Limited Partnerships, Partnerships, Fiduciary Duties - Shareholders - Canada (2022)

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The following is a brief paper prepared with the assistance ofLauren Vrsnik, articling student at-law on the topic of fiduciaryduties in the context of the partnership relationship.

1. General Overview of fiduciary duties in the corporatesetting

Section 97(1) of the MCA states that directors shall manage, orsupervise the management of, the business and affairs of acorporation. The scope of a director's power is subject to anyunanimous shareholder agreement, the MCA, its regulations, and thecorporation's articles and by-laws. Directors may not delegatetheir duties, although they can create committees to report tothem. A director's duties may be fettered by unanimousagreement of the shareholders of the corporation who then take onthe liabilities associated with those duties. Although adirector's capacity to act can be restricted by the constatingdocuments of the corporation, or by the shareholders themselves,directors are not relieved from the duty to act in accordance withthe MCA and regulations or relieved from liability.

Directors, in undertaking their duties, are subject to a certainstandard of care, and owe a fiduciary duty to the corporation. Thefiduciary duty and duty of care are typically seen to be owed tothe corporation rather than the shareholders directly. Directorsare under a general obligation to maximize the value of shareholderinvestment. Directors must consider the interests of thecorporation's employees, customers, creditors, and otherstakeholders, and not just the interests of the shareholders(Peoples Department Stores Inc. (Trustee of) v. Wise, 2004SCC 68 (CanLII at para 42; cited with approval in Manitoba inMatic et al v Waldner et al, 2016 MBCA 60 (CanLII)).However, under certain circumstances, personal liability ofdirectors can extend in favour of shareholders (or otherstakeholders), where there has been a personal benefit (in the formof either an immediate financial advantage or increased control inthe corporation), or where directors have breached a personal dutythey owe as directors, or misused a corporate power. This liabilitymay extend in situations where oppressive conduct against one ormore shareholders (or other stakeholders) is found to exist, andwhere the facts would make a remedy against the corporationinequitable.

Fiduciary Duty

Directors are subject to a fiduciary duty enshrined in section117(1) of the MCA:

Every director and officer of a corporation in exercising hispowers and discharging his duties shall (a) act honestly and ingood faith with a view to the best interests of the corporation

A fiduciary relationship, broadly interpreted by the case law,is a relationship between parties where one party is considered tobe in a special relation of trust, confidence, or responsibility tothe other. Therefore, as a director, one has a duty to act in everycircumstance in the way in which that director honestly believes,in good faith, to be in the best interest of the corporation. Thisis has been the standard jurisprudence since BCE Inc. v 1976Debentureholders ("BCE"), 2008 SCC69, when the Supreme Court of Canada clarified that the "bestinterests of the corporation" does not mean the best interestsof the corporation's shareholders. Rather the interests ofother stakeholders may be relevant. Following the principles inBCE, Parliament amended the Canada BusinessCorporations Act to enumerate different stakeholderinterests.

The role of the director is likened to that of atrustee so that, just as a trustee owes thefiduciary duties of loyalty and good faith to the beneficiaries ofa trust, a director owes those duties to the corporation. Thefiduciary duty has several features. First, corporate managementmust avoid conflicts of interest, except with the company'sknowledge and consent. Second, directors and officers areprohibited from taking secret rewards or appropriating anopportunity that should have been available for the company (seeCAS v O'Malley, [1974] SCR 592, 1973 CarswellOnt 236).Last, directors and officers must protect the corporation'sconfidential information. In Matic et al v Waldner et al,2016 MBCA 60 (CanLII), the Manitoba Court of Appeal considered thefiduciary duty imposed upon directors. In that case, the majorityshareholders of Springhill argued that one of their directors haddiverted a corporate opportunity for his personal benefit. TheCourt of Appeal found the director had breached his fiduciary dutyby allowing another company that he owned to take on a constructionproject which Springhill could have performed. In reaching thisconclusion, the Court of Appeal acknowledged that determiningwhether a director has breached his or her fiduciary duty under thecorporate opportunity doctrine requires an extensive contextualanalysis, considering:

[153] the maturity of the opportunity; whether it was activelypursued by the corporation; whether the corporation was capable oftaking advantage of the opportunity; whether the opportunity was inthe corporation's line of business or a related business; howthe opportunity arose or came to the attention of the director;whether the other directors of the corporation had knowledge of thedirector's pursuit of the opportunity; and whether the otherdirectors gave their fully informed consent to the director'spursuit of the opportunity. The overall goal of the analysis is todetermine whether the opportunity fairly belonged to thecorporation in the circumstances.

