Canada: Duties And Obligations Of Directors: A Brief Overview

The duties and obligations of directors are at the heart of sound corporate governance. A great deal has been written over the years about how they apply in practice, and their guiding principles have been established and revisited in several major judgments. The leading decisions of the Supreme Court of Canada in Peoples1 and BCE2 among others are excellent guides on the directors' duty of care and diligence ("duty of care") and the duty of loyalty, which are provided for in the Canada Business Corporations Act3 Quebec's Business Corporations Act4, and the Civil Code of Québec.5 The purpose of this article is to provide a brief overview of these concepts and how they are applied.6 It will also canvass a few examples of statutory obligations that directors should be aware of, as in certain cases their civil or even criminal liability may be presumed.7

Duty of care

The duty of care can be summarized as follows: "exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances"8. In its decision in Peoples, the Supreme Court of Canada stated the following regarding the duty of care:

"[67] Directors and officers will not be held to be in breach of the duty of care under s. 122(1)(b) of the CBCA if they act prudently and on a reasonably informed basis. The decisions they make must be reasonable business decisions in light of all the circumstances about which the directors or officers knew or ought to have known."9

This is thus not an obligation of result, but of means. A director must be able to show that he or she took the necessary precautions and was proactive in order to ensure that the decisions made by the board are reasonable and well thought out. To do so, the director must, in particular (i) attend meetings of the board, (ii) read and analyzed all documentation received beforehand, (iii) ask the required questions, (iv) informed himself or herself about the matter being dealt with, (v) request additional information if necessary, (vi) obtain the opinion of an independent expert when relevant, etc. Thus, a court will not intervene to change a decision made by the directors if it concludes that it was reasonable. The court's role is not to determine retroactively if the best possible decision was made but whether in the specific circumstances of a given situation, the decision was reasonable.

Duty of loyalty

The duty of loyalty can be summarized as follows: "act honestly and in good faith with a view to the best interests of the corporation".10 In this regard, the following three concepts are to be taken into consideration: (1) integrity, (2) good faith11 and (3) the best interests of the corporation. In its decision in BCE, the Supreme Court stressed the importance of not confusing the interests of the shareholders, or any other stakeholders, with those of the corporation per se:

"However, the directors owe a fiduciary duty to the corporation, and only to the corporation. People sometimes speak in terms of directors owing a duty to both the corporation and to stakeholders. Usually this is harmless, since the reasonable expectations of the stakeholder in a particular outcome often coincide with what is in the best interests of the corporation. However, cases (such as these appeals) may arise where these interests do not coincide. In such cases, it is important to be clear that the directors owe their duty to the corporation, not to stakeholders, and that the reasonable expectation of stakeholders is simply that the directors act in the best interests of the corporation." 12

It is not always easy to differentiate the impacts of a decision on the corporation itself and on the various categories of stakeholders in its orbit. It is up to the directors to ensure that each stakeholder affected by a decision is treated "equitably and fairly".13 This is where the duties of care and loyalty converge: the guiding principles of the duty of care assist directors in the decision-making process, while those of the duty of loyalty help them constantly focus on the goal, i.e. a result that serves the best interests of the corporation.

Legal and statutory obligations

In addition to the duties of care and loyalty, specific obligations may also be imposed on directors, pursuant to either the corporation's enabling statute or its bylaws and certain internal policies (e.g. code of ethics). As each organization is different, a careful review of these documents is all the more necessary. There are also many statutory provisions, both provincial14 and federal15 that impose a framework for and govern the work of directors. Among these are provisions imposing obligations under taxation laws, bankruptcy and insolvency legislation, and statutes dealing with the environment and occupational health and safety, or aimed at preventing anti-competitive business practices.16

Conclusion

The members of the board of directors have a supervisory role with respect to the management of the corporation, a role they must discharge reasonably and with care and loyalty. To achieve this, it is useful if not necessary that directors have complementary skills and knowledge. In addition, while directors do not have a legal obligation to bring added value, diversity of outlooks may allow the board to better assist the legal person in developing and executing its strategic vision.

Footnotes

1 Peoples Department Stores Inc. (Trustee of) v. Wise, [2004] SCC 68, [2004] 3 SCR 461 ("Peoples")

2 BCE Inc. v 1976 Debenture holders, 2008 SCC 69 (CannLII), [2008] 3 SCR 560, ("BCE ")

3 RSC 1985, c C-44, ("CBCA"), s 122

4 CQLR c S-31.1, s. 119 (the "QBCA")

5 CQLR c C-1991 ("CCQ"), arts 321 ff

6 See also – Langlois lawyers, "Directors & Officers Liability" online

7 See also – information to come

8 Section 122(1)(b) CBCA

9 Peoples, supra, note 1, para 67

10 Section 122(1)(a) CBCA

11 Article 7 CCQ

12 BCE, supra, note 2 para 66

13 Ibid, para 82

14 QBCA (including s 450 in particular)

15 CBCA (including s 241 in particular)

16 Directors of a corporation, like all persons responsible for the management of a legal person in Quebec, are also subject to various obligations provided for in the CCQ, including those pertaining to civil liability, contracts of mandate and partnership contracts (arts 1457 ff, 2130 ff, 2186 ff CCQ, etc.).

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.

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