration in dealing with exceptional cases which arise, but in order to give effect to this fourth recommendation we have proposed in this bill section 2 and 3, which read as follows:

2, Section five of the said act is amended by adding thereto the following subsections: -

"(4) Nothing in this part shall be construed' to authorize the incorporation of any company for any purposes or objects other than those which it is intended the company shall actively pursue as set forth in the letters patent of the company.

(5) If any company in the opinion of the Secretary of State-

(a) carries on any business which is not within the scope or the purposes or objects set forth in the letters patent or supplementary letters patent, or

(b) exercises or professes to exercise any powers which are not truly ancillary or necessarily incidental to the purposes or objects set forth in the letters patent or supplementary letters patent, or

(c) exercises or professes to exercise any powers expressly excluded by the letters patent or supplementary letters patent,

Companies Act-Mr. Cahan

such company shall be liable to be wound up under the provisions of the Winding-Up Act as if it had become insolvent, and the Attorney General of Canada may, upon receipt of a certificate of the Secretary of State setting forth his opinion as in this section provided, apply to a court of competent jurisdiction for an order that the company be wound up."

I think that that, with section 3 of the bill, gives very complete control. Section 3 reads:

3. Paragraph (b) of subsection one of section seven of the said act is repealed and the following is substituted therefor:-

"(b) The purposes for which incorporation is sought which shall be limited to the purposes and objects which it is intended that the company shall actively pursue."

So with respect to the application for letters patent and with regard to the granting of letters patent this recommendation is carried into very full effect. But I would remind the house that the dominion parliament is not the only legislative body in Canada which controls the incorporation of companies. It has been decided by the privy council that the grant of letters patent by the crown in the province of Quebec gives to the company the power to carry on every and any activitiy which is within the legislative competence of the province of Quebec, the same as if the company were a private person or individual, and other provincial legislatures have taken advantage of this decision of the privy council to the effect that the crown in the right of the province in Quebec is authorized to grant such charters. Other provincial legislatures by their own legislation have conferred upon their companies distinctly and expressly the same right as an individual would possess.

The fifth recommendation is as follows:

5. A company's annual statement, together with the auditor's report should be required to be published in the daily press and in The Canada Gazette, in such a way as to ensure the widest publicity.

This recommendation I have not felt free to incorporate in the bill now before the house. Under the present law every shareholder and every bondholder is entitled to receive an annual statement, and some amendment has been suggested to section 16 of the eixsting act for widening its scope. But there are approximately ten thousand dominion companies in active operation and we estimate, although we have not the particulars with regard to provincial companies, that there are about thirty thousand companies in active operation throughout the Dominion of Canada even in these days of depression, of which approximately one-third are dominion companies. The advertising of the annual statement of each of these companies in statutory form in the Canada Gazette would' require at least one page of the Gazette for one company, and at the lowest rates at which the King's Printer can economically operate the Gazette, the charge would be $50 per page. The Canada Gazette now consists of approximately 2,500 pages per year, and it is becoming so extensive that I dioubt if anybody ever reads it. But this recommendation would require the publication of ten thousand extra pages of the Gazette each year, and for an English version alone we would have to charge the companies all told $500,000, and if you insist upon publication in both the English Gazette and the French Gazette we would have to double that amount, but I am assuming that if this recommendation were put into effect parliament might be content with one publication either in French or in English.

To publish that same statement in the daily press would cost each company at the very least $150 for each such publication. At the rates charged by the daily press in many cases it would run up to $200 or $250 for each publication. Assuming an average of $150 the publication in the daily press would impose an annual burden upon these companies of SI,500.000. I can see no reason why, in these times of stress and strain, when dominion companies are subject to federal, provincial and municipal taxation, we should compel them to expend $2,000,000 per year upon such publicity, when any person who is really interested in. the affairs of the company can obtain all the information in printed form at the cost of an envelope, a piece of writing paper and a three cent stamp.

The sixth and seventh recommendations are carried into effect, in part, by section 19 of the bill which provides that a copy of every balance sheet shall be filed with the Secretary of State, where it is available to everyone.