Furthermore, directors must exercise their powers for a properpurpose. As long as a director's primary motive is the bestinterests of the company, his or her actions are not necessarilyimproper simply because the director also benefits from the matter.Directors who breach their fiduciary duty will be held strictlyliable, even if there is no evidence of loss or damage to thecorporation.

2. Fiduciary duties in the partnership setting

Partnerships, like corporations, are creatures of statute. ThePartnership Act (C.C.S.M. P30, the "PA") establishesduties between partners that run along fiduciary lines, such as aduty to account (Sections 31 and 32) and a duty not to compete(Section 33). Generally, the jurisprudence has favoured thefiduciary approach to the partner relationship akin to that ofdirectors to a corporation.

Accordingly, subject to any agreement or behavior to thecontrary (more on this later), partners in a partnership, (whichincludes a limited partnership) owe each other certain duties ofgood faith. In Rochwerg v. Truster, 2002 CarswellOnt 990(Ont. C.A.), the court held that the obligation to account arisesunder section 29(1) of the Ontario equivalent of the PA (whichcontains the same language as Section 31 of the PA) without proofof a competing activity.

This case is often cited in discussions surrounding thefiduciary duties owed between partners and provides a brief historyof the origins of these duties. A chartered accountant disclosed tohis partners that he had become a director of a corporate client ofthe firm. He had remitted his first year's director's feesto the firm but neglected to tell his partners that he was alsoentitled to certain shares and stock options granted to him by theclient "to lock in" the continuation of his "counseland advice". Rochwerg later left the partnership and in thecourse of its winding up, the issue arose as to whether hispartners were entitled to an accounting of the benefits he hadreceived. In its analysis, the Court confirmed:

36 It has long been established that partners owe a fiduciaryduty to each other, and that equitable principles hold fiduciariesto a strict standard of conduct, encompassing duties of loyalty,utmost good faith and avoidance of conflict of duty andself-interest. These are well recognized, core principles of thelaw of partnership.

[...]

63 Mutual trust, confidence and good faith are the cornerstonesof the modern professional services partnership. Without them, thevery essence of the partnership arrangement is eroded and,ultimately, destroyed. In my view, the equitable principlesdeveloped over the last century concerning the fiduciaryobligations of partners continue to control contemporarypartnerships. They may require, however, flexible application torespond to changing partnership structures, activities andsettings. Support for this approach is found, in my opinion, in theobservations of Laskin J. (as he then was) in Canadian AeroService Ltd. v. O'Malley (1973), 40 D.L.R. (3d) 371 (S.C.C.) whendiscussing the principles applied in Regal (Hastings) Ltd.(at pp. 382-383):

[W]hat I would observe is that the principle, or, indeed,principles, as stated, grew out of older cases concerned withfiduciaries other than directors or managing officers of a moderncorporation, and I do not therefore regard them as providing arigid measure whose literal terms must be met in assessingsucceeding cases. In my opinion, neither the conflict test,referred to by Viscount Sankey [in Regal (Hastings)], northe test of accountability for profits acquired by reason only ofbeing directors and in the course of execution of the office,reflected in the passage quoted from Lord Russell of Killowen [inRegal (Hastings)], should be considered as the exclusivetouchstones of liability. In this, as in other branches of the law,new fact situations may require a reformulation of existingprinciple to maintain its vigour in the new setting.

Although Laskin J.'s comments concerned the responsibilitiesof directors and officers of corporations, and the appropriation ofmaturing corporate opportunities, in my view, they apply with equalforce to the definition of fiduciary concepts and their applicationto modern partnerships. (See Davis v. Ouellette (1981), 27 B.C.L.R. 162 (B.C. S.C.), at p.176, per McEachern C.J.S.C.).

3. Fiduciary duties in the limited partnership setting

The fiduciary relationship of a general partner to the limitedpartners may create a somewhat different, and possibly lower,standard than that of each partner among the partners of a generalpartnership. The PA provides, at Section 64, a duty to account onthe general partners:

64 The general partners of a limitedpartnership are liable to account, both at law and in equity, toeach other and to the limited partners for their management of theconcern, in like manner as other partners are liable.

Unlike other comparable legislation in other jurisdictions inCanada, Manitoba has no other restrictive language on the generalpartner, and general partners appear to have broader unrestrictedpowers with regard to their undertaking of the business of thelimited partnership. In the PA, the only specific statements made,with regard to the responsibilities of the general partner, requirethat the general partners render an account of their management oradministration to the remaining limited partners.

