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GOWLING LAFLEUR HENDERSON LLPMEMORANDUM

DIRECTORS AND OFFICERS DUTIES AND LIABILITIES

August, 2010

Gowling Lafleur Henderson LLPRobert E. Milnes & Kathleen M. Ritchie

This paper is designed to provide information of a general nature only and is not intended as asubstitute for professional consultation and advice in a particular case.


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TABLE OF CONTENTS

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INTRODUCTION ......................................................................................................................... 1

PART I - BRIEF OVERVIEW OF DIRECTORS AND OFFICERS DUTIES ANDLIABILITIES......................................................................................................... 2

1. Duties of Directors and Officers ............................................................................ 2(a) The Duty to Manage .................................................................................. 2(b) The Fiduciary Duty of Directors and Officers........................................... 2(c) The Duty of Care, Diligence and Skill....................................................... 3(d) The Duty to Comply with the Law ............................................................ 4(e) Conflicts of Interest.................................................................................... 4

2. Liabilities of Directors and Officers ...................................................................... 5(a) Liabilities of Directors Under the Business Corporations Statutes ........... 5

(b) Liability for Wages and Other Employee Related Payments .................... 5(c) Liability under Environmental Legislation................................................ 6(d) Oppression Remedy................................................................................... 6(e) Liability under Securities Legislation........................................................ 6(f) Liability under Other Statutes.................................................................... 7(g) Statutory Relief from Certain Liabilities under the Business

Corporations Statutes ................................................................................. 7(h) Indemnification and Insurance................................................................... 8

3. Conclusion ............................................................................................................. 9

PART II - IN-DEPTH REVIEW OF DIRECTORS AND OFFICERS DUTIES AND

LIABILITIES....................................................................................................... 101. Introduction.......................................................................................................... 102. Historical Background ......................................................................................... 103. The Duty to Manage ............................................................................................ 114. The Duty of Care, Diligence and Skill................................................................. 115. The Fiduciary Duties............................................................................................ 13

(a) The Duty to Act in the Best Interests of the Corporation ........................ 13(b) The Duty of Loyalty and Conflicts of Interest......................................... 16(c) The Duty to Disclose Interest in Corporate Transactions........................ 17

6. Other Liability Under the Business Corporations Acts ....................................... 197. Liability Under the Occupational Health and Safety Act .................................... 20

8. Liability Under Environmental Law.................................................................... 219. Liability Under the QBCA................................................................................... 2310. Liability Under Other Statutes ............................................................................. 2411. Liability in Tort: The Duty to Act within the Scope of Authority....................... 2712. Indemnification of Directors and Officers........................................................... 2813. Liability Insurance ............................................................................................... 2914. New Legislation in Canada.................................................................................. 2915. Conclusion ........................................................................................................... 31


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TABLE OF CONTENTS(continued)

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PART III - PRACTICAL SUGGESTIONS FOR COMPLYING WITH DUTIESAND MINIMIZING LIABILITY........................................................................ 32


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INTRODUCTION

This paper discusses the duties and liabilities imposed on directors and officers of acorporation organized under the Canada Business Corporations Act(the CBCA) or under theBusiness Corporations Act(Ontario) (the OBCA) (collectively, the Acts). While directors

and officers duties and liabilities are substantially similar under both Acts, there are sometechnical differences.

Part I of this paper provides a brief overview of directors and officers duties andliabilities. Part II is an in-depth review of this area of the law, including the historicalbackground and a summary of relevant case law. Finally, Part III of the paper contains a list ofpractical suggestions to assist directors and officers in complying with their duties and avoidingliability.

This paper is intended to provide information of a general nature only, and is not intendedas a substitute for professional consultation and advice in a particular case. This area of law can

be quite complex and must be considered in light of the relevant facts of any particular situation.

For more information on directors duties and liabilities, please feel free to contactGowlings and Robert E. Milnes at [email protected] or Kathleen Ritchie [email protected].


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PART I - BRIEF OVERVIEW OF DIRECTORS AND OFFICERS DUTIES AND

LIABILITIES

1. Duties of Directors and Officers(a) The Duty to ManageUnder both the CBCA and the OBCA, the basic mandate of the board of directors (the

Board) is to manage or supervise the management of the business and affairs of thecorporation. The Boards mandate can be accomplished directly by the Board, or indirectly bydelegating permissible tasks to committees of the Board and to officers of the corporation. TheBoard of a public corporation in Canada will have at least one standing committee the AuditCommittee, and possibly other committees, including a Compensation Committee and aCorporate Governance and Nominating Committee. The Board of a public corporation will alsoappoint officers, including a Chief Executive Officer and a Chief Financial Officer.

In delegating tasks to Board committees, the directors are not relieved of their duties, but

rather must continue to perform their oversight function and question the reports andrecommendations of the committees. In so doing, the directors are entitled to rely in good faithon committee members to discharge the mandate of their committee.

Similarly, in delegating certain management functions to the officers, the directors muststill retain ultimate control and direction over the affairs of the corporation. However, providedthe directors appropriately oversee management, and in the absence of grounds for suspicion, thedirectors are justified in trusting the officers of the corporation to perform their duties honestly.

(b) The Fiduciary Duty of Directors and OfficersIn addition to the statutory duties of the directors, at common law, officers and directorsowe a fiduciary duty to the corporation, which can be described as a duty of loyalty and good

faith. As such, officers and directors are obliged not to put themselves in positions of conflictwith their duty to the corporation. The courts have rigidly applied this concept by insisting thatdirectors and officers avoid not only actual conflict but also the potential for conflict.

Under both Acts, this duty requires every director and officer of a corporation, inexercising his or her powers and discharging his or her duties, to act honestly and in good faithwith a view to the best interests of the corporation. The application of these concepts has evolvedover time primarily through judicial analysis and they are intended to protect a corporationagainst self-dealing, self-interest and bad faith at the hands of its directors or officers.

In addition, there are provisions in both Acts discussed under Conflicts of Interestbelow which, if followed, provide procedures for the directors and officers to follow inconnection with related party transactions which can protect the validity of the contract ortransaction, provided that the contract or transaction is reasonable and fair to the corporation.

Finally, the courts have been very clear that a director nominated to the Board by acontrolling shareholder or other stakeholder is not entitled to prefer the interests of his or hernominator to the interests of the corporation. Furthermore, the courts have found directors to be


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ineligible for indemnification where they have acted in the interests of their nominator, ratherthan in the best interests of the corporation. The courts have also not been sympathetic todirectors who have argued that they were sitting on the Board at someones request and wereperforming no real function and accordingly, that they should not be held accountable for theactions of the Board.

(c) The Duty of Care, Diligence and SkillAt common law, directors and officers are expected to perform their duties in accordance

with a certain standard, generally referred to as the duty of care. The duty of care, which hasbeen codified in both Acts, is the standard of performance against which the actions of directorsand officers will be measured. Under the Acts, this duty requires every director and officer of acorporation in exercising his or her powers and discharging his or her duties, to exercise the care,diligence and skill that a reasonably prudent person would exercise in comparable circumstances.The qualifications of a particular director or officer, the significance of the action to the directoror officer when making the decision, the time available for making the decision, the alternativesopen to the corporation and other factors have been considered in interpreting the phrase incomparable circumstances. Specifically, such phrase has been interpreted to apply differentstandards to different directors and officers and to increase the standard of care required from asophisticated director or officer.

In assessing whether or not the directors or officers have met their obligations, Canadiancourts generally approach the subject on the basis of what has become known as the businessjudgement rule. This rule operates to shield from court intervention business decisions whichhave been made honestly, prudently, in good faith and on reasonable grounds. Specifically, thecourt will look to see that the directors or officers have made a reasonable decision, notnecessarily a perfect decision. Provided the decision is taken within a range of reasonableness,the court will not substitute its opinion for that of the Board or management even though

subsequent events may cast doubt on a particular Board or management decision. Directors andofficers are not likely to be held to be in breach of their duty of care if they have acted prudentlyand on a reasonably informed basis. Directors and officers must be scrupulous in theirdeliberations and demonstrate diligence.