The eighth recommendation is that annual statements should be given in more detail than at present and should include information under the following headings:

(a) Fixed and intangible assets to be given m more detail than at present;

(b) Investments and securities-nature, and market value;

(c) Inventories-so as to show raw materials in process of manufacture;

(d) Accounts and notes receivable-in such a form as to make a distinction between current and overdue and doubtful accounts;

(e) Executive salaries and bonuses-so as to show the number of executives and' the total amount paid;

(f) The amount, if any, by which fixed assets

(including goodwill and other intangibles), have been written up. .

Companies Act-Mr. Cahan

I am doubtful if the author of these recommendations has considered carefully the express terms of the Companies Act, 1934, which requires more detailed accounting than any companies act of which I have knowledge. Nevertheless, in section 17 of the bill we have proposed certain amendments to the existing act. Section 17 reads:

Subsections two and three of section one hundred and twelve of the said act are repealed and the following are substituted therefor:-

"(2) Every balance sheet shall be drawn up so as to distinguish severally at least the following classes of assets and liabilities, namely:-*

(a) cash;

(b) debts owing to the company from its directors, officers or shareholders respectively;

This is a re-enactment of the present provision.

(c) other debts owing by the company-

That should be " to the company."

[DOT]-including accounts and bills receivable in such form as to distinguish between current and non-current accounts in all cases in which the estimated loss is not provided for;

I can see no reason why the shareholders would desire to go into individual accounts so long as the statement distinguishes between current and non-current accounts. This section of the bill has been taken from the corresponding section of the Bank Act of Canada which is very precise and definite. The section continues:

(d) inventory, if any, stating the basis of valuation adopted and the manner in which such value has been determined in respect of various subdivisions of such inventory;

The words " in respect of various subdivisions of such inventory " are new. I continue:

(e) investments and securities, if any, stating the nature and the market value thereof in case such market value is readily ascertainable.

I do not think it is possible to carry out the recommendation more completely because many companies own securities of other companies, operating industrially in connection with their own, with respect to which there is no way of determining the market value. If it is a subsidiary company the present act provides that the consolidated balance sheet must show with great precision and clarity the financial standing of the subsidiary companies. If its shares are on the stock exchange the market value can be ascertained, but in other cases it cannot be readily ascertained. I quote:

(f) expenditure made on account of future business, if any;

(g) lands, buildings and plant, stating the basis of valuation, whether cost or otherwise,

and, if valued on the basis of appraisal, the date of appraisal and the name of the appraiser and the amount, if any, by which the value of such assets has been written up;

We have added the words, "and the amount, if any, by which the value of such assets has been written up." I have incorporated this recommendation but I do not think it can be carried into practical effect. During the revision of 1934 this suggestion was definitely brought before us and accounting firms and associations said that it would be impossible to carry it into effect unless it were limited to a term of years. Many of these companies have been in operation for twenty, thirty and forty years and during that period their fixed assets have been accumulated by the acquisition of property, the construction of new buildings, the restoration of old buildings, investments in new machinery and replacements of old machinery. From year to year these companies have set aside a certain portion of their incomes to cover depreciation. The accountants advise that in the case of a company which has been operating over a term of years it would be absolutely impossible to ascertain the amounts by which the value of such assets had been written up, that is, by which they have been appreciated. In many cases they are properly appreciated by the purchase of new fixed assets or the replacements of old fixed assets which are worn out. The accounts which have been kept hitherto under the provisions of the Dominion Companies Act do not permit of a satisfactory investigation. The accountants protested very strongly against the incorporation of such a provision in the 1934 revision as they claim that no conscientious auditor could give a certificate of that kind. I have incorporated in this bill the full recommendation, but I suggest that hon. members should consider whether it should not be limited to writings up within a term of three or four years, which would be ascertainable. In fact under the present amendment we are compelling such a system of accounting as will give very clearly and definitely either in the prospectus or the balance sheet the full particulars required here. I should like hon. members to consider in committee as to whether or not this should not be restricted to a term of three or four years. Clause (c) of subsection 3 of section 112 provides:

(c) If it is shown as a separate item in or is otherwise ascertainable from the books of the company, or from any contract for the sale or purchase of any property, the amount of the goodwill, franchises, patents, copyrights, trade marks, leases, contracts and licences as so shown or ascertained-*

Companies Act-Mr. Cahan

We have added the words:

-and the amount, if any, by which the value of any such assets has been written up.