General partners are liable at law to account to theother partners for their management, meaning: they are liable tothe extent that either the governing statute requires them toaccount, or to the extent that the partnership agreement requiresthem to account.

Additionally, general partners are liable in equity toaccount to the other partners for their management, meaning: theycould be liable to the extent that they are bound by a fiduciaryduty to account.

We know that general partners generally have some level offiduciary responsibility to the other partners in a limitedpartnership. An element of most fiduciary relationships is anobligation of the fiduciary to disclose matters relating to the"trust" to the "beneficiary". This seems toapply to partnerships as well. So, a general partner may be liablein equity to account to the other partners for their management ofthe partnership on an issue that may not be specifically includedin the wording of the partnership agreement, or in the statute, ifthe general partner would not be acting in good faith by keeping ita secret.

This section of the legislation has not been judiciallyconsidered in Manitoba.

Other jurisdictions

In Molchan v. Omega Oil & Gas Ltd., [1988] 1 SCR348, a limited partnership was involved in oil and gas developmentoperations. The partnership had exhausted its sources of capitaland ceased operations. All but one limited partner agreed to havethe parent company of the general partner purchase the partnershipunits and certain partnership assets in order to allow the limitedpartners to recoup some of their investment. The disagreeinglimited partner asked the court to, among other things, restore theassets to the general partner and to order the parent to accountfor and distribute the limited partner's share of any revenuesearned from the assets.

The Court considered whether a general partner owes a fiduciaryduty to its limited partners, and whether or not the abovetransaction resulted in a breach of that duty.

35 For these purposes I assume the highest status of the generalpartner under the limited partnership, namely, that of a trusteeholding the properties of the partnership on behalf of all otherpartners. [...]

After a consideration of the general rules relating to purchasesof trust property by fiduciaries, the Court concluded:

42 On the facts before the court on this appeal, and applyingthe law thereto as examined shortly above, I conclude that thegeneral partner owes a fiduciary duty to Molchan, the one remaininglimited partner, but in the circumstances of this case there is nobreach of that duty in the sale of non-producing lands because:

43 i. there is no evidence of bad faith of the general partnerand neither Shannon J. nor Prowse J.A. made any such finding;

44 ii. there has been no attempt by the appellant to demonstratethat Hydrocarbons paid an inadequate consideration for thenon-producing lands;

45 iii. the general partner's assertion that the sale was inthe best interests of the partnership is supported by evidence attrial which indicates the strained financial circumstances of thepartnership and the difficulty of selling the lands to thirdparties because of the encumbrances upon the lands; and

46 iv. the terms of the agreement, of which Molchan was fullyaware, provided the general partner with the power to dispose ofproperties at its discretion.

In a case out of British Columbia (Naramalta DevelopmentCorp. v. Therapy General Partner Ltd., 2012 BCSC 191), theCourt examined a similar question, although in this case itappeared there may have been nefarious activity. This caseconcerned a limited partnership operating a winery business. Thedeveloper, McBean, owned both the general partner and its parentcompany. The partnership agreement did not provide for any profitparticipation by the general partner until a certain returnthreshold had been met. In order to get around this, McBean had theparent company begin charging a management fee to the generalpartner unbeknownst to the limited partners.

The Court considered Molchan and Rochwerg andconfirmed that the general partner owed a fiduciary duty to thelimited partners. The management fee arrangement was "entirelyinconsistent" with the duty to the limited partners and wasnot in their "best interests".

In Simkeslak Investments Ltd. v. Kolter Yonge LP Ltd.,2011 ONSC 7134, the Ontario Courts considered whether the fiduciaryrelationship could be brought to an end by the actions of thepartners. In this case, Kolter and Simkeslak were both limitedpartners in a limited partnership whose purpose was to acquire anddevelop property. Kolter was also the general partner.

The Simkeslak partners offered to sell their interests toKolter, who later sold them to a third party for a higher price.The Simkeslak partners argued that Kolter breached its fiduciaryduty to the rest of the limited partners by keeping secret apartnership opportunity as a result of failing to disclose thedetails of the subsequent sale.

While a fiduciary relationship originally existed between thepartners, it ended when both parties began engaging in negotiationsdesigned to maximize their own interests.

59 There is no dispute between the parties that as partners inNastapoka, Kolter and the Class A Partners stood in a fiduciaryrelationship to each other: see Hodgkinson v. Simms, [1994] 3S.C.R. 377 (S.C.C.), at pp. 407-408 and Ruggiero v. Swartz, 2003CarswellOnt 6018 (Ont. S.C.J.) at para. 40. However, what is indispute is whether these fiduciary duties ended when the Class APartners made the Offer to sell their partnership interest toKolter.

