Directors’ Duties and Liabilities

This chapter provides a brief summary overview of the statutory and common law duties of directors of corporations incorporated under the federal Canada Business Corporations Act (CBCA). Although the liability of corporate directors varies with the jurisdiction of incorporation, the statutory duties of directors found in provincial legislation are similar to those outlined in the CBCA.

The CBCA contains statutory provisions which are intended to limit self-dealing transactions between directors and the corporations they serve so that directors put the interests of the corporation ahead of their own. Under the CBCA, directors have two principal duties: a fiduciary duty of loyalty and a duty of care.

Duty of Loyalty and Duty of Care

The fiduciary duty of loyalty requires that directors and officers act honestly and in good faith with a view to the best interests of the corporation. This duty creates an obligation for directors to avoid conflicts between the interests of the corporation and any opposing interests, including their own.

Under the fiduciary duty of loyalty, directors and officers are to act impartially and to place the interests of the corporation first, not allowing their decisions to be tainted by self-interest or self-dealing. Additionally, the CBCA contains a duty of care which provides that every director and officer of a corporation in exercising their powers and discharging their duties must exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. The duty of care requires that directors and officers make sufficient inquiries to inform themselves and consider all material information available to them prior to acting.

In a landmark case involving BCE Inc., the Supreme Court of Canada made it clear that at all times a director’s fiduciary duty is owed to the corporation:

“The fiduciary duty of the directors to the corporation is a broad, contextual concept. It is not confined to short-term profit or share value. Where the corporation is an ongoing concern, it looks to the long-term interests of the corporation. The content of this duty varies with the situation at hand”.

In a departure from American jurisprudence, the Court also stated that acting in the best interests of the corporation is not synonymous with acting in the best interests of shareholders:

“There is no principle that one set of interests—for example the interests of shareholders—should prevail over another set of interests. Everything depends on the particular situation faced by the directors and whether, having regard to that situation, they exercised business judgment in a responsible way”.

The BCE decision has, however, created ambiguity regarding the nature and extent of directors’ duties. While the Supreme Court of Canada held that directors’ duties are to the corporation, they also stated that directors who are acting in the best interests of the corporation are required to act as “good corporate citizens”. While the Court maintained that the fiduciary duty is owed to the corporation, it did not provide guidance as to how to give effect to this concept, particularly where stakeholder interests are in conflict. The Court’s reference to “good corporate citizen” seems to suggest some degree of accountability to the public and consideration of stakeholder interests, as does its statement that directors, in considering what is in the best interests of the corporation, may consider the interests of stakeholders.

Directors and Conflicts of Interest

The CBCA further attempts to minimize conflicts of interest between directors and corporations on which boards they serve by requiring directors to disclose conflicts of interest. A director who discloses a conflict of interest must refrain from taking part in any discussion or voting on any resolution to approve the contract or transaction giving rise to such conflict of interest, subject to certain exceptions.

While directors do not have a fiduciary duty to stakeholders, shareholders and other interested parties have the ability under Canadian corporate statutes to seek redress against directors under the oppression remedy. This statutory right is available to a complainant in circumstances where the directors have acted in a manner which was oppressive, unfairly prejudicial to or unfairly disregarded that person’s interest. Additionally, shareholders may commence a derivative action on behalf of the corporation if directors breach their fiduciary duty to the corporation or engage in a self-interested transaction. These provisions act as a restraint on directors’ actions and are intended to control directors’ opportunism.

Business Judgment Rule

Under the business judgment rule, if a board acts in good faith and on an informed basis, it is afforded wide latitude under the shield of the business judgment rule and is presumed to have acted in the best interests of the corporation and its shareholders. While a high degree of diligence is required, courts do not require perfection. Where a director’s decision is a reasonable one in light of all the circumstances about which the director knew or ought to have known, courts will not interfere with that decision.

The court’s inquiry will generally focus on whether the directors applied an appropriate degree of prudence and diligence in reaching their decisions. So long as a decision is within the range of reasonableness, a court will not substitute its opinion for that of the board, regardless of what subsequent events may have transpired. The business judgment rule reflects the reality that directors are generally better suited than courts to determine what is in a corporation’s best interest. However, the business judgment rule is not a complete defence – business judgment must actually be shown in order for directors to be able to rely on it.

Limiting Liability

The CBCA provides that the corporation may indemnify directors and officers against liabilities incurred in the course of their duties and may purchase and maintain insurance against any liability incurred by the individual in his/her capacity as a director or officer. Provided that the corporation is solvent and the director has acted honestly and in good faith with a view to the best interests of the corporation, such indemnity is generally available.

Although there is no legal obligation to establish a special committee, except in certain limited circumstances, the creation of a special committee is a way to protect directors from liability by ensuring that a board’s decision-making process is free from the influence of a director who may have a conflicting interest with that of the corporation. Establishing a special committee will protect the board from allegations of wrongdoing and, where the board acts on the recommendation of a special committee, the decision should be respected under the business judgment rule, provided the special committee acted independently and in good faith.

A director may also limit his or her liability by stating objections to questionable decisions in writing, by abstaining from voting on such matters and finally, by resigning from the board. The resignation will not absolve the director from liabilities incurred while serving as a director.