I still think with regard to that item that there should foe fixed a term of years, because companies which have been operating for twenty-five, thirty or forty years, with writings-up from year to year, by acquisition of new patents, franchises, trade marks, leases and contracts, which such companies are writing off to a certain extent from year to year when the returns are good, would require such a complicated system of accounting as to render this clause impracticable. Therefore, if it is desired to give effect to a recommendation of that extent, I still think the house should consider whether it should not be restricted to a term of years.

We have not given effect to the clause (c) of the recommendations "so as to show raw materials in process of manufacture." Large industrial companies operating in several different localities allege that they would require to cease operations for several weeks in order to make accurate statements in compliance with this recommendation. Moreover, wo. see no good reason why such companies should be compelled to disclose at any time to wholesale vendors of the raw materials, which any particular industry consumes, whether its stocks of any raw material are heavy or low, as such information could only prove valuable to the speculators in the wholesale trade in such materials, and we all know that there is a speculative market in all the basic raw materials which enter into the manufacturing industry.

As to the recommendation in clause (e) for the disclosure of executive salaries and bonuses, we have, I think, made full provision in section 18 of the bill, which reads:

18. Subsections one and two of section one hundred and' thirteen of the said act are repealed and the following are substituted therefor: -

"113. (1) The statement of income and

expenditure to be submitted at the annual meeting shall, subject to the provisions of this section, show as a separate item the total of the amount paid to the directors as remuneration for their services as such directors, inclusive of all fees, percentages, or other emoluments, paid to or receivable by them or from the company or by or from any subsidiary company, exclusive of the amounts paid to a managing director, if any, or any other director who holds any salaried employment or office in the company and who devotes substantially the whole of his time^ to the business of the company or its subsidiaries.

That clause provides for the disclosure of everything paid to the directors qua directors, and the second clause provides for the disclosure of executive salaries:

(2) The said statement of income and expenditure shall also show separately the total of the amount paid as salaries, bonuses, fees or other remuneration to the counsel, solicitors, or other legal advisers of the company, and also to the executive officers of the company including the managing director, if any, of the company, and any other director who holds any salaried employment or office of the company and who devotes substantially the whole of his time to the business of the company or its subsidiaries."

That is as full and effective a compliance with the recommendations as could possibly be made, but I have received protests against it because this new provision applies to private companies as well as to public companies. My own opinion is that the house should favourably consider some amendment which would make this apply solely to public companies. Where you have private companies, or three or four persons in a town or village operating as a private company under this act, where each knows the other and all are directors as well as shareholders, a provision such as this should not, I think, be made to apply. But expressing the terms of the recommendation, in the bill, we have attempted a full compliance with the recommendations made.


Charles Hazlitt Cahan (Secretary of State of Canada)

Conservative (1867-1942)


I was going to suggest that in committee. I wish the hon. gentleman would consider it, because it certainly should not apply to private companies which have a few thousands dollars capital, operating in country towns and villages, which are prevented from seeking any subscriptions for stock from the public and prevented from selling their stock except to those who are shareholders with them m the same company.

The ninth, tenth and eleventh recommendations are as follows:

9. The prospectus provisions of the present act should be altered to place upon a company and its directors the responsibility for representations made on any offering for general public subscription, whether made on behalf of the company or not. If this change cannot be made through the Companies Act, it should be made a criminal offence to offer for public subscription, securities of a company with federal incorporation, if those securities have not been subjected^ to the prospectus obligations of the Dominion Companies Act.

10. Every prospectus should be required to state in clear detail all commissions, fees, and other remuneration received by promoters, underwriters or middlemen.

11. Whenever shares are allocated otherwise than through an offer to the public, a statement in lieu of prospectus should, as formerly, be filed. It should also be published in the press and in the Canada Gazette in such a way as to ensure the widest publicity.

Companies Act-Mr. Cahan

At present an "underwriter" is any person who acts as agent of the company in procuring subscriptions for its securities when offered, by or on behalf of the company, to the public for subscription; and "subscription" includes a purchase or other acquisition of such securities, except by way of security only, on any sale or other disposal thereof made by or on behalf of the company. "Prospectus," under the existing act, is any document issued by or on behalf of a company, which invites persons to subscribe for securities of the company. In general, it may be said that any holder of securities who has purchased them outright, in whom the absolute title thereto is vested, is now deemed to be the "owner" of the securities and not an "underwriter" of the securities.

