Directors have clear duties when acting for the corporation, particularly when choosing whether to engage in M&A. Below is a brief summary of what duties directors owe to the corporation and how directors can uphold them in M&A.
At all times, and particularly during M&A, directors have the following duties: (1) a duty to supervise; (2) fiduciary duties; and (3) a duty of care.
- Duty to Supervise. Directors have specific, statutory duties to manage the corporation. To satisfy this duty, directors may select a senior management team that is qualified and worthy of the director’s trust. However, directors are not relieved of their duties by simply delegating tasks and must continue to play an active role in the corporation.
- Fiduciary Duties. Fiduciary duties encompass: (i) the duty to act honestly and in good faith; (ii) the duty to act in the best interests of the corporation; and (iii) the duty of loyalty. These duties are owed solely to the corporation, and not to shareholders, creditors, or other shareholders.
- The duty to act honestly and in good faith captures self-dealing and preferential treatment. A director nominated by a controlling shareholder must not prefer the interests of such shareholders over those of the corporation as a whole.
- The duty to act in the best interests of the corporation has been interpreted to mean the best interests of the collective shareholders. The best interests of the corporation does not simply mean what is best in terms of profit or share value. Rather, consideration must also be given to long-term interests that could ultimately impact the corporation.
- The duty of loyalty includes the duty to avoid usurping corporate opportunities, the duty of confidentiality, and the duty to avoid conflicts of interest.
- Duty of Care. Directors are required to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Courts normally abide by the “business judgment rule” which provides that as long as the board is guided by an informed, prudent, and reasonable decision, the director’s judgment will be entitled to deference. Unlike fiduciary duties (which are owed solely to the corporation), the duty of care is owed to shareholders, creditors, and other stakeholders.
Best practices in M&A
Considering the above duties, directors can follow some simple steps to protect themselves and prepare the corporation for M&A. At minimum, directors should: (i) be well-informed of all information concerning the proposed deal; (ii) recognize all reasonable alternatives and weigh the pros and cons of each alternative to the corporation; (iii) rely in good faith on the appropriate and properly instructed advisors such as senior management, accountants, auditors, financial advisors and legal counsel; (iv) comply with all governing laws, including provincial and federal corporate legislation and the corporation’s own by-laws; and (v) maintain documentation of the decision-making process at all stages of the deal.
The author would like to thank Chelsea Nimmo, articling student, for her assistance in preparing this legal update.