For directors, from a practical perspective, this means that the business judgement rulefocuses in part on the procedures implemented and processes followed by the Board in reachingits decision, with the question being whether the procedures and processes were sufficient toensure that the directors judgment was exercised in good faith, in an impartial, informed andreasonable manner. Where a court is satisfied with the procedures and processes followed, it isless likely to second-guess the Boards decisions. Process alone, however, cannot substitute for

an informed and reasonable decision. The Board must be able to demonstrate that it took anactive role in the decision-making process and was fully informed. The Board should documentits process and the reasons for its decisions through the minutes of its meetings as these recordswill form the evidence that it discharged its duties.


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(d) The Duty to Comply with the LawIn addition to the statutory and common law duties noted above, directors and officers are

also required to comply with all applicable laws. Under the Acts, every director and officer of acorporation is required to comply with the applicable business corporations statute and theregulations thereunder and the articles and the by-laws of the corporation. Furthermore, noprovision in a contract, the articles, the by-laws or a resolution relieves the directors from theduty to act in accordance with the CBCA, the OBCA or the applicable regulations thereunder orrelieves them from liability for a breach thereof.

(e) Conflicts of InterestThe provisions of the Acts dealing with conflict of interest require the directors and

officers to disclose their interest in material contracts and transactions. If the directors or officersfail to make the required disclosure, the Acts provide that the corporation or a shareholder mayapply to the court to have the transaction set aside. The Acts set forth procedures which, iffollowed, can protect the validity of the contract in question and may also protect a director or

officer from being required to account for the profits accrued from such contract in certaincircumstances. However, in order to avoid being set aside by court action, the contract ortransaction in question must also be reasonable and fair to the corporation at the time it wasapproved.

More specifically, under both Acts, a director or officer is required to disclose to thecorporation, in writing or by requesting to have it entered in the minutes of meetings of directorsor of meetings of committees of directors, the nature and extent of any interest that he or she hasin a material contract or material transaction, whether made or proposed, with the corporation, ifthe director or officer is a party to the contract or transaction, is a director or an officer, or anindividual acting in a similar capacity, of a party to the contract or transaction, or has a material

interest in a party to the contract or transaction.

A director required to make such a disclosure is not permitted to vote on any resolution toapprove the contract or transaction unless the contract or transaction:

(i) relates primarily to her remuneration as a director, officer, employee oragent of the corporation or any affiliate;

(ii) is for indemnity or insurance permitted under the relevant Act; or(iii) is with an affiliate of the corporation.

The Acts also outline requirements with respect to the timing of the initial disclosure,which differ depending on whether the person making the disclosure is a director or an officer,and with respect to continuing disclosure. The Acts also address the effect of the disclosure andimplications of shareholder approval.

It is important to note that compliance with the conflict of interest provisions of the Actswill not protect a director or officer who has misappropriated a corporate opportunity. Thecourts do not tolerate the misappropriation of corporate opportunities and the Acts do not provide


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any mechanism for the directors or officers to follow that would allow them to take advantage ofa corporate opportunity with impunity. Directors and officers will be found in breach of theirfiduciary duty if they appropriate for their benefit or for the benefit of any other entity of whichthey are a director or officer or in which they have an interest, a business opportunity which hasbeen presented to the corporation and discussed at the Board level. A further concern in this area

is the appropriation of confidential information. A director or officer who becomes privy toconfidential information pertaining to a transaction that the corporation is contemplating couldface personal liability if it is established that such confidential information which was impartedto such director or officer in the course of his or her duties for the corporation was disclosed toanother entity in which he or she is interested, for the benefit of that other entity and to thedetriment of the corporation.

2. Liabilities of Directors and Officers(a) Liabilities of Directors Under the Business Corporations StatutesThe Acts generally provide that directors of a corporation who vote for or consent to a

resolution authorizing the issue of a share for consideration other than money are jointly andseverally, or solidarily in the case of the CBCA, liable to the corporation to make good anyamount by which the consideration received is less than the fair equivalent of the money that thecorporation would have received if the share had been issued for money on the date of theresolution. A director who proves that he or she did not know and could not reasonably haveknown that the share was issued for consideration less than the fair equivalent of the money thatthe corporation would have received if the share had been issued for money will not be heldliable under these provisions.

The Acts also generally provide that directors of a corporation who vote for or consent toa resolution authorizing: (i) a purchase, redemption or other acquisition of shares; (ii) a

commission; (iii) payment of a dividend; (iv) payment of an indemnity; or (v) payment to ashareholder, in each case in a manner or in circumstances prohibited by the applicable Act, arejointly and severally, or solidarily under the CBCA, liable to restore to the corporation anyamounts so distributed or paid and not otherwise recovered by the corporation.

(b) Liability for Wages and Other Employee Related PaymentsOne of the more frequent areas of exposure for directors is in respect of amounts owing

to employees and for source deductions owing to government authorities in respect ofemployees.

Under the Acts, directors are generally jointly and severally, or solidarily in the case ofthe CBCA, liable to employees of the corporation for all debts not exceeding six months wagespayable to each such employee for services performed for the corporation while they aredirectors respectively.

Under the OBCA, directors are also liable for vacation pay accrued while they aredirectors, for not more than twelve months under the provincial Employment Standards Actandthe regulations thereunder, or under any collective agreement made by the corporation. There are


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certain conditions precedent to a director being held liable under these provisions as well ascertain limitations on directors liability for amounts owed by the corporation to employees.

In addition, provincial employment standards legislation and other federal legislation in Canadaimpose liability on directors for employee wages and for employee source deductions forincome tax, employment insurance premiums and Canada Pension Plan contributions.Employees have the option of pursuing directors under either the applicable businesscorporations statute or such other legislation.

(c) Liability under Environmental LegislationAn area which can give rise to significant liability for directors and officers is under

environmental legislation. Under applicable environmental legislation, officials can issueremediation orders directly against directors or officers of a corporation to rectify environmentalcontamination. Such orders can be issued against a corporation and its directors and officerseven without fault and without proof of causation, on the basis of a corporations ownership,management or control of a property. Defences to such orders by directors and officers have

included a demonstration of having acted with due diligence and prudence and without havingcreated or aggravated the contamination problem.

(d) Oppression RemedyIt should be noted that the Acts establish a procedure for a complainant to apply to a

court for an order to rectify certain matters. These provisions may be invoked to imposepersonal liability on directors or officers. A court may issue any order it thinks fit, if it is satisfiedthat the powers of the directors of the corporation have been exercised, or the business or affairsof the corporation have been carried on or conducted, in a manner that is oppressive or unfairlyprejudicial to or that unfairly disregards the interests of any security holder, creditor, director or

officer. Generally, the courts have held that the specific actions or inaction of a director orofficer must be directly linked to the conduct said to constitute the oppression and thecircumstances of the case must make it appropriate for the director or officer to be required topersonally compensate the aggrieved parties.

(e) Liability under Securities LegislationFor public corporations, under the Securities Act(Ontario), every person or company that

makes a misrepresentation in a document filed pursuant to Ontario securities laws or otherwisecontravenes Ontario securities laws is guilty of an offence and on conviction is liable to a fine ofnot more than $5 million or to imprisonment for a term of not more than five years less a day, orto both. Where a public corporation is guilty of an offence, every director or officer of the publiccorporation who authorized, permitted or acquiesced in the offence is also guilty of an offence.The Ontario Securities Commission (the OSC) also has powers to impose administrativepenalties of up to $1 million and may order the disgorgement of amounts obtained as a result ofnon-compliance with the Securities Act. The OSC may also issue cease trading orders against apublic corporation and its directors and officers and can prohibit an individual from acting as adirector or officer of any public corporation. As of December 31, 2005, a new offence wasadded to the Securities Actrelating to fraud and market manipulation. No person or company


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may, directly or indirectly, engage or participate in any act, practice or course of conduct relatingto securities or derivatives of securities that the person or company knows or reasonably ought toknow: (i) results in or contributes to a misleading appearance of trading activity in, or anartificial price for, a security or a derivative of a security; or (ii) perpetrates a fraud on anyperson or company.