The underwriter of securities, who acquires and becomes vested with absolute title to the securities, is not, under the existing act in respect of his subsequent dealings in such securities, deemed to act as underwriter, but as owner. It has hitherto been accepted by the legal profession that any sales, made by an owner of securities to any other persons who become purchasers thereof, are subject to the exclusive legislative jurisdiction of the provinces; and that the power of the dominion to legislate with respect to the incorporation of companies does not include the right to legislate with respect to subsequent sales of a company's securities after the company has issued, sold and delivered the same to the purchasers thereof who have fully paid for the same. I have a clear and decided opinion that to give full effect to the ninth recommendation would require the enactment of legislation which is not within the legislative jurisdiction of this parliament, and that to attempt to filch the provincial jurisdiction over property and civil rights by the creation of new and unprecedented crimes would, in the end, be equally ineffective.

In drafting section 73 of The Companies Act, 1934, I gave very careful consideration to this issue, and I concluded that clauses (a) and (b) went as far as was within the competency of parliament. These 'Clauses, which appear on page 14, lines 12 to 22 of the new bill, are as follows:

"underwriter" includes (a) any person who to the knowledge of the company, proposes to subscribe for securities of the company with a view to the resale to the public of those securities or a part thereof, and (b) any person to whom a commission is proposed or intended to be paid by the company in consideration of his subscribing or agreeing to subscribe, whether absolutely or conditionally, or in consideration of his procuring or agreeing to procure subscriptions, whether absolute

or conditional, for any securities of the company to be offered to the public for subscription.

That is the present law which is reexpressed in this bill on page 14. The opinion then expressed to me by eminent counsel;, in which I concurred, was to the effect that whenever the title to such securities became unconditionally vested in the subscriber or purchaser, then the subsequent dealings of such purchaser fell under the provincial jurisdiction and beyond the legislative jurisdiction of parliament. However, in order to bring before the house this issue and the full implications of the report, I have gone beyond my own professional opinion by proposing in this bill in amendment to section 73 of the existing act a new and unprecedented term to the definition of the word "underwriter" and to include, on page 5 of the bill, line 43 et seq., an additional paragraph (c), as follows, and this is new in any legislation of which I have knowledge:

"Underwriter" includes (c) any person who, in respect of any securities issued or to be issued by the company, has purchased or acquired or agreed to purchase or acquire such securities from the company, or has acquired from the company any option or right of disposal of such securities, with a view to effecting the first distribution of such securities or any of them to the public by advertisement or circular or in the course of successive transactions of a like character; and it shall, unless the contrary be proved, be evidence that such person purchased or acquired or agreed to purchase or acquire such securities or any option or right of disposal aforesaid, with a view to effecting the first distribution to the public of such securities, if it is shown that such person effected or attempted to effect such distribution within six months after such purchase or acquisition or the making of such agreement or that at the date when such distribution is made the whole consideration to be received by the company in respect of such securities has not been so received.

This will require litigation to determine the validity of it, but certainly it gives full effect to the recommendation of the 'Commission. Then, in order to complete 'that recommendation and to tie it in a double grip, I have also included on page 7 of the bill certain proposed amendments to section 75 of the act, new subsections (4) and (6), which read as follows, and these provisions are new in any legislation:

(4) The company shall not allot or issue any of its securities to or on the direction of any person whose principal business, to the knowledge of the company, is offering, buying, selling or otherwise dealing or trading in shares, debentures or other securities, unless the company shall have first obtained an agreement in writing from such person to comply with the provisions of subsection two of this section;-

Companies Act-Mr. Cahan

That is the previous one which I have read.

-and if and whenever, to the knowledge of the company, any offer to the public of its securities has been or is about to be made without due compliance with the requirements of subsection two of this section by such person, the company shall forthwith cause notice of the particulars of such non-compliance to be given to the Secretary of State by registered mail.

Then follows the penalty in subsection 6:

(6) Any underwriter who offers any securities of a company for public subscription before the provisions of subsection one of this section have been complied with by the company or without causing the provisions of subsection two of this section to be complied with shall be guilty of an offence and liable upon summary conviction to a fine not exceeding one thousand dollars or to imprisonment for a term not exceeding six months or to both fine and imprisonment.

I think we have there utilized to the widest possible extent the criminal law of the country to carry into effect the recommendations made. I still think, if the commission had invited hearings from those interested and had heard the other side of the case, the recommendations might not have been so extreme and severe.

