Smith on North-West Transportation Co. v. Beatty (1887)

McGill/Oxford Equity guru Lionel Smith has posted "A Selfish Loyalty: North-West Transportation Co. Ltd v. Beatty" on SSRN. The essay will be published in Landmark Cases in Equity, C. Mitchell and P. Mitchell, eds., Oxford: Hart, 2012.

Here's the abstract:

North-West Transportation Co. Ltd. v. Beatty (1887), 12 App. Cas. 589 (P.C.) is well known throughout the Commonwealth as a foundational decision regarding the ability of corporate directors to contract with their own corporation, and in particular their ability to vote as shareholders for the approval of such conflict-affected contracts. The background to the case reveals a young nation in which enormous numbers of immigrants were seeking to start new lives on the western prairies. Before the trans-Canada railroad was completed in 1885, and long before a full road network was in place, shipping lines on the Great Lakes provided the only feasible way to reach the continental interior (the “North-West”).

The dispute in Beatty was about a contract by which one of the directors of a company, who was also its majority shareholder, sold a steamship to the company over the objections of minority shareholders. In giving its advice, the Privy Council arguably misunderstood the nature of the corporate entity involved in the case, and produced a solution that has puzzled and divided commentators and legislators ever since.

This paper traces the story of the Beattys and their influence in late-19th century Canada, and examines how the dispute arose and how it was resolved by four levels of courts. It goes on to assess the decision against the principles of corporate and fiduciary law, and to show how Canadian legislators have reacted against the Privy Council's decision with the result that in modern Canadian law, shareholder approval is often necessary for certain corporate decisions, but it is never sufficient to insulate such decisions from judicial review.