In addition, under applicable insider trading laws, it is illegal for persons in a specialrelationship (such as a director or officer) to trade in securities using inside information that isnot generally available to the public, or to inform others of such information (tipping) otherthan in the necessary course of business. Under the Securities Act, a person found guilty ofillegal trading or tipping is liable to a fine of not more than the greater of $5 million or triple theprofit made and/or imprisonment for a term not exceeding five years less a day. Under theCriminal Code (Canada), the maximum term for imprisonment is ten years.

With respect to civil liability, under the Securities Act, investors have the right to sue apublic corporation, its directors and others for a misrepresentation found in a prospectus, take-over bid circular, directors circular or offering memorandum. As of December 31, 2005, theSecurities Actwas amended to give investors in the secondary market the right to sue a publiccorporation, its directors and others for a misrepresentation in certain documents (such asfinancial statements, MD&A, the annual information form and information circulars) and publicoral statements and for failing to make timely disclosure. Investors have the right to sue whetheror not the investor actually relied on the misrepresentation or disclosure non-compliance.Varying defences (including, in some instances, a due diligence defence) are available based onones responsibility for the disclosure.

(f) Liability under Other StatutesIn addition to liability under the Acts, employment related legislation, environmental

legislation and securities legislation (in the case of a public corporation), it should be noted thatother federal and provincial legislation can impose liability on directors in a variety of areas (forexample, consumer legislation).

(g) Statutory Relief from Certain Liabilities under the Business CorporationsStatutes

Both Acts specifically provide that if the directors relied in good faith on certain things,they will not be liable for certain offences under the applicable business corporations statute.However, these provisions operate to relieve directors of liability only for certain specificstatutory liabilities, not for just any matter for which the directors may be liable.

The CBCA provides safe havens for directors in certain circumstances if the directorsacted in good faith. Specifically, under the CBCA, a director is not liable under the enumeratedliability provisions or wage liability provisions noted above, and has complied with his or herduty to comply with the CBCA, if the director exercised the care, diligence and skill that areasonably prudent person would have exercised in comparable circumstances, includingreliance in good faith on financial statements of the corporation represented to the director by anofficer of the corporation or in a written report of the auditor of the corporation to fairly reflect


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the financial condition of the corporation in accordance with generally accepted accountingprinciples, or a report of a lawyer, accountant, engineer, appraiser or other person whoseprofession lends credibility to a statement made by any such person.

Under the OBCA, the safe haven provision is somewhat different. Importantly, there isno relief from statutory liability with respect to unpaid wages. In addition to the good faithreliance on financial statements and auditors reports and reports of professionals mentionedabove, a director of an Ontario corporation is entitled to rely in good faith on interim or otherfinancial reports represented to him or her by an officer of the corporation to fairly present thefinancial position of the corporation in accordance with generally accepted accounting principles.The OBCA also allows directors to rely in good faith on a report or advice of an officer oremployee of the corporation, where it is reasonable in the circumstances to rely on the report oradvice.

It is important to note that the safe haven provisions noted above apply only to directors,and do not operate to relieve officers of the same statutory liabilities.

It should be noted that directors may also be relieved of liability if they dissent from aparticular action. Under both Acts, a director who is present at a meeting of directors orcommittee of directors is deemed to have consented to any resolution passed or action taken atthe meeting unless the director requests a dissent to be entered in the minutes of the meeting, orthe dissent has been entered in the minutes, the director sends a written dissent to the secretary ofthe meeting before the meeting is adjourned, or the director sends a dissent by registered mail ordelivers it to the registered office of the corporation immediately after the meeting is adjourned.

Furthermore, a director who votes for or consents to a resolution is not entitled to dissent.A director who was not present at a meeting at which a resolution was passed or action taken isdeemed to have consented thereto unless within seven days after becoming aware of the

resolution, the director causes a dissent to be placed with the minutes of the meeting, or sends adissent by registered mail or delivers it to the registered office of the corporation.

(h) Indemnification and InsuranceThe Acts provide for the indemnification of directors and officers in relatively narrow

circumstances. Generally, the Acts provide that a corporation is permitted to indemnify a directoror officer, a former director or officer or another individual who acts or acted at the corporationsrequest as a director or officer, or an individual acting in a similar capacity, of certain otherentities, against all costs, charges and expenses, including an amount paid to settle an action orsatisfy a judgment, reasonably incurred by the individual in respect of any civil, criminal,

administrative, investigative or other proceeding in which the individual is involved because ofthat association with the corporation or other entity. However, a corporation may not indemnifysuch an individual unless she acted honestly and in good faith with a view to the best interests ofthe corporation or other entity, as the case may be, and in the case of a criminal or administrativeaction or proceeding that is enforced by a monetary penalty, the individual had reasonablegrounds for believing that the individuals conduct was lawful.


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Under the Acts, a corporation may also purchase and maintain insurance for the benefitof such an individual against any liability incurred by the individual in the individuals capacityas a director or officer of the corporation or in her capacity as a director or officer, or in a similarcapacity, of another entity, if the individual acts or acted in that capacity at the corporationsrequest, subject of course to the limitations on indemnification noted above.

3. ConclusionDirectors and officers of corporations should be aware of common law and statutory

duties applicable to them and understand how to comply with such duties. Directors and officersof corporations should also be aware of the liabilities which they may face and understand howto mitigate those liabilities. For some practical tips on complying with these duties and avoidingliability, see Part III of this paper, below.


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PART II - IN-DEPTH REVIEW OF DIRECTORS AND OFFICERS DUTIES AND

LIABILITIES

1. IntroductionHistorically the duties and liabilities of directors under Canadian law have evolved from

the duties of trustees of commercial organizations up until the evolution of the modern businesscorporation commencing in the mid-19th century. As stand-alone principles the duties ofdirectors under modern Canadian corporate legislation appear quite simple. The directors havethe duty to manage or supervise the management of the business and affairs of the corporation.The directors must act honestly, in good faith and with a view to the best interests of thecorporation. Finally, directors have a duty to avoid conflicts of interest unless such conflict isdisclosed and approved by a disinterested quorum of shareholders.

Given the complexity of modern corporate life, particularly in large corporations, the

courts are struggling to fit these simple straight-forward principles into the context of a moderncorporation. For example, does the best interests of the corporation involve only considering theeconomic interests of shareholders, or are the interests of other stakeholders such as employeesand bondholders to be considered as well? In assessing their performance, are directors to bejudged by an objective standard, or are the qualifications of each director to be considered inassessing whether or not the particular director met the required standard of care?

This potion of the paper examines the basic principles and discusses how the courts arecurrently interpreting these principles in actual situations.

2. Historical BackgroundUntil the early part of the century directors were considered as trustees, and their duties

and powers developed out of this concept. The historic development of the concept of a directoras trustee is easy to explain in that prior to 1844, the enactment of first modern companieslegislation in England, most commercial enterprises were unincorporated and depended for theirvalidity on a deed of settlement vesting the property of the corporation in trustees. To impose ondirectors the fiduciary duty of trustees made sense, since the directors were usually also thetrustees and they held the property in trust for the shareholders or members. The analogy beganto break down at the end of the 19th century when it was realized that directors of a commercialenterprise are charged with different responsibilities from trustees, the latter being only expectedto adopt a conservative management policy to preserve the assets for the beneficiaries of the trustand the former being charged with the responsibility of managing the assets in such a way so asto gain a profit.

Before considering the modern statutory provisions relating to these duties, it should benoted that the statutory provisions in question now subject officers of a corporation to the sameduties as directors. At common law officers were not subject to any higher duty than those offull-time employees, which is the duty to devote their whole time and attention (during usualoffice hours) to the business of the corporation and to act honestly in the best interests of theiremployer. The evolution of a class of professional corporate managers is one of the most


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distinctive features in the development of a modern corporation but the courts are not preparedyet to recognize that it has obtained professional status and standards and should perhaps besubject to its own standard of skill and diligence. However, the argument has been madeacademic by recent Canadian companies legislation, which holds officers to the same standard ofskill and fiduciary duties as directors.