60 Fiduciary duties have their roots in equity. At their core,fiduciary duties seek to ensure that the law protects vulnerableindividuals in their transactions with others. That said, courtshave been clear that "... the concept of vulnerability is notthe hallmark of a fiduciary relationship though it is an importantindicium of its existence." (Hodgkinson v. Simms, atp.405)

61 The fact that fiduciary duties exist in a particular categoryof relationship, such as a partnership, does not mean that thefiduciary duties inherent in that relationship will necessarilycontinue unaffected throughout the course of the parties'relationship. It will be "the facts surrounding therelationship" and the expectation of the parties that willdetermine the existence and nature of any fiduciary duties.

4. Contracting out of Fiduciary duties

With a carefully crafted partnership agreement, it may bepossible to contract out of particular duties and obligationsincluding the fiduciary relationship. Further, although there areno cases on the topic, it may be possible to infer, as a result ofthe actions of partners, a consent to the waiver or release of thefiduciary duties imposed under the PA.

Section 22 of the PA contemplates the concept of variation ofthe duties and terms between partners:

Variation by consent of terms ofpartnership

22. The mutual rights and duties of partners,whether ascertained by agreement or defined by this Act, may bevaried by the consent of all the partners, and the consent may beeither express or inferred from a course of dealing.

While there appears to be agreement within the jurisprudencethat a fiduciary duty exists between partners, the exact scope ofthose fiduciary duties can vary from partnership to partnership,depending on the nature of the relationship, the historical actionsof the partners and the agreement governing the relationship.

Section 22 grants to partners the right to tailor their mutualrights and duties towards each other by way of a partnershipagreement. Fiduciary duties that exist under equity or statutorylaw can thus be modified on consent under an agreement. The Courtshave, in some cases, construed agreements that limit or extinguishfiduciary obligations narrowly, and as is always the case withequity, the facts, and the egregious nature of the parties'behavior, will influence a Court's reading of any limitinglanguage.

In McKnight v. Hutchison, 2013 BCCA 340, 2013CarswellBC 2229, the question arose as to whether the followingArticle from the Partnership Agreement acted to provide a list ofactivities to which the Partnership Act would not apply, and thattherefore the related fiduciary obligations (of notice to the firm)would not apply either.

2.8 Partners may conduct business, other than the practiseof law, upon notice to the other partners, and receive remunerationseparately therefrom, provided that such activities shall notcompromise the practise of law within the partnership [...] Withoutlimiting the generality of the foregoing, such activities mayinclude:

a) holding of share interests in operatingcompanies;

b) holding of directorships of corporate bodies or otherinstitutions;

c) acting as executor of an estate, except in circumstanceswhere the appointment has occurred by reason of succeeding anotherpartner or previous partner due to the membership in thepartnership;

d) holding and administering private investments;or

e) providing legal or other business services to familymembers or to family businesses.

The Court did not find that this Article of the PartnershipAgreement excluded the partners from their fiduciary obligationsbut opened the door to the possibility when it said:

18 In my opinion, it would take very clear wording to excludethe fiduciary principle from any partners' relationship, orto exclude ss. 22, 31, 32 and 33 from the partnership that wasreconstituted by the 1990 Agreement. Nothing in the documentpurports to do so: indeed, Article 1.3 stated that the partnershipis "subject to ... the Partnership Act of BritishColumbia." It follows that the partners here must be takento have intended that the Agreement would operate against thebackdrop of the Act and fiduciary principles generally. [Emphasisadded]

19 I do not read the Agreement as excluding or broadening the"practise of law" or the applicability of the Act beyondpartnership matters. Rather Article 2.8 seems to be intended toaddress the division between "private business" and firmbusiness, to provide a mechanism - the giving of notice and theconsequential discussion that would naturally ensue betweenpartners - for the line to be drawn in cases as they arise, and toprovide examples of activities that "may" in somecircumstances be permitted to be carried out privately (i.e.,without an accounting to the firm) provided notice is given.

