Canada: Risky Business

Last Updated: January 4 2006
Article by Aaron Emes

Published in Lexpert, October 2005.

This article examines the increased personal risks faced by directors and officers of public companies. Our next article discusses how to manage these risks.

The recent corporate scandals, and subsequent corporate governance reforms, have resulted in substantial increased personal risk to directors and officers of public companies.

Personal Liability of Directors

In January 2005, ten former outside directors of Worldcom agreed to pay $18 million to settle shareholder suits, $18 million that could not be recovered by any indemnification or insurance available to the directors, and estimated to be in the neighborhood of 20% of the aggregate net worth of these directors (excluding principal residences, retirement accounts and judgment proof joint-assets). Around the same time, ten former directors of Enron (8 of whom were outside directors) settled shareholder claims for $13 million of their own money (representing their pre-tax profits from their Enron stock sales). The requirement that directors pay personally has been driven by class action-leading institutional shareholders as a way of "disciplining" directors perceived not to have done a good enough job.

Closer to home, there is litigation requiring Nortel executives to return bonuses paid on the basis of financial information that was restated: the pressure extends to more junior executives, including in-house counsel, who are asked to return bonuses paid on the basis of the original financials. Similar claims have been threatened against other Canadian companies.

Regulators have also increased the responsibilities of directors and the risks directors face. This is most obvious in the case of audit committees, where there are now detailed rules regarding member responsibilities and qualifications. Audit committee members must be financially literate and must disclose their background in this regard. This has created a concern that audit committee members will be held to a higher standard than other directors in determining liability, particularly in cases involving financial matters. The same rationale could also apply to other directors recruited because of specialized qualifications, including to satisfy corporate governance "best practices", which often require specialized expertise in order to sit on specific board committees.

The notion that a director’s experience will be a factor in determining liability was evident when the Ontario Securities Commission considered the background and expertise of the various directors of YBM Magnex in determining individual culpability. Sanctions sought by securities regulators can include fines, reimbursement of (substantial) investigator and prosecutor costs and prohibition on service as a public company officer or director (for up to a lifetime term).

The recent Peoples decision in the Supreme Court of Canada stated that directors will be held to an objective standard in determining compliance with the statutory duty of care they owe to the corporation. However, the Supreme Court indicated that such a standard was more onerous than the subjective standard previously applied at common law. The Supreme Court also noted that prevailing socio-economic conditions can be taken into consideration, stating in this regard that "the emergence of stricter standards puts pressure on corporations to improve the quality of board decisions". The Supreme Court also stated that the "factual aspects of the circumstances surrounding the actions of a director or officer" are important in determining compliance with the duty of care. This case provides little realistic comfort that a director’s specialized skillset will not be a factor in determining liability. The recent Disney case out of Delaware did hold that a failure to comply with corporate governance "best practices" is not a factor in determining whether directors have met their fiduciary duties. However, this appears inconsistent with the language in Peoples.

Civil Liability for Public Disclosure

Starting on December 31, 2005, under recently proclaimed legislation in Ontario, directors and officers of Canadian public companies will have statutory civil liability for misrepresentations in public disclosure documents and for failure to make timely disclosure of material changes. This will provide purchasers in the secondary market (where the vast majority of stock trading takes place) with statutory rights against directors and officers for disclosure violations, a right previously provided only to primary purchasers. While there are provisions in the legislation intended to stop so called "strike suits", and a due diligence defence (which will be discussed in more detail in our next article), if the experience in the U.S. (which has had similar liability for years) is at all informative, we can expect a significant amount of litigation and exposure on this basis.

Certification Requirements

CEOs and CFOs of public companies are required to personally certify the accuracy of the disclosure documents filed by the companies they manage. The certification requirements may be extended in the future to include matters relating to disclosure controls and internal financial controls (as is already the case for some U.S. companies, and to a certain extent for cross-border Canadian companies). Under current Canadian law, there is a reasonable possibility that CEOs and CFOs could face personal liability for misrepresentations in any of these certifications (that is, they may not be able to argue that the certifications were provided on behalf of the corporation and thus only the corporation should have liability for them), on the basis of misrepresentation, breach of a statutory duty or otherwise. In any event, once civil liability for public disclosure is implemented at the beginning of 2006, there is no question that all directors and officers of a company face potential liability for inaccurate or misleading certifications filed by the CEO and CFO.

Insurance and Indemnification

There are increased risks that directors and officers’ insurance, and indemnification from the company, will not be available when needed most. Insurance policy risks include provisions relating to limit sharing (innocent directors and officers sharing available coverage - including for defence costs - with those involved in wrongdoing, limiting the amount available to them), lack of severability and rescission by insurers of policies due to misrepresentations in the application for insurance (which most directors and officers are not involved in reviewing) and inadequate (or no) coverage of regulatory defence costs (an increasing liability in fact).

In addition, it was recently held in Disney that "an intentional dereliction of duty, a conscious disregard for one’s responsibilities" by a director can constitute a breach of the fiduciary obligation to act in good faith with respect to the corporation. The implication of that type of finding would be to preclude directors from being able to receive indemnification in connection with any related liability (as indemnification from the corporation is sometimes not permitted where the "good faith" obligation is breached).

Reputational Risk

Even where a director or officer is not subject to personal liability, association with a corporate scandal can leave a director or officer tainted for life. With a public that is increasingly scrutinizing and critical of the conduct of board members and officers, and with a media that has a longer memory (aided by technology), the reputational risk, and the consequences of being even tangentially involved in a corporate scandal, have increased significantly.

Other new risks touched on in previous articles include those faced by compensation committee members in connection with excessive management compensation, failures by board members to follow corporate governance mandates they have approved, and up the ladder reporting requirements for in-house counsel. The new risks may seem daunting. But stay tuned: in our next article, we will tell you how to manage these risks.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.