3. The Duty to ManageUnder subsection 115(1) of the OBCA and subsection 102(1) of the CBCA, the directors

of a corporation are required to manage or supervise the management of the business and affairsof the corporation. According to both Acts, this power which is vested in directors can only berestricted, in whole or in part, by a unanimous shareholders agreement (USA). When a USA isadopted, the shareholders assume those rights, powers, duties and liabilities which have beenremoved from the directors. In the absence of a USA, the management of a corporationsbusiness and affairs is the prerogative of the directors, not of the shareholders.

4. The Duty of Care, Diligence and SkillThe principle formulated in English cases by the end of the 19th century that a director

must exercise such degree of skill and diligence as would amount to the reasonable care whichan ordinary man might be expected to take in the circumstances, has been embodied in both theOBCA and the CBCA. Both Section 134 of the OBCA and Section 122 of the CBCA state thatdirectors and officers in exercising their powers and discharging their duties shall exercise thecare, diligence and skill that a reasonably prudent person would exercise in comparablecircumstances.

It has been suggested that the phrase in comparable circumstances is intended to makerelevant all of the circumstances in which a decision is made including the qualifications of the

particular director, the significance of the action to the director when making the decision, thetime available for making the decision, the alternatives open to the corporation, and other factors.It might also be used to apply different standards to different directors depending on whether thedirector is an outside or an inside director, a representative of a special interest group such asworkers or minority shareholders, or a professional advisor to the corporation, such as a lawyeror an accountant.

In Standard Trustco Ltd., Re (1993), 6 B.L.R. (2d) 241 (O.S.C.) the phrase incomparable circumstances was held to increase the standard of care required from asophisticated director. This action was based on the release of financial statements that did notdisclose the concerns of the Office of the Superintendent of Financial Institutions (OSFI). The

OSC noted that the directors failed to exercise the requisite amount of care and placed greatemphasis on the sophistication of the Board. This decision discusses at length what the directorsshould have done as a result of concerns expressed by OSFI. The OSC determined that it shouldhave been obvious to the directors that they could not rely on management, when they had areason to be concerned about the integrity or ability of management, and in these circumstances,the directors themselves should have consulted independent outside advisors and made moreindependent inquiries to OSFI.


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The Standard Trustco decision also addressed the issue of the standard of care of adirector who sits on a committee of the Board, such as the audit committee. The OSC offered thefollowing commentary:

In our opinion the members of the audit committee should bearsomewhat more responsibility than the other directors for whatoccurred at the board meetings not because there was a greaterstandard of care imposed on them, but rather because theircircumstances were different. As members of the audit committee,they had a greater opportunity to obtain knowledge about and toexamine the affairs of the company than non-members had.

Although it is still not clear that the attempts to codify the common law standard of carefor directors in Canada have been successful in raising the standard of skill required for directors,such codification has had two significant results. First of all, it is no longer possible for directorsof Ontario or federal corporations to contract out of their duties or to exclude liability for breachthereof under corporate by-laws. Furthermore, indemnification by the corporation for breach ofthis duty is either not permitted or is very limited. Secondly, there is clearly a trend in moderncompanies law towards a due diligence test. For example, both the CBCA and the OBCAprovide that, unless a director expressly dissents within seven days, he is deemed to haveconsented to any resolution or action of which he becomes aware.

Both the CBCA and the OBCA permit Boards to appoint an executive committee fromamong its directors, and to delegate powers and duties of the Board to such committee. Also,both Acts require public corporations to have audit committees of directors to review financialstatements. The question arises, as it did in Standard Trustco, whether directors serving on thesecommittees are subject to a higher standard of care than the other directors.

In the case of audit committees, it is submitted that under both the OBCA and CBCA theaudit committee is only an additional protection for shareholders and is not intended to reducethe duty of diligence and the liabilities of all of the directors in approving financial statements.Under both Acts the directors, and not a committee thereof, are responsible for approving thefinancial statements before they are submitted to the shareholders.

In UPM-Kymmene Corp v. UPM-Kymmene Miramichi et al. (2004), 183 O.A.C. 310(Repap), an Ontario Court of Appeal decision, the Court of Appeal affirmed an OntarioSuperior Court decision ((2002), 214 DLR (4th) 310) that a director generally cannot rely on therecommendations of a Board committee to shield him from an independent obligation to makeinformed decisions. In Repap, the Chairman of the company was provided with an overly

generous compensation package that was not commensurate with his experience and abilities andthe precarious financial state ofRepap. The Board relied upon the recommendation of thecompensation committee but that committee did not have the time or expertise to review thecontract, and its members did not understand its key components. The trial judge held that it wasnot unreasonable for the Board to assume that the committee had done a careful job, but thisassumption did not relieve the duty of the directors to make an informed and reasonable decision.Accordingly, the Court of Appeal held that the process by which the Board members came to


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their decision was flawed, and fell short of the exercise of prudent judgment in the interests ofshareholders that is expected of directors.

5. The Fiduciary DutiesThe fiduciary duties expected of directors and officers under the Acts are, simply stated,

that the directors and officers must act honestly, in good faith and with a view to the bestinterests of the corporation. As in the case of the duty of care owed by directors, the provisionsof the OBCA and CBCA dealing with directors fiduciary duties attempt to codify the case law.Despite this codification, the standard to which directors and officers must comply to avoidbreaching their fiduciary duties is unclear. Nonetheless, directors and officers who take acautious approach to possible conflicts of interest are unlikely to become subject to an actionclaiming damages or other loss.

The fiduciary duties of directors and officers can be divided into three categories: theduty to act in the best interests of the corporation, the duty of loyalty and to avoid conflicts ofinterest, and the duty to disclose any interests in corporate transactions.

(a) The Duty to Act in the Best Interests of the CorporationThe courts have established that directors will be liable as fiduciaries if they fail to act in

good faith and in what they honestly believe to be the best interests of the corporation, whencarrying out their statutory responsibility for managing the corporation. Historically, the phrasebest interests of the corporation has been interpreted to mean the interests of all of theshareholders taken as one group. Any exercise of the shareholders powers by a director for acollateral purpose, not in accordance with the interests of shareholders, may be set aside by thecourts. However, difficulties arise, and will continue to arise, in determining what are the bestinterests of the corporation.

Traditionally, the courts have taken a fairly narrow view of what is in the best interest ofthe corporation. Until recently the courts have taken the position that directors must always begoverned by the profit motive, and are prohibited from taking into account the interests ofemployees, creditors, consumers, or society-at-large unless it can be established that actionstaken or payments made for non-business purposes will increase profitability. Furthermore,directors and officers must pursue the profit motive for the benefit of all shareholders equally.Any transactions entered into which depart from this narrow focus may be set aside by the courtseven if the transactions could perhaps, under a more modern analysis, lead to greater profits inthe long run by creating a better corporate image.

A case that challenges the traditional view of profit being the sole justification for adirectors decision is the judgment of the Ontario Court of Appeal in Pente InvestmentManagement Ltd. v. Schneider Corp (1998), 42 O.R. (3d) 177. A special committee of outsidedirectors was appointed by Schneiders to review take-over bids. The committee accepted a bidfrom Smithfield Foods that was higher than market value for the shares of the company, but lessthan another bid made by Maple Leaf Foods Inc. The main issue was whether the committeesactions were not in the best interest of Schneider Corp. and therefore in bad faith. In dismissingthe appeal by Maple Leaf, the court emphasized that the committee acted in the best interests of


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the company. In particular, the committee canvassed its options, but was not under anyobligation to turn the bidding process into an auction. The committee obtained fair value for theshareholders given the intense time-limit-driven context of the bid process.

Recently the Supreme Court of Canada considered whether or not the fiduciary dutiesowed by directors to a corporation could be extended to creditors, in the case ofPeoplesDepartment Stores (Trustee of) v. Wise, 2004 SCC 68, an appeal from a judgement of theQuebec Court of Appeal. In Peoples, the directors of a department store chain implemented acash management system among affiliated retail entities, which resulted in the insolvency of theentire corporate group. Creditors of the corporate group sued the directors personally, on thebasis that the creditors were owed the same fiduciary duties as owed to the corporation, and thedirectors of Peoples had breached this duty by implementing the cash management system,thereby causing the insolvency of the corporation to the detriment of the creditors. In its decisionthe Supreme Court of Canada rejected the extension of directors fiduciary duties to creditors,but did hold that the statutory standard of care imposed on directors will enable any outside partyinjured by a failure to meet this standard of care to sue for damages, including creditors.Therefore creditors can bring an action for breach of the statutory duty of care should directorsact recklessly and not with the degree of skill expected of them in the particular circumstances.Although the Supreme Court found that the Peoples directors had acted within the requiredstandard in these particular circumstances, the Supreme Court decision may be an importantextension of the liability of directors for breach of their statutory standard of care, because thedoor appears to be open for injured third parties, whether creditors, employees, or suppliers toname a few, to sue directors personally for damages.

