BUS ORG Lec 14 Fiduciary Duties.pdf

Fiduciary Duties of Directors & Officers Codification of Fiduciary Duties in CBCA Codification in CBCA & Statutory Override of Default Nature of Common Law Fiduciary Duties CBCA s. 122(1):  Every director & officer of a corp in exercising their powers & discharging their duties shall (a) act honest...

Fiduciary Duties of Directors & Officers Codification of Fiduciary Duties in CBCA Codification in CBCA & Statutory Override of Default Nature of Common Law Fiduciary Duties CBCA s. 122(1):  Every director & officer of a corp in exercising their powers & discharging their duties shall (a) act honestly & in good faith w a view to best interests of corp [duty of loyalty]; & (b) exercise care, diligence & skill that a reasonably prudent person would exercise in comparable circumstances [duty of care].  Subject to s. 146(5) [unanimous shareholder agt], can’t override duty by K, articles, by-laws, or resolution – s. 122(3) Duty of Care CBCA s. 122(1)(b)  …exercise care, diligence & skill that a reasonably prudent person would exercise in comparable circumstances. UPM-Kymmene Inc v. UPM-Kymmene Miramichi Inc (Ont CA, 2004)  On non-urgent matters directors must proceed cautiously & educate themselves thoroughly  Business judgement rule (BJR) only protects if scrupulous in deliberations & demonstrate diligence Duty of Care Peoples Department Store v. Wise (SCC, 2004) Creditors can be claimants under s. 122(1)(b)  Not liable if acted prudently & on reasonably informed basis – decisions must be reasonable in light of all circumstances directors & officers knew or ought to have known  Plaintiff must show breach of duty & also caused damage Duty of Care  Business judgment rule – yes court should not second-guess corporate decision-making BUT no to US abstention doctrine  Absent showing of fraud, illegality or conflict of interest the court must abstain from reviewing the board's decision.  Similar statement in BCE v. 1976 Debentureholders (2008) Diligence  Deemed consent if not present unless within 7 days dissent placed in minutes or written dissent by registered mail – s.123  Recall can be liable for issuing shares etc. for inadequate consideration or when tests s.42 under not met CBCA – s.118  Liable for up to 6 months unpaid wages owed to employees if corp becomes unable to pay – s.119  Defenses:  Exercised care, diligence & skill that reasonably prudent person would have exercised in comparable circumstances Indemnification & Insurance  CBCA provides for 3 types o indemnification:  Generally, indemnity, s.124(1)  An indemnity in derivative actions s.124(4)  A required indemnity for litigation defence costs if certain conditions met s.124(5) General indemnity  s. 124(1) permits indemnification of D&O for all reasonable costs, charges, and expenses, including amounts paid to settle an action or satisfy a judgment.  Not allowed if, s.124(3)  D&O did not act honestly & in good faith w view to best interests of corp, or;  In case of criminal or administrative proceeding enforced by $ penalty, did not have reasonable grounds for