The tenth recommendation as to the disclosure of commission fees, etc., is quite fully provided for in section 77, clauses (j), (k) and (1), of the Companies Act of 1934.

The eleventh recommendation for the revival of the old form of statement in lieu of prospectus, which was abolished by the Companies Act, 1934, should not, in my opinion, be complied with. The statement in lieu of prospectus served to conceal many irregularities. It was deliberately abolished in framing the Companies Act, 1934, because under the present act every public company, that is, every company, except a private company, must issue and file a prospectus if it issues and allots any shares whatsoever to others than the original subscribers to the memorandum of agreement which appears as form 2 to the act. Having exacted a prospectus from all companies when shares are issued to the public, as is now the case, we see no sound reason for recurring to the old practice of requiring the statement in lieu of prospectus, which was so often used to contra-vent the provision of the act dealing with prospectuses.

The twelfth recommendation, that hereafter all shares issued to the public should be limited to common and preferred shares without any subdivisions, would prevent a company, after issuing preferred shares at the company's inception, when its prospects were doubtful, from thereafter, in times of proven

financial success, issuing preferred shares yielding a lesser rate of dividend. We have not carried that into full effect. I do not wish to discuss the affairs of a particular company, but I know within the last few months one industrial company which has a large bond issue outstanding, chiefly held in the English market, received offers to substitute for the debentures outstanding, its capital indebtedness, an issue of its preferred shares. It was of the utmost importance to the company that in times of stress and strain such as these, its debenture indebtedness should be reduced by several million dollars and its capital assets increased by a corresponding amount. When they took the matter into consideration their existing preferred shares bore a dividend rate of eight per cent, if I remember correctly, and they had power under the letters patent to issue other preferred shares ranking with the first issue. But so cheap had money become, and so successful had been the operations of the company, that they were able to procure contracts for the purchase of the new issue of preferred shares yielding a rate of dividend two or three per cent less than the rate on the outstanding preferred shares. If you prevent companies from issuing preferred shares of more than one division or class you prevent absolutely such successful operations as those to which I have referred, which are entirely legitimate and worthy of commendation.

The thirteenth recommendation, that all shares offered, both common and preferred, should bear equal voting rights, is carried into effect in section 16 of this bill, which reads as follows:

The said act is amended by inserting immediately after section ninety-eight thereof the following section:

"98a. Subject to the provisions of any bylaw of the company duly enacted under the provisions of this act, each share of the capital stock of any company issued and allotted, shall, subject to the provisions of this part, carry voting rights and entitle the shareholders to one vote for each such share owned by him."

Well, sir, the object of that recommendation is obviously meritorious, or would seem so to the mind that conceived it. But, can you see any sound reason why the holder of a common share of $5 par value, for which five dollars has been paid, should necessarily have the same voting rights as a holder of a preferred share of $100 in the same company? That is a suggestion which I should like hon. gentlemen to take into consideration when they enter upon the discussion of the several clauses of this bill.

Companies Act-Mr. Cahan

The fourteenth recommendation, is to the effect that management shares should be prohibited. This recommendation is carried into effect by section 5 of the bill, which enacts a new subsection 10 to section 12 of the act, reading as follows:

(10) In no case shall shares of the company of any class, or any subdivision of any class, whether with or without par value, be issued and allotted to which shall attach any exclusive right to control the management of the business or affairs of the company by the election or removal of the board of directors thereof or otherwise.

As I drafted that section I thought it might be opportune for me to go back again to practice of the legal profession, because I am sure I could find half a dozen ways to get around it. But it is the best effort to carry completely into effect the recommendations of the committee that I could conceive of.

The fifteenth recommendation, that a meeting of the shareholders should be called by the directors in case of serious impairment of the capital of the company, is carried into effect, so far as practicable by section 14 of this bill, which reads as follows:

The said act is amended by inserting immediately after section ninety-four thereof the following section:-

"94a. Whenever the officers of a company, or any of them shall have become aware of any impairment of the capital of the company, they shall forthwith inform the directors of the nature and extent of such impairment; and thereupon, if in the opinion of the directors such impairment of its capital renders the company insolvent, it shall be the duty of the directors immediately to call a special general meeting of the shareholders of the company for the purpose of making to the shareholders full disclosure of the nature and extent of such impairment of the capital of the company."