In response to the decision inPeoples, s. 134 (1) of the OBCA was amended on August1, 2007 with the intention of clarifying that directors and officers owe their fiduciary obligationsto the corporation alone. The section now reads, [e]very director and officer of a corporation inexercising his or her powers and discharging his or her duties to the corporation shallact

honestly and in good faith with a view to the best interests of the corporation [emphasis added].While the amendments are clearly an attempt to limit the scope of the statutory duty of careowed by officers and directors, and thus prevent the types of legal actions against directors bythird parties seen inPeoples, it remains to be seen how the courts will interpret the changes.

In 2008, the courts again considered the same issue of best interests, but from adifferent perspective. In BCE Inc. (Arrangement relative ), 2008 SCC 69, the courts had todecide to what extent directors must consider the interests of bondholders in situations where thecompany is for sale. In BCE, a group of investors proposed to take one of Canada largesttelecommunications companies private in what would be the largest private equity deal inCanadian history. Bell Canada Enterprises Inc. (BCE Inc.) was a prime candidate for a private

takeover because its stock price was stagnating due to stringent competition and a failed attemptto transform BCE Inc. into an income trust. Bondholders of Bell Canada Inc., a wholly-ownedsubsidiary of BCE Inc., believed that the high rating of their bonds would be jeopardized by thehighly leverage nature of the going private transaction of its parent, and consequently launched alaw suit to stop the privatization on the grounds that BCE Inc.s Board only considered theinterests of the shareholders of BCE Inc. and overlooked the interests of other affectedconstituents, including the Bell Canada bondholders.


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At the trial level, [2008] Q.J. No. 1728, the Quebec Superior Court found against thebondholders. The Court held that in balancing the various interests, the bondholders wouldcontinue to be paid their interest and if the bondholders had been concerned about a buy-out ofBCE Inc. and the resulting downgrading of their bonds to junk status, the bondholders couldhave protected themselves with covenants covering this situation. On appeal to the Quebec Court

of Appeal, 2008 QCCA 930, the Quebec Court of Appeal overturned the trial decision on thegrounds that the directors never discharged their duty to act in the best interest of the corporationby considering the interests of the bondholders. The Court of Appeal held that the directors hada duty to consider the position of the bondholders, and examine potential alternatives that couldpreserve the high rating of their investment, even if at the end of the day they decided in favourof the shareholders. The Quebec Court of Appeal decision was appealed to the Supreme Courtof Canada, and on June 20, 2008 the Supreme Court of Canada agreed with the Quebec SuperiorCourt decision and overruled the Quebec Court of Appeal, with reasons to follow later.

In December, 2008 the Supreme Court released its reasons for judgement in the BCEcase. First of all, the Supreme Court affirmed its decision in the Peoples case that the fiduciaryduty of directors to act in the best interest of a corporation is owed only to a corporation. TheSupreme Court described the fiduciary duty as a broad, contextual concept, not confined toshort-term profit or share value, but based on the long-term interest of the corporation. The Courtheld that directors must consider the impact of a Board decision on all affected stakeholders, orrun the risk of being found not to have acted in a fair and reasonable manner, leaving the Boardopen to a successful claim by a qualified claimant under the oppression remedy. The SupremeCourt also referred to the fiduciary duty of directors to act in the best interest of the corporationviewed as a good corporate citizen. It is possible that the Supreme Court is now adding a newstandard in assessing whether or not a fiduciary duty has been properly performed; whether ornot the best interests of the corporation must always be viewed in the context of good corporatecitizenship. Finally, the Supreme Court did uphold the business judgment rule, defining it asdeference to a business decision, as long as it lies within the range of reasonable alternatives.

In summary, theBCEdecision has provided some refinement of the correct interpretationunder Canadian law relating to the fiduciary duties of directors of Canadian companies to act inthe best interest of a corporation. On the one hand, directors may take into account the interestof all affected stakeholders, and in fact must do so in order to fulfill their responsibilities.However, given the development in Canadian cases such asPeoples andBCE, it is clear that thecommon law duty of directors to act in the best interest of the corporation no longer means to actonly in a way that will maximize profit for shareholders, adopting the Revlon duties principle,formulated by the Delaware Supreme Court inRevlon vs. MAC Andrew & Forbes Holdings Inc.506 A 2d 173 (Del Sup. Ct. 1986). In light of the current public pressure on corporations to takeinto account environmental and other issues, we will probably see a further expansion of the

principle permitting directors to take other interests into account, particularly in light of theSupreme Courts characterization in theBCEdecision of the fiduciary duty requiring directors toact in the best interest of the corporation, viewed as a good corporate citizen.

Canadian law has never fully endorsed the United States Revlon Duties principle,formulated inRevlon.


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Although it does not appear to have been litigated yet, particular problems will arise incases of directors appointed by special interest groups which have provided financing, such asfinancial institutions, minority shareholders, unions or government departments. Under presentlaw, these directors are bound to act only in the best interests of the corporation and cannotconsider the special interest of the party which elected them, unless such interest coincides with

the best interest of the corporation. Canadian law at the present time does not recognize theconcept of nominee directors.

(b) The Duty of Loyalty and Conflicts of InterestAs fiduciaries, directors and officers are under a strict duty to avoid any conflict between

self-interest and the interest of the corporation. Although recent legislation has developedstatutory rules to regulate the directors duty to disclose his interest in a corporate transaction andto regulate his use of confidential information in insider trading, other breaches are generally leftto be governed by the common law and each case must be considered on its particular facts.

In 1966 the Supreme Court of Canada held inPeso Silver Mines, [1966] S.C.R. 673, that

the directors were free to take up independently an opportunity originally offered to theircorporation, but which had been rejected by the Board in good faith on the basis that thecorporation did not have sufficient funds to take up the opportunity. In finding for the directors,the court held there was insufficient evidence to show that the offer to the corporation wasaccompanied by confidential information not available to other prospective purchasers, or thatthe directors had access to such confidential information by reason of their office.

In Canadian Aero Services Ltd. v. OMalley, [1974] S.C.R. 592, the Supreme Court ofCanada held former senior officers of a corporation liable to the corporation when such officersdeliberately set out to take advantage of a contract, the basis of which they had formerlydeveloped as officers of the corporation. Justice Laskin rejected the argument that officers of a

corporation are mere employees and held that senior officers are under a fiduciary duty similar tothat owed to a corporation by its directors. Although the responsibility of officers in this regardhas now been embodied in legislation, the decision is important for several reasons. First, it isclear that each case must be considered on its own facts. Second, the principle from Peso thatdirectors and senior officers are always entitled to take advantage personally of opportunitiesformerly offered to their corporate employers which were turned down for valid businessreasons, was rejected. Finally, Justice Laskin made it clear that the fiduciary duty extends pastthe time of employment. The defendants in Canadian Aero had tried to argue that because someamendments were made later to the proposal submitted by their personal corporation from theproposal originally submitted by Canadian Aero under their direction, the business opportunitywas different.

In an Ontario case, Sanford Evans List Brokerage v. Trauzzi (2000), 50 C.C.E.L. (2d) 105(Ont. S.C.J.), Chapnik J. makes some interesting comments regarding the duty of loyalty, asfollows:

In these times of fast paced business and increased mobility ofpersonnel, it would be folly to hold employees captive to theiremployers. Thus not only do the courts not impose the mantle of


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fiduciary lightly, but they carefully scrutinize the actions of thefiduciary in assessing the alleged wrongful conduct. The failure toprovide reasonable notice to the employer is not, in itself, viewedas a breach of fiduciary duty. As an overriding proposition,departing employees have an absolute right to go into direct

competition with their former employer and make use of the skillsand general knowledge they accumulated during their period ofemployment. Competition per se by a departing fiduciary is notprohibited; only unfair competition is precluded. Thus, a departingfiduciary may advertise to the general public. If the formeremployers customers are notified during the course of the generaladvertisement campaign, there is no breach, provided there is nomisuse of confidential information such as trade secrets orcustomer lists.

