Duty of Care

Duty of care requires that, in carrying out their functions, the directors and officers must, among other things:

exercise at least the level of care and diligence that a reasonable person would exercise in similar circumstances. To act diligently a director:

• should attempt to attend all directors’ meetings;
• should obtain specialized advice where required;
• may rely in good faith on certain documents, such as financial statements provided by the company’s auditor;
• must exercise necessary skill (depending on the director’s background circumstances, for example level of education, different standards may apply to their action);
• must act in accordance with the Business Corporations Act and its regulations and, to the extent that it does not conflict with the legislation, to act in accordance with the memorandum and articles of the company;
• while the directors owe their duties only to the company, in assessing the company’s best interests, they should also consider the interests of shareholders and other stakeholders, including creditors, employees, consumers and suppliers, the government, and potentially the broader community in which the company operates and even the environment.
• act honestly at all times, in good faith and in the best interests of the corporation, as opposed to their own personal interests, which, if there are any, must be disclosed in writing.

The standard of care is objective in that a director’s conduct is tested by reference to a “reasonably prudent person in comparable circumstances”. In contrast to the duty of loyalty, which is owed only to the corporation itself, the duty of care is potentially owed not only to the corporation, but also to stakeholders directly. The effect of this is to make alleged breaches of the duty of care actionable directly by and in the name of individual stakeholders, rather than any claim having to be brought by or in the name of the corporation, as is the case with a claim alleging a breach of the duty of loyalty. This increases the exposure of directors to claims alleging breach of the duty of care, as compared with duty of loyalty claims.

Duty of Loyalty

Directors, as fiduciaries, are held to a very high standard of loyalty and good faith in their conduct in relation to the corporation. The duty of loyalty and good faith has been codified by Canadian corporate statutes in the requirement that directors “act honestly and in good faith with a view to the best interests of the corporation.”

Canadian corporate law formerly adhered to a “shareholder primacy” view under which the best interests of the corporation were determined by reference to the interests of “shareholders as a whole”. Canadian courts have now rejected that approach in favour of a stakeholder view of the corporation according to which the “best interests of the corporation” are not to be equated with the interests of any single stakeholder group and are to be determined having regard to the interests of all of the relevant constituencies that together comprise the corporate enterprise. Where the interests of all stakeholder groups are aligned, determining the best interests of the corporation is straightforward. However, where the interests conflict, the directors are to engage in a balancing exercise. The relative weight to attach to the conflicting interests and the timeframe by reference to which the interests are to be considered are matters of business judgment for the directors. While directors are not to equate the corporation’s interests solely with shareholder interests, shareholders are clearly a critical stakeholder. Directors are expected to engage with shareholders and be responsive to their concerns.

An important aspect of the duty of loyalty is the avoidance of conflicts between a director’s duty to the corporation and personal interests or duties to others with their own interests. The latter is a potential issue in circumstances where the director is a fiduciary of other enterprises whose interests intersect with, and are not necessarily aligned with, the interests of the corporation on whose board the director sits.

Directors should regularly review their other commitments and determine whether there is a conflict. The Canadian corporate statutes specifically require each director (and officer) to disclose in writing the nature and extent of the director’s interest in a material contract or transaction or in a proposed one with the corporation. This applies if the director is a party to the contract or transaction or is a director or officer of, or has a material interest in, a party to the contract or transaction. In these circumstances, the statutes require the director to refrain from voting on a resolution to approve the contract or transaction. A director who fails to declare an interest properly or fails to abstain from voting can be called to account for any gain or profit from the contract or transaction, and the contract or transaction can be voided. A conflict that is serious and ongoing may not be amenable, as a practical matter, to being dealt with through disclosure or abstention from voting. In some circumstances, the director may have to resign. Failure to make such a disclosure could result in a court setting aside the contract upon application by the corporation or a shareholder.

Another aspect of the duty of loyalty is the obligation of directors not to divert, for their personal benefit or for the benefit of another business, business opportunities that come to their attention that could be of interest to the corporation.

Business Judgment Defence

Courts will not generally second-guess or substitute their judgment for that of the directors, who are the statutorily constituted body to make business decisions on behalf of the corporation. The merits of directors’ business judgments will not be challenged at all provided:

• the directors’ decision was unconflicted, any actual conflicts having been addressed through recusal of conflicted directors;
• the directors asked themselves and answered the correct question, namely, “What is in the best interests of the corporation having regard to the implications for all affected stakeholders”?
• the directors acted on the basis of all material information reasonably available in the circumstances, including professional advice;
• the directors took adequate time to deliberate; and
• the decision in question falls within the range of reasonable possible choices, measured against the criterion of the best interests of the corporation.

To establish these preconditions for business judgment deference, directors should ensure that their decision-making process is appropriately documented, including in minutes of directors’ meetings. These minutes should reflect not only the decision reached by the directors, but also what they actually considered in reaching the decision.

Other Bases for Personal Liability

The statutory oppression remedy confers on courts a broad remedial jurisdiction to make any order the court thinks “fit” to rectify corporate conduct that the court considers unfairly prejudices or unfairly disregards the interests of any stakeholder. Fairness is tested by reference to the “reasonable expectations” of stakeholders as to their treatment by the corporation. The courts’ remedial powers under the oppression remedy extend to making orders for compensation of aggrieved stakeholders against directors personally where directors have exercised their powers in a way deemed unfair to the complainant. Absent self-dealing or the appropriation of corporate opportunities, directors do not normally face personal liability under the oppression remedy. For personal liability to be an appropriate remedy in the circumstances, one would normally expect to see present:

• the breach by the director of the duty of loyalty or care;
• a personal benefit derived by the director from the conduct in question; and
• undue prejudice to other stakeholders from a remedy against the corporation rather than against the director personally.

Courts have traditionally been reluctant to allow claims against directors where the factual basis for the claim is the same as for a parallel claim simultaneously asserted, or that could be asserted, against the corporation. Exceptions to the general rule protecting directors against personal liability in tort were made in circumstances where the director was acting at least partly for personal interest or where the conduct in question could be characterized as fraudulent or dishonest. Recent cases appear to be eroding this protection of directors against personal liability in tort. Some cases suggest that there is no principled basis for shielding directors from liability just because the tortious conduct was committed on behalf of the corporation. In other words, if directors do anything to a third party for which they would be personally liable if they had done it on their own behalf, they may not be able to escape personal liability merely because they did it on behalf of the corporation in performance of their corporate responsibilities.