You must remember that any impairment whether of the company's capital should not be sufficient cause to place the whole assets of the company in jeopardy, as you would do in calling such a meeting; therefore it should be only such an impairment as affects the solvency of the company. I have known in my experience a company to drop $3,000,000 in twenty-four hours. If you called the shareholders together you would cause a panic. But by giving careful attention to the matter, inasmuch as the loss itself did not impair the solvency of the company, the directors were able to take effective measures to place the company on a sound basis for successful operation. I suggest that I have carried into effect as far as possible and practicable the recommendations of the commission.

The sixteenth recommendation, that the first permanent directors of a company should be held responsible for all business transacted by the provisional directors, is carried into effect by section 18 of this bill, as follows :

The said act is amended by adding to section eighty-eight the following subsection:-

"(2) The directors of the company elected by the shareholders at the first general meeting of the company shall be responsible for all business transacted as a board of directors by the first directors of the company."

The seventeenth recommendation is that:

Directors should be prohibited from speculating in the shares of their companies. They should be required to disclose annually to their shareholders the extent to which they have directly or indirectly purchased or sold their company's shares during the year.

1 have known of speculation by directors in the shares of their company for the purpose of maintaining the company's reputation and preventing outside speculators from depreciating the value of its shares in the market in such a way as to ruin shareholders who were widely separated and unable to protect themselves. Speculation in the market may be evil or it may be of real advantage to the other shareholders of the company. But in view of this recommendation section 15 is inserted in the bill, reading as follows:

The said act is amended by inserting immediately after section ninety-six thereof the two following sections;.-

"9'6a. (1) Every director shall furnish annually to the secretary, for the information of the shareholders of the company at the annual general meeting thereof, a statement setting forth in detail all shares or other securities of the company bought or sold by him, for his personal account, directly or indirectly, during the twelve months immediately preceding such annual meeting.

(2) No director of a company shall speculate. for his personal account, directly or indirectly, in the shares or other securities of the company of which he is a director.

(3) "Speculate" as used in this section means trading in securities in the course of successive and continuous acts; selling a security where the director does not own the security sold, or, if owning the security, does not deliver it against such sale within twenty days thereafter, or does not deliver the same within five days after such sale by depositing it in the mails or other usual channels of transportation; or selling securities not previously held by such director for at least three months, unless such securities were acquired in good faith in connection with a debt, obligation or liability of some other person previously contracted; or unless the director proves that such sale was made bona fide for reasons other than to affect the market price of such securities or the making of a profit by such sale.

Other hon. members of the house may be able to agree on a more exact definition of

Portage la Prairie Mutual Insurance

the term "speculation", but it is beyond me. The fourth clause imposes a penalty:

(4) Every director who neglects or fails to make a true and accurate statement of such transactions as required by subsection one of this section, shall be guilty of an offence and liable on summary conviction to a fine not exceeding one thousand dollars or to six months imprisonment or to both fine and imprisonment.

(5) Every director, who shall speculate, for his personal account, directly or indirectly, in the shares or other securities of the company of which he is a director in contravention of subsection two of this section, shall be guilty of an offence and liable'on summary conviction to a fine not exceeding one thousand' dollars or to six months imprisonment or to both fine and imprisonment.

After drafting this clause I began to meditate as to why any person should be so foolish as to undertake the office of director of a commercial or industrial company and render himself liable to such penalties as these.

With reference to the recommendation of provisions to prevent stock watering, so called, section 15 of this bill contains a proposed amendment to the act by inserting a new subsection 96b.


Charles A. Stewart


Mr. STEWART (Edmonton):

Would the minister mind reading the new section? I am very much interested in that.

M-r. CAHAN: The section reads:

"96b. (1) It shall not be lawful for the directors or promoters of a company to authorize the issue and allotment of any shares of the capital stock of the company as fully paid up unless the company receives, or is to receive what may justly be deemed, in all the circumstances of the case, adequate consideration therefor in cash, property or services.

(2) Subject as hereinafter provided, every director or promoter of a company who is a party to authorizing the issue and allotment of any shares of the capital stock of the company as fully paid up shall be liable, jointly and' severally with his codirectors, at the suit of any director, shareholder or creditor of the company, to make good to the company the amount by which the consideration actually received by the company for any shares so issued and allotted as aforesaid, is found by the court, after full inquiry into the circumstances of the transaction, to be less than the amount of the consideration which the company ought to have received for such shares, if it is proved, as to any such first mentioned director, that such director

(a) had knowledge of the inadequacy of the consideration so received by the company; or

(b) failed to take reasonable steps to ascertain whether the consideration so received by the company was in fact adequate consideration.