Ivanore v. Bastion Development Corp. (1993) 47 C.C.E.L.74, a British Columbia trialcourt decision, again illustrates when a senior officer will be regarded as having breached thefiduciary duty the officer owes to his employer by taking a corporate opportunity. In this case,the opportunity arose from a long-standing business and social relationship between the officerand a third party. The court stated that the crux of the matter ... [was] whether, in allcircumstances, [the officer] failed to keep [the corporation] ... adequately informed. The courtfound that the officer did disclose the existence of this opportunity, actual or potential, to [thecorporation] and the disclosure was sufficiently detailed. In obiterthe court said that in so faras the business and social relationship between the officer and the third party constituted acorporate opportunity, it was an opportunity that belonged to the officer before he becameemployed at the corporation.

In summary, the duty to avoid conflicts of interest and loyalty is difficult to define, and

each case must be considered on its facts. However, it is clear that although the directors andofficers of a corporation will be entitled to take advantage of business opportunities which havebeen offered to their corporation but turned down for valid business reasons after full and fairdisclosure, directors and officers who deliberately misappropriate corporate opportunities fortheir own gain will be liable to the corporation, even if the gain materializes after they haveceased to hold office.

(c) The Duty to Disclose Interest in Corporate TransactionsIn the 19th century, the courts developed a strict rule that contracts of a corporation in

which one of its directors had a personal interest, whether pecuniary or non-pecuniary, were

voidable at the option of the corporation and that the interested director was liable to account tothe corporation for any profits received. The only exception to the rule occurred when aninterested director declared his interest and the shareholders of the corporation approved thecontract after full disclosure.

Problems developed over the application of the rule in two ways. Firstly, dishonestdirectors were often controlling shareholders, and therefore had the required votes to ratify theirown contracts. Secondly, because of the strictness of the common law rule, contracts which were


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fair and in the best interest of the corporation were not protected from voidability under thecommon law rule. As a result, modern companies legislation sets out disclosure rules with whicha director (and an officer) must comply in order to prevent the contract in which he is interestedfrom being voided.

Recent amendments to the OBCA have tightened the disclosure requirements fordirectors and officers. Prior to the amendments, a director or officer was able to sufficiently meethis disclosure obligations by providing a general notice of a material interest in the transaction tothe Board. As of August 1, 2007, a director or officer must additionally provide disclosure everytime there is a material change in his interest in the transaction or contract. Furthermore, prior tothe amendments, directors were not allowed to vote on any resolution to approve a contract ortransaction in which they had a material interest, but could attend the meeting in which theirpotential conflict was discussed. As a result of the amendments, such directors are no longerallowed to attend any part of a meeting of directors during which the contract or transaction isdiscussed.

The CBCA provides that a material contract or material transaction in which a director orofficer has an interest is neither void nor voidable by reason only of that relationship. Moreoverthe contract is not void or voidable if the interested director is present at or is counted todetermine a quorum of the Board or committee thereof, provided that (1) the director or officerhas properly disclosed his interest to the Board, (2) the contract was approved by a disinterestedquorum of the Board or the shareholders, and (3) it was reasonable and fair to the corporation atthe time that it was approved. As discussed above, the OBCA adds the additional requirementthat the interested director may not attend any part of the Board meeting during which thecontract or transaction is discussed. If the director or officer fails to disclose his interest, a courtmay set aside the contract on such terms as it sees fit, and the director or officer may be liable toaccount for any profits personally realized on the transaction.

The term material interest is not defined in either the CBCA or the OBCA; however,case law suggests that a material interest does not necessarily require the director or officer tohave a direct financial interest, as shown in a recent Ontario decision. InExide Canada Inc. v.Hilts (2005), 11 B.L.R. (4th) 311 (S.C.J), the CEO and director of Exide and his executiveassistant co-signed a cheque made out to a joint account in their own names. They later, withoutthe knowledge of the Board, executed a contract between Exide and a corporation controlled bythe executive assistant, and transferred $300,000 of the money to this corporation. The court setaside the contract, and ordered the CEO to account for profits, stating:

A material interest includes a personal relationship with the person who was a party to amaterial contract. Even where a director had no monetary interest in a person, but the negotiation

involves a close personal friend of one of the directors the transaction ought to be suspect. [atpage 316].

In summary, directors and officers have a legal obligation to act honestly and in goodfaith. This fiduciary duty requires that directors and officers disclose any personal interest theymay have in a material contract or transaction involving the corporation. Moreover, directors andofficers who permit a corporation to be a party to a material contract or transaction in which thedirector or officer has an interest, must ensure that the contract is fair and reasonable to the


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corporation. If directors and officers adhere to these obligations, it is unlikely that they can laterbe called upon to account to the corporation for the profits from a transaction. More importantly,the corporation will be unable to exercise its common law option to void the contract.

6. Other Liability Under the Business Corporations ActsBoth the OBCA and CBCA provide for the personal liability of directors for the

following financial misconduct:

(a) improper redemption or purchase by the corporation of its own shares;(b) improper declaration and payment of dividends which will render the corporation

insolvent;

(c) authorizing the issue or allotment of shares for consideration other than money,when such consideration is less than the fair value of the shares.

In the above situations the directors are jointly and severally liable to make restitution tothe corporation for the financial harm caused to the corporation and not otherwise recovered bythe corporation. This means that an injured party can sue and be entitled to recover damagesagainst each director, although the directors will have the right to force their fellow directors tocontribute their proportionate share of damages.

A provision common to both Acts creates a large potential liability for directors. TheActs provide that in the case of an insolvent or dissolved corporation, the directors are jointlyand severally liable for up to six months unpaid wages (and in Ontario for up to twelve monthsvacation pay) to employees, provided that the employees have first tried to sue the corporationfor such wages, or the corporation has gone into bankruptcy and the execution against the

corporation has been unsatisfied in whole or in part. Previously, the OBCA required an action tobe commenced while the defendant was a director or within six months after he had ceased to bea director. As of January 1st, 2004 the OBCA no longer includes a six-month limitation periodagainst a director for wages payable, since the Limitations Act, 2002 has substituted a two-yearlimitation period for the previous six-month rule. The CBCA requires the suit to be commencedwithin six months of the wages becoming payable, and provides for liability while continuing tobe a director or within two years of the director ceasing office. If a director personally pays foremployee wages, both Acts subrogate to the director the employees claims and preferences fortheir unpaid wages.

In the Ontario Court of Appeal decision ofProulx v. Sahelian Goldfields Inc. (2001), 55O.R. (3d) 775, Borins J.A. indicated that in addition to being responsible for employee wages,directors of a corporation can be held liable for employee debts for services performed for thecorporation. Former employees of Sahelian Goldfields Inc. sued the directors of the corporationfor lost salary, vacation pay and reasonable travel expenses incurred in performing their dutieson behalf of the company. The court found that directors were liable for not only unpaid wagesbut also for debts to employees for other services (such as travel expenses) up to a maximum ofsix months wages.


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Both Acts provide that a director who dissents to a particular action in accordance withthe procedure as set out in each Act is not liable. It is important to note that both Acts deem adirector to be liable if the director was present at a meeting at which a particular resolution wasconsidered unless the director records his dissent at the meeting or sends written dissent to thecorporation immediately after the meeting is adjourned. However, directors lose their right to

dissent afterwards if they vote for or consent to the resolution in the meeting.

Finally, Section 248 of the OBCA and Section 241 of the CBCA contain the oppressionremedy which, in limited circumstances, may be invoked to impose personal liability ondirectors. One of the grounds a plaintiff can rely upon is a finding that in respect of acorporationthe powers of the directors of the corporation or of any of its affiliates are, havebeen or are threatened to be exercised in a manner that unfairly disregards the interests of ashareholder or creditor. If such a finding is made, a court may make any order it sees fit,including an order requiring the director to compensate the plaintiff personally.

