Legal Issues Arising from ADL Corporate Governance and Collapse of Operations

Roles of Board of Directors and Management Team in Corporate Governance

Aardvark Incorporated (AI) is a federally incorporated business that operates a gold mine in Northern Ontario.

There are three people on its board of directors all of whom reside in Ontario – Pam, Sam, and Stan A partnership located in Toronto called Gold Digging Partners (GDP) approaches AI to collaborate in opening a new mine in Ontario.

The three partners are Logan, Mojgan and Trojan. GDP and AI incorporate a joint venture corporation under federal law called Aardvark Diggers Limited (ADL). AI owns 50% of the shares in ADL and Logan, Mojgan and Trojan each own one third of the remaining 50% (16.66% each).

AI elects Pam and Sam to sit on the ADL Board of Directors while the GDP partners collectively elect Logan and Mojgan to the ADL Board in accordance with the ADL shareholder agreement that permits each of AI and the GDP partners collectively to elect 2 directors for a total of 4.

ADL hires a CEO, Ricki, and a senior management team of 3, along with 47 miners who do not form a union. ADL has $10 million of working capital and a $25 million line of credit with the Bank of Nova Scotia. It spends $ 6 million of the $10 million on mining equipment and mining begins in March of 2021.

The mine and the land are valued at $20 million at this time.

By June, its capital is down to $1 million and there have been various delays in the operation owing to unforeseen challenges with the mine –primarily, there was an underwater stream that had been undetected and has been slowing down operations.

The lead engineer, Blair, who is on the senior management team, tells the CEO that the stream is eroding the structural integrity of the mine and urgently advises Ricki to spend another $3 million to strengthen the mine and divert the stream.

Ricki is concerned that the resulting delay of six months will cause ADL to run out of money and exhaust the line of credit before production can begin. She tells nobody and delays meetings of the Board of Directors.

The mine collapses on September 30, 2021, three miners are killed, and several are seriously injured. The ADL Board has only had one meeting in total, when ADL first started operating.

The collapse causes dangerous chemicals to get dumped into the stream which leads to the water supply of the nearby Town of Muskrat Junction where 4,000 people live.

Ricki finally contacts the ADL Board, and the four directors quickly warn the Town so that the residents do not consume the water. However, the Town becomes dependent on bottled water for the next year. By this time, ADL has spent al of its capital and has used $9 million of its line of credit with the Bank of Nova Scotia. All ADL staff are let go, including Ricki. and ADL ceases operations.

The loan with the Bank of Nova Scotia is now in default and the Bank is threatening to sue all of the parties. Pam and Sam decide to incorporate Spam Ltd (SL).

SL offers ADL $9 million to take over the operation from ADL, without disclosing its ownership. They know that the mine sits on a huge gold reserve and has a great deal of potential in spite of the current problems.

The ADL Board meets to consider the offer which will retire ADL debt to the Bank of Nova Scotia. Identify as many important legal issues as you can and elaborate on them as best you can.