In Ruggiero v. Swartz, 2003 CarswellOnt 6018, one ofSwartz' claims against his previous law firm partners was thatthey breached their fiduciary duty to him by failing to make anequitable distribution of profits. The partnership agreementprovided that certain profits would be allocated "as thepartners may agree at the end of the partnership fiscal year bymajority vote amongst the partners which majority vote shall bebinding upon the partners and the partnership." The Courtstated:

40 It is true that partners stand in a fiduciary relationship toone another, and this governs certain aspects of their relations.However, the partners here also entered into a contractualrelationship with each other to govern other aspects of theirrelations - most importantly for purposes of this motion, thedivision of the profits of the firm. In my view, there is nofactual basis to indicate that there was a breach of fiduciary dutyin the way in which the profits were distributed. Given the termsof the partnership agreement, a partner would not have a reasonableexpectation that the other partners would be bound to act in hisinterest when it came to the distribution of profits. Nor isthere evidence of a relationship of trust, confidence orvulnerability among these individuals that are the usualindications of a fiduciary relationship. The parties agreedthat profits would be distributed by majority vote. In each year,Mr. Swartz received a share of profits, although not the amountwhich he would have liked. In his examination, he indicated thatthe others were critical of his efforts at client promotion and ofhis work ethic. In my view, there is no factual basis for a trialjudge to find a breach of a fiduciary duty in the manner in whichthe profits were divided over the years. [Emphasis added]

And in yet another law firm dispute, Springer v. Aird &Berlis LLP, 2009 CarswellOnt 1832 considered the duty inallocating an interest in the partnership. Each January, thepartners of the firm were allocated partnership units for that yearbased on certain performance criteria. The plaintiff resigned, andlater contended that the firm had a fiduciary duty to warn him thathis units would be significantly reduced in 2002. Had he beenwarned, he argued that he could have served his notice ofwithdrawal in 2001 and obtained his withdrawal share valued on 400(which he was allocated in 2001) rather than 175 units (which hewas allocated in 2002).

169 Section 20 of the Partnerships Act, R.S.O. 1990, c.P. 5 provides that the mutual rights and duties of partners,whether ascertained by agreement or defined by the Act,may be varied by the consent of all the partners. Thus, section 24of the Act provides for profits of a partnership to bedivided equally amongst all partners unless there is an agreementto the contrary. Section 20 of the Act recognizes thatpartners are free to regulate their dealings with one another byagreement. See also Rochwerg v. Truster, supra, at para50. In the case of Aird & Berlis, of course, the partners haveagreed in their partnership agreement to give the ExecutiveCommittee the exclusive right to set the partners' income bymeans of allocating units to the partners.

170 The fact that partners owe certain fiduciary duties to eachother does not mean that every decision taken by a partnernecessarily carries with it fiduciary duties of the kind assertedby the plaintiff. A fiduciary duty traditionally has resulted froma relationship of dependency and vulnerability of the person towhom the duty is owed such that the fiduciary must act only in theinterests of the beneficiary and not in his or her own selfinterest. La Forest J. discussed these concepts in Hodgkinsonv. Simms, [1994] 3 S.C.R. 377 (S.C.C.), at 405. Thatcannot be the situation in a partnership in which the ExecutiveCommittee must allocate profits amongst all the partners. If theExecutive Committee were the fiduciary, it would mean that it couldnot act in the interests of all of the partners to whom it wascharged with the responsibility of allocating income units. Ratherit would be bound to act only in the interest in this case of Mr.Springer or any other partner who thought he or she was beingtreated unfairly.

173 In my view, there was no fiduciary duty on the part of theExecutive Committee to allocate Mr. Springer any particular numberof units, or any number that he thought fair. Under the partnershipagreement, the Executive Committee had the exclusive entitlementand obligation to allocate income units and in doing so it had toweigh the interests of all partners.

174 I agree with the plaintiff that the members of the ExecutiveCommittee had to act in good faith. That is one of the duties owedby partners to each other, and the partnership agreement did notcontract out of that duty. For example, if a decision to allocateunits to a particular partner was motivated by some irrelevantconsideration to the affairs of the partnership, such as a decisionthat no red haired persons should be set above threshold level two,it may be that such a decision could be challenged. But there wasno evidence whatsoever that the decisions to allocate Mr. Springer400 units in January, 2001 and 175 units in January, 2002 weretaken in bad faith.

In a limited partnership setting, do the actions of the limitedpartners (willingly relinquishing all management decisions to thegeneral partner, acknowledging and enforcing their rights tolimited liability, receiving income or loss allocations anddistributions as their sole entitlement to the assets of thepartnership, waiving their rights to partition the assets, orotherwise limiting any duty to account to the partnership)eliminate the fiduciary duty? Arguably yes, and with a carefullycrafted partnership agreement, given Section 22 of the PA, there isno reason to assume that general partners are in a fiduciaryrelationship to limited partners.

The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should be soughtabout your specific circumstances.

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