In Budd v. Gentra Inc. (1998), 43 B.L.R. (2d) 27, the Ontario Court of Appeal set outsome factors for a court to consider in determining whether a director should be held personallyliable under the oppression section. The court stated that (1) specific actions or inaction on thepart of the directors must be directly linked to the conduct said to constitute the oppression; and(2) the circumstances of the case must make it appropriate for the director to personallycompensate the aggrieved parties.

Sidaplex-Plastic Suppliers Inc. v. Elta Group Inc. (1998), 40 O.R. (3d) 563 is an exampleof a case in which a court has held a director personally liable under the oppression remedy. Thedefendant was the sole director, officer and shareholder of the corporation. The plaintiff bankgranted a letter of credit (which later lapsed) to the corporation, and in exchange took back apersonal guarantee from the defendant as security. In finding that a director of a closely-heldcorporation should be personally liable for the amount of a lapsed letter of credit, the Court

emphasized that the defendant benefited substantially upon the lapse. The case law in this areasuggests that where directors of closely-held corporations conduct the affairs of a corporation insuch a way as to benefit themselves personally while at the same time harming creditors, theremay be grounds for an oppression remedy application.

7. Liability Under the Occupational Health and Safety ActOntario and British Columbia have enacted specific duties owed by directors and officers

of a corporation under the relevant provincial health and safety laws. In the remaining provincesand territories, to date directors and officers are held liable only if prosecuted as individuals inbreach generally. Since these other jurisdictions do not impose any specific duties on directors

and officers under its health and safety law, the odds of prosecution are generally low.

Section 32 of Ontarios Occupational Health and Safety Act (the OHSA) requiresofficers and directors of a corporation to take reasonable care to ensure that a corporationcomplies with the OHSA, its regulations, and the orders and requirements made pursuant to theOHSA. Section 121 of British Columbias Workers Compensation Actplaces a similar duty ondirectors and officers of a corporation. Section 66(1) of the OHSA stipulates that directors andofficers may receive a term of imprisonment (of not more than 12 months) or a fine (of not more


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than $25,000), or both, for failing to comply with Section 32 of the OHSA. The exact scope andmeaning of the duties under Section 32 remain unclear however since the section has yet to bejudicially considered by an Ontario court.

InR. v. Bata Industries Ltd. (1992), 9 O.R. (3d) 329 [appeal allowed in part (1993), 14O.R. (3d) 354] the Ontario Court of Justice set out a list of criteria to be considered indetermining whether accused directors and officers had established the due diligence defence toan environmental offence (further elaboration on case in next section). While Bata was anenvironmental case, it nevertheless provides guidance in determining how the due diligencedefence may be used by directors and officers under health and safety law. In future, for adirector or officer to prove that they were duly diligent to escape liability under health and safetylaw, they will have to establish that they:

(i) created a system to ensure compliance with health and safety law;(ii) gave instructions for implementing the system;(iii) created a system to ensure that the Board of Directors received reports on

operation and effectiveness of the system;

(iv) reviewed compliance reports that were provided to them;(v) were aware of industry standards in dealing with the risks faced by the

corporation and met those standards; and

(vi) reacted immediately to and rectified a system failure.8. Liability Under Environmental Law

Under Section 280.1 of the Canada Environmental Protection Act (the CEPA),directors and officers have a duty to take reasonable care to ensure that the corporation complieswith the CEPA, its regulations and any orders or directions made pursuant to the CEPA. Further,under Section 280(1), directors and officers are liable for an offence committed by thecorporation under the CEPA if they were in a position to direct or influence the corporationsactivities that led to the violation and regardless of whether the corporation was prosecuted orcharged. Directors and officers can escape liability under the CEPA if they are able to establishthat they were duly diligent in attempting to prevent the offence (Section 283).

Section 194 of OntariosEnvironmental Protection Act(EPA) was amended in 2005 tosignificantly broaden the scope of directors and officers statutory duties. Pursuant to this

section, a director or officer has a duty to take all reasonable care to prevent the corporation fromcommitting a number of environmental offences under the Act, such as:

(i) discharge of a contaminant contrary to law;(ii) failure to provide notification of the discharge of a contaminant contrary

to law;


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(iii) contravention of the sections of the Act dealing with hauled industrialwaste or hazardous waste;

(iv) failure to act to restore the natural environment when there has been aspill;

(v) obstruction, giving false information, or refusing to provide information;(vi) failure to install, maintain, operate, replace, or alter equipment as required;

and

(vii) contravening certain orders issued under the Act.A director or officer of a corporation is liable to conviction for a breach of the statutory

duty whether or not the corporation has been prosecuted or convicted. The maximum penalty fornon-compliance with the Act by an individual was recently raised substantially to a maximumfine of $4,000,000 per day on a first conviction ($6,000,000 per day on subsequent conviction),

or to imprisonment for up to five years less a day; or both. Once charged with one of the offencesfor failing to carry out one of his statutory duties, the director or officer bears the burden ofproving, on a balance of probabilities, that he carried out the duty that is the subject of thecharges. It should be noted that the Ontario Water Resources Actwas also amended in 2005 toinclude provisions similar to those in the EPA regarding expanded liability for directors andofficers (Section 116(1)), including an onus on the director or officer to prove due diligence(Section 116(2.1), and penalties (Section 109(3)).

The Ontario District Court, in the case ofRegina v. Shamrock Chemicals and Shirley(1989), 4 C.E.L.R. (N.S.) 315 displayed a willingness to enforce the director liability provisionsof the EPA. The Court found that the sole director, shareholder and the corporation itself could

all be fined for an environmental offence, dismissing any double jeopardy argument. The courtviewed the offence under the Act as one of strict liability. Moreover, the court held that, in theinterests of general deterrence, it was necessary to penalize both the sole director and thecorporation under the Act. Considering the recent public emphasis on environmental protection,it is anticipated that the courts will increasingly find directors liable for a corporationsenvironmental offences.

Bata expanded the scope of directors liability even further. In that case, two officers ofBata Industries Ltd. were convicted for failing to take all reasonable care to prevent a dischargeof liquid industrial waste contrary to the Ontario Water Resources Act. In making this findingthe court ruled that the Crown is only required to prove the actus reus of the offence; that is, theCrown only has to show that the defendants were engaging in an activity that caused theprohibited discharge.

Once the Crown established beyond a reasonable doubt that the officers were engaged inthe activity in question, it was open to the officers to argue that they were duly diligent.Essentially, the officers had to show, on the balance of probabilities, that they exercised allreasonable care by establishing a proper system to prevent commission of the offence and bytaking reasonable steps to ensure the effective operation of the system. The officers were


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unsuccessful in arguing that they were duly diligent and were each fined $6,000. Bata IndustriesLtd. was ordered not to indemnify them.

It is instructive to note the standard of care that the court required of the officers in Bata,as it may be applied by analogy to other situations. The court stated that directors are responsiblefor reviewing the environmental compliance reports provided by corporate officers, but arejustified in placing reasonable reliance on these reports (and the reports of consultants, counselor other informed parties). Furthermore, directors should ensure that officers are promptlyaddressing environmental concerns brought to their attention by government agencies or otherconcerned parties, including shareholders. Directors should also be aware of the standards oftheir industry and other industries which deal with similar environmental pollutants or risks.Finally, the court stated that directors should take immediate remedial action when they havenoticed that the system has failed.

Ontarios Environmental Enforcement Statute Law Amendment Act sets out specificenvironmental duties owed by directors and officers. One of the main duties it imposes ondirectors and officers is to take reasonable care to prevent a corporation from allowing or causingthe unlawful discharge of contaminants. Quebecs Environment Quality Act (the Act) statesthat a director or an officer commits an offence by allowing a corporation to neglect or refuse tocomply with an order made under the Act. It is also an offence for a director or an officer toallow the corporation to unlawfully dispose or release contaminants in contravention of the Act.The Act does not however require directors and officers to take positive action in preventingthese contraventions and nor does it result in personal prosecution of the directors or officers. Inmost of the other provinces of Canada, the relevant environmental legislation imposes liabilityon directors and officers who permit, direct or agree to contraventions of the legislation.

