Generally, directors in Canada are mandated by statute to oversee the business and affairs of their respective corporations. With that mandate comes a variety of legal obligations in the form of duties owed by directors. Arguably the most vital of those duties is a director's fiduciary duty to their corporation.
Focusing on competing interests, this article explores two ways in which the fiduciary duty guides directors. The article first examines conflicts of interest as between directors and corporations. It then considers external interests that are captured under the environmental, social, and governance policy umbrella.
The Fiduciary Duty
Every director and officer must act honestly and in good faith with a view to the best interests of the corporation. Thus, directors are fiduciaries of the corporations they serve. When carrying out their duties, directors must place the corporation's interests before their own and those of shareholders, creditors, and other stakeholders, as the duty is not owed to them.
The fiduciary duty encapsulates a variety of sub-duties. Among others, directors must manage the corporation's assets to its benefit and may not divert to themselves any property or business advantage belonging to the corporation. Other sub-duties include disclosing conflicts of interest, the duty of confidence, and ensuring that the corporation complies with laws and regulations. From issuing shares to retaining advisors, nearly every decision a director makes engages (or at least has the potential to engage) the fiduciary duty.
Competing Interests: Directors and Corporations
As a director, setting aside one's own interests can be difficult because the interests of directors and corporations oftentimes overlap. Take, for instance, a corporation that intends to acquire a company in which one of its directors is a shareholder. Although the acquirer and director both stand to benefit from the transaction (and there appears to be no conflict), the director's interests in the target company could encroach upon the best interests of the acquirer. The director's interest does not, in and of itself, foreclose the opportunity to lawfully advance the transaction. Corporate statutes set out requirements that, if met, permit corporations to close “material transactions” and execute “material contracts.”
Directors should first determine whether the conflicts regime in the governing corporate statute captures the contract or transaction. In our example, the director ought to consider whether her interest in the transaction is material. A contract is material where a director involved in its approval has a “non-trivial” personal interest in its subject matter. The threshold is generally low. An Ontario court held that, where a director is charged with considering a contract selflessly on behalf of a corporation, the existence of a personal interest will always be material to the board. Such personal interests include relationships with or monetary interests in the counterparty. The definition of “material” is broad and contextual; there is no hard-and-fast rule delineating what it entails. In our example, the director is a shareholder in the target and is involved in the acquirer's decision-making processes. Given that she has a financial interest (known as an “indirect conflicting interest”), she would be well-advised to make the prescribed disclosures.
A director's non-disclosure could attract costly litigation for breach of the fiduciary duty, oppression, and other causes of action. In those circumstances, a court may set aside or vary the terms of the material contract or transaction. However, if disclosure is made where appropriate, the transaction meets the legal standard of “reasonable and fair,” and the board or shareholders duly approve the transaction, the transaction may proceed subject to the terms of a unanimous shareholder agreement, if any, and the corporation's articles of incorporation.
From selling a corporation's assets to dealing with remuneration and gifts, interests can manifest in seemingly benign ways. Accordingly, to develop a strong sense of whether competing interests are at play, a director must: (i) be alive to the interests of counterparties, stakeholders, and other external entities; and (ii) appreciate what is in the best interests of their corporation. To complicate matters, however, the two considerations are not mutually exclusive.
In considering the corporation's best interests, directors may look to the interests of various stakeholders and even the environment to inform their decisions. The way in which ESG fits into assessing the fiduciary duty, conflicts, and competing interests has become increasingly important in the wake of statutory changes reflecting societal and normative shifts in Canada.
Beyond the Corporation: Stakeholders and ESG Considerations
There is no doubt that the interests of shareholders, creditors, employees, and other stakeholders stand behind the corporation's interests. However, the Canada Business Corporations Act allows directors to consider those stakeholders' interests and the environment. The common law has developed such that directors, generally, may look beyond the corporation when making decisions for the benefit of its long-term prosperity. For those reasons, and because directors must ensure that business is done in accordance with the law, the scope of the interests up for consideration expand as the law adjusts to better protect Canadians, our environment, and others.
More than ever before, directors must consider ESG-related laws. Regulators have in recent years explored the intersection between competition, consumer protection laws, and what is now known as “greenwashing.” Penalties have increased for deceptive marketing, which captures representations about environmental claims relating to products marketed in Canada. Securities laws across the country now require the disclosure and management of climate-related risks on behalf of corporations. Certain corporations are also subject to new reporting obligations in connection with the prevention of forced labour in Canadian supply chains. The list goes on.
Directors must be attuned to changes to the legal landscape to truly understand what interests are at stake, what conduct is acceptable in the market, and how that conduct might attract liability. Directors are responsible for a corporation's compliance with the law and ought to consider not only what consumers want and the government now demands, but also how to appropriately weigh ESG-related commitments against the corporation's primacy.
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.