(3) No suit shall be commenced against the directors of a company or any of them under the authority of subsection two of this section by any director or shareholder of the company without the consent in writing of the Secretary of State; and no such suit shall he commenced by any creditor of the company until an execution at the suit of such creditor against the company has been returned unsatisfied in whole or in part.

The next subsection' provides an exception, which was recommended by the commission.

At six o'clock the house took recess.

After Recess

The house resumed at eight o'clock. PRIVATE BILLS



The house in committee on Bill No. 97, respecting the Portage la Prairie Mutual Insurance Company-Mr. Willis-Mr. Morand in the chair. On section 1-Incorporation.


George Washington McPhee



I have just seen this bill for the first time this afternoon and there appears to be a very considerable change in its meaning and purport. For instance, section 2 of the old act reads;

Any policyholder who holds a policy or policies to the amount of at least one thousand dollars who is not in default in respect of any premium or any assessment on his deposit or premium note and who has paid in cash all liabilities incurred by him to the company shall be eligible to be elected as a director, but he shall cease to be such director if the amount of his insurance as aforesaid becomes reduced below the sum of one thousand dollars.

The new section changes the whole tenor of the act. It reads:

Any policyholder on the mutual system or cash system who holds a policy or policies to the amount of at least one thousand dollars who is not in default in respect of any assessment on his deposit or premium note and who has paid in cash all liabilities incurred by him to the company shall be eligible to be elected as a director, but he shall cease to be such director if the amount of his insurance as aforesaid becomes reduced below the sum of one thousand dollars.

The sponsor of the bill can no doubt throw some light on the matter. I think the committee is entitled to a full explanation as to the reason for this change and as to what is meant by the mutual o-r cash system inserted in this new bill. I would ask the sponsor to give a full explanation not only of the changes but of the reason for the changes and all the circumstances surrounding the matter.


Errick French Willis

Progressive Conservative


The purpose of the bill is to place the control of the company in the hands of the premium note policyholders. The company operates under two different systems of policies. That is to say, a man

Wapiti Insurance Company

who desires insurance in this company may pay a cash premium for which he will get a policy, and in that connection there will be no contingent liability. He has paid his cash premium and he gets the (benefits indicated in his policy. On the other hand, if he proceeds on the premium note plan he signs a premium note and subsequently he is assessed for the amount of the losses of the company as apportioned among the policyholders. It will therefore be seen that the premium note policyholder has a contingent liability. He may be assessed up to the full amount of the note; in other words, he is liable for his proportionate share of the losses of the company during that year, but the cash policyholder has no contingent liability. He has paid for something for which he receives a policy which indicates the benefits to which he is entitled.

The purpose of the amendments is to place control of the company in the hands of the mutual policyholders who are on the premium note plan in view of the fact that they have a contingent liability and have to pay the losses. The bill itself merely indicates two things. It indicates first that those who hold cash premium policies may be elected as directors. Secondly it indicates that only those who are under the other plan, the premium note plan, may vote and elect such directors.

I may say that the bill was considered by the senate committee, where it was approved by Mr. Finlayson, the superintendent of insurance who attended there, and also by the banking and commerce committee of this house where again Mr. Finlayson attended. The bill now before the house is similar to one which was passed here last year respecting the Wawanesa Mutual Insurance Company. There is little more I can say in connection with the bill except to point out that the Portage la Prairie Mutual Insurance Company is one of the oldest mutual insurance companies in Canada. It was incorporated in 1884, received dominion incorporation in 1930, operates in all the provinces of Canada except the maritimes, and has some S65.000.000 of insurance in force. The present bill has received the approval of the superintendent of insurance, the approval of the senate committee and the approval of the banking and commerce committee of this house, and I think it should go through this house without any difficulty.


Section agreed to. Sections 2 to 4 inclusive agreed to. Bill reported, read the third time and passed.


The house in committee on Bill No. 87, respecting the Wapiti Insurance Company- Mr. Weir (Macdonald) Mr. Morand in the chair. On section 1-Extension of time.

June 14, 1935