9. Liability Under the QBCAThe Quebec Business Corporations Act (QBCA) came into effect on December 1,

2009. This new piece of legislation was aimed at modernizing the law governing companiesunder the Quebec Companies Act(the QCA) and creating a legislative framework for Quebeccorporations. The drafters of the QBCA have modelled the provisions on officer and directorliabilities on the related provisions under the CBCA in an attempt to harmonize the provisions.

Under the QBCA, directors are liable for certain acts that the corporation is prohibitedfrom doing. These include acts such as paying an unreasonable commission in connection withthe issuance of a corporations securities or accepting property value as consideration for shareswhere such property value is less than what the amount of money consideration would havebeen. Directors are relieved from this statutory liability if they can establish that they have acted

with a reasonable degree of prudence and diligence (Section 158). The section further elaboratesthat even if the director cannot prove he/she acted prudently and diligently, a court can excusethe director if it appears to the court that the director acted loyally, honestly, reasonably andought to be excused.

Section 119 of the QBCA states that directors and officers in exercising their duties aredirectly accountable to the corporation to act diligently and prudently. Section 120 further statesthat no articles, by-laws, contracts or resolutions can be used to relieve directors and officers


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from the liabilities imposed on them in the event that they do not uphold their obligations underthe QBCA. Section 122 clarifies that directors and officers have discharged the duty to actprudently and diligently if in good faith they relied on the report, information or opinion of a) anofficer of the corporation, b) legal counsel or an expert, or d) a committee of the Board ofDirectors of which the director is not a member of. Where an officer or director relied on the

report, information or opinion of an officer of the corporation, the Section 122 onus is met onlyif the director or officer believed the officer of the corporation to be reliable and competent.Where an officer or director relied on the advice of the Board, legal counsel or an expert, theSection 122 onus is met only if the officer or director they believed the Board, counsel or expertto merit confidence. The presumption in favour of the director or officer who relied on the advicefrom the Board, officer, legal counsel or expert is rebuttable.

Section 159 of the QBCA requires a corporation to indemnify directors and officersagainst all costs and expenses incurred in the exercise of their functions. The language used inthis section broadens the group to whom the corporation owes an obligation to indemnify whencompared with the related provisions under the QCA. A director or officer may however onlyreceive indemnification if he or she acted with honesty and loyalty in the interest of thecorporation. If a court finds that the director or officer does not deserve indemnification, Section160 states the corporation may not indemnify the director or officer for costs, charges andexpenses related to the legal proceeding. The director or officer will also be required to repayany money that was advanced to them with regards to the legal proceeding. If corporationindemnifies the director or officer contrary to Section 160, Section 156(6) of the QBCA statesthat the directors who approved the indemnification are liable for repaying the money to thecorporation.

Recognizing the fact that directors and officers are under great risk of facing personalliability, Section 162 of the QBCA has been added in for the benefit of directors and officers byallowing corporations to maintain liability insurance against its directors and officers.

10. Liability Under Other StatutesIt is common practice for modern legislation to provide penalties not only for

corporations which breach legislation, but also for directors and officers of corporations whoconsent to or acquiesce in the particular activity which leads to the breach of the legislation inquestion. Two examples are the federal Consumer Packaging and Labelling Act, and theconsumer business practices legislation of various provinces. Legislation of this nature is now soextensive that directors and officers of modern corporations are subject to liabilities under thesestatutes as onerous as the liability under the companies legislation governing their particularcorporation. A number of statutes of general application merit some attention in this regard.

The Ontario Securities Actand the securities legislation of other provinces provide strictliabilities for directors in respect of materially false statements and omissions of necessarystatements contained in prospectuses or takeover bid circulars. The Ontario Securities Act, forexample, provides that a director is personally liable (jointly and severally with the corporationand other liable directors) for materially false statements contained in a prospectus or a takeoverbid circular, unless the director proves to the satisfaction of a court one of the following defencesas set out in the Act:


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(a) the prospectus was filed without the directors knowledge or consent and, onbecoming aware of the filing, he has given reasonable public notice that it was sofiled;

(b) he has given reasonable public notice of withdrawal of his consent after becomingaware of any false statement;

(c) he had reasonable grounds to believe that the statement was true, or relied onreasonable grounds on the qualifications of an expert who made a statement in theprospectus or whose report or evaluation was produced or fairly summarized inthe prospectus; or

(d) he reasonably relied on a statement purporting to be a statement by an official oran official document.

Directors and officers of publicly-traded corporations are also subject to liability underCanadian securities legislation for insider trading using material information unavailable to the

general public. An amendment to the Ontario securities legislation introduced in 2002 hasresulted in potentially stringent penalties for contravention of the insider trading rules. Adirector, by virtue of his position, is defined as an insider of the corporation and on conviction isliable to a penalty not less than the profit made by reason of his trading with insider informationand not more than the greater of $5,000,000 or three times the profit made on the illegal trade.The information may be any matter considered to be a material fact or change to the corporation,not publicly disclosed at the time of trading. On June 12th 2003, then Justice Minister MartinCauchon introduced amendments to the Criminal Code that would create a new insider tradingoffence. Prior to this announcement, insider trading was covered only by provincial securitieslaws. The new Section 382.1 of the Criminal Code came into force on September 15, 2004,providing that persons charged with insider trading are guilty of an indictable offence and liable

to imprisonment for up to 10 years. In addition, under Section 382.1 a person who knowinglyconveys inside information is guilty of an indictable offence and liable for imprisonment of up to5 years, or guilty of an offence punishable by summary conviction.

The current federal Bankruptcy and Insolvency Act provides for general liability fordirectors and officers of bankrupt corporations in Section 204 as follows:

If a corporation commits an offence under this Act, any officer ordirector or agent or mandatary, of the corporation, or any personwho has or has had, directly or indirectly, control in fact of thecorporation, who directed, authorized, assented to, acquiesced in or

participated in the commission of the offence is a party to andguilty of the offence and is liable on conviction to the punishmentprovided for the offence, whether or not the corporation has beenprosecuted or convicted.

This amendment, enacted in 1992, and reworded in 2004, is more generally worded thanthe previous section regarding director and officer liability under the Act. It was introduced toeradicate the possibility of abuse by fraudulent directors and officers.


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A number of statutes require the corporation to hold funds in trust for the Crown and paysuch funds to the Crown, usually at a specified time. If the corporation fails to do so, it commitsan offence and is liable to a fine, which can be quite substantial. Such legislation often providesfor the personal liability of directors and officers who have authorized this breach of trust inorder to provide an incentive for management to pay the amounts owing to the Crown.

Examples of these Acts include: the Income Tax Act, the Canada Pension Plan Act, theEmployment Insurance Act, theExcise Tax Act, and the Ontario Retail Sales Tax Act.

TheIncome Tax Actprovides for the personal joint and several liability of all directors ofa corporation under Section 227.1 when the corporation fails to deduct or withhold a requiredamount or to remit such an amount, including interest and penalties. The Act also has a generalliability section (Section 242) whereby, when a corporation has committed an offence under theAct, an officer or director of the corporation who directed, authorized, assented to, acquiescedin, or participated in the commission of the offence is a party to it, whether or not thecorporation has been prosecuted or convicted of that specific offence.

Legislation designed to protect the public often use personal liability of directors andofficers to achieve its ends. For example, the EPA, subsection 186(1), provides that every personwho contravenes the Act or regulations is guilty of an offence. This includes acts and omissionsby officers, officials, employees or agents of a corporation in the course of employment or in theexercise of their powers in the performance of their duties, and is deemed to be an act of thecorporation (Section 192).

With the proclamation of Bill C-45 (The Westray Bill) on March 31st, 2004,organizations and individuals face potential criminal liability if they fail to take reasonable stepsto protect the health and safety of employees. The amendments to the Criminal Code impose aduty on all persons who have the authority or undertake to direct the work of another person.The duty imposed

Documents

MilnesR_DirectorsMemo10