A nominee director of a corporation appointed by one of its creditors may encounter risk of liability where that creditor is engaged with the corporation in efforts to restructure its debt. Steps can be taken to minimize the risk of such liability.
Nominee Directors in Canada
Canadian law relating to corporate directors’ duties differs from U.S. law. In particular, the directors’ fiduciary duty requires a director to act in the best interests of the corporation. This duty does not change when the corporation is in the “vicinity of insolvency”. In particular, the directors’ duty remains with the corporation and does not shift to creditors. Further, a director has a positive obligation to share third party information, including confidential information, with the corporation if the information affects the corporation in a vital aspect of its business. Nominee directors are subject to the same fiduciary duty as any other director. They may not prefer the interests of their nominators and their duties to the corporation are not attenuated in any way. We also note that a number of federal and provincial statutes impose personal liability on directors to pay certain amounts if a corporation becomes insolvent and cannot pay the amounts.
Minimizing the Risk
- Resign - In the context of a creditor appointed director in a debt restructuring, resignation may be more readily considered than in other circumstances. Resignation as a director will avoid allegations of misuse of confidential information, non-disclosure and conflict of interest based on subsequent events. However, resignation will not excuse the nominee from obligations incurred as a director before resignation.
- Don’t Participate in the Restructuring (Place a “Cone” Over the Nominee) - If nominee directors do not resign, the creditor should consider placing a “cone” over its nominees to provide insulation from information and decision-making relating to the creditor’s restructuring efforts. The objective of the cone is to facilitate the nominee directors complying with their fiduciary obligations. If the director is not involved in the restructuring efforts, the director will not be sharing information with or acquiring information from the creditor in a manner that could be criticized as inconsistent with their duties as a corporate director. Nor will the nominee be making decisions about the restructuring that could be perceived as conflicting with the interests of the corporate borrower.
If the Nominees Participate, Demonstrate Compliance - If nominee directors do not resign and participate in the creditor’s restructuring efforts, the directors should take care to act in a way that demonstrates compliance with their duties as directors. It is not possible to produce an exhaustive list of behaviours because the situation would be an evolving one. However, examples of the types of behaviour the director should exhibit include the following: •Nominee directors should always be clear about whether they are acting in their capacity as a director of the corporation or as an employee of the creditor. In particular, restructuring discussions among a nominee and the corporation should clearly be conducted in the nominee’s capacity as an employee of the creditor.
- Nominee directors should clarify their authority to share information regarding the corporate borrower with the creditor, even where such sharing is authorized in the applicable loan documentation
- If the board of the borrower is addressing issues relating to the loan, Canadian business corporations statutes require nominees to disclose a conflict of interest and to refrain from attending at board discussions about, or voting on, the issues. Depending on the nature of more general restructuring discussions, it may also be prudent for the nominee director to simply recuse themselves.
- The nominee director should continue to seek legal advice about their duties throughout the process. Some business corporations statutes do not recognize an expert reliance defence in connection with breach of a director’s fiduciary duty, but expert advice may nevertheless help a director avoid an obvious misstep.
Please note that each circumstance will have its own particular facts and issues and that counsel should be conducted before proceeding.