to which I referred before, simply to show that I was speaking inadvertently, I was sent through a member of the house a short memorandum from the Dominion Association of Chartered Accountants as follows:
If the proposed section (9) of this act is to remain, should not the word "less" in the third line read "more"?
As this came from such an important body, I thought there could not possibly be a mistake, but the suggestion that any change should be made has now been entirely withdrawn.
section is what I conceive to be its absolute unworkability and the uncertainty which it is going to create among people who happen to buy shares. I may be wrong about this, but the effect of this section appears to be this. It means that if a company is incorporated under the Dominion Companies Act, and for instance I am an officer of it, I agree to serve the company for $100 a month plus ten shares, doing that because I know the company is in hard circumstances and the directors think it is a good thing to take me on because it means I have an interest in the progress of the company; in other words,
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if I make a success of the company my shares will be worth something. I sell my shares to someone else. Five years afterwards, the company gets into financial difficulties and is wound uip. Mr. X, the man to whom I sold the shares, is put on the list of contributories of the company. He asks why? He is told that it is because of the fact that as regards those shares, although issued fully paid up, the consideration, that is Ralston's services, did not represent adequate consideration for the shares. He is told "you are liable to pay the difference between the real value of Ralston's services and the par value of the shares." I think that is the effect of this section. I think it means that no man can buy the shares of a dominion company without the fear that at some later date a liquidator may put him on the list of contributors and say to the judge, "We want you to project your mind back to the time these shares were issued, to find out if in all the circumstances adequate consideration therefor was given in cash, property or services."
I take that illustration about salary because X happen to know of a case which is all finished with now, so I can speak of it quite freely. It was the subject of considerable discussion in another city. A managing director was given certain shares in addition to his salary; he cut his salary about in two and took shares in place of part of it. That man is getting those shares to-day. This act does not apply to him, so there can be no trouble about it, but if that had happened after this act came into force it w-ould seem that a person who might buy shares from him would face the possibility of some liquidator or creditor coming in and saying that man's services were not worth the number of shares given to him, and the holder of the shares might be required to pay the balance.
That is the situation from the point of view of the shareholder. The point of view of the adviser is just the reverse. Somebody is asked to advise whether these shares were fully paid up. They are marked paid up on their face, but that is not enough. Were they actually issued for less than what -might justly be deemed, "in all the circumstances of the case, adequate consideration therefor in cash, property or services." I do not know of any legal or business adviser who can forecast the mind of a judge having to decide ten years hence what the circumstances were at the time the shares were issued. On that ground, therefore, it seems to me that the section is unworkable and dangerous. I am fully in accord with the idea of not having shares issued for fictitious considerations. As the Secretary of State knows, under the English act there was a provision .whereby, if shares are issued for anything else than cash, the agreement must be filed showing exactly what was the consideration for those shares, so that anyone buying shares may know that the company did not receive cash for them but something in place of cash.
Quite right. Under the amendments of last year there was required to be stated in the prospectus itself what was the consideration for the shares. That is, you cannot just say so many dollars; you must specify the property or the thing for which the shares were issued.
Or, in my case, service for so -many years as a portion of the salary, So the shareholder knows exactly the sort of consideration that was given and the extent of that consideration, and it is up to him to put a value on those services and decide whether or not they represented adequate consideration. But it seems to me to impose on what might be innocent holders, the liability of facing a law-suit to decide the question of the adequacy of the consideration at the time the shares were issued to the original allottee and it seems to me that is going to make it very inadvisable to incorporate under the Dominion Companies Act. It is not fair to the investor; I do not think it is fair to the business public, nor is it fair to the companies themselves, because in these times shares are issued for considerations other than cash, and perfectly good considerations too, which are just as valuable to the company as cash and for which people will accept shares in order that the cash position of the company may not be impaired. I suggest that the Secretary of State consider the matter further before this section passes in its present form.
The difficulty which the hon. gentleman has mentioned is obvious, but I think he forgets a decision of the Supreme Court of Canada in the early days, when I think Chief Justice Ritchie was presiding- and that decision never has been modified-in which it was held that if a company issues shares as fully paid and those shares are subsequently transferred from the first allottee to others, the third parties being without notice that the shares have not been fully paid when the certificate of the company shows that they are fully paid, are not liable either to the company or to a creditor. The
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first purchaser of the shares, or perhaps it is better to say the first allottee of the shares, remains liable if the shares were issued for an inadequate consideration, but the third party does not. I have had very strong representations made, in regard to this section, that we should incorporate in it a provision of the English act under which the question of the inadequacy of the consideration, if raised, must be raised within a period of two years.
I think this subject is worthy of clarification. We have section 15 of the bill which contains a proposed enactment of section 96B of the statute, and which deals with the subject of adequate consideration.
Yes, that is right. It imposes a penalty upon directors, among others, for doing what is forbidden by section 5. When I say it needs clarification I do not mean that I can clarify it to any great extent, but I am speaking in the presence of some able company lawyers, and perhaps they will be able to do so. I have had veiy little experience with the Dominion Companies Act-practically none. In the province of Nova Scotia where I have incorporated companies we have used the old English provision whereby an agreement is filed when property is transferred to the company and shares taken in consideration of the property.
trouble incorporating companies in that way. I am not sure what the effect of the Dominion Companies Act would be. To begin with, there is no section in the Dominion Companies Act at the present time which states specifically that shares are issued subject to being paid for in full. The section which has the nearest application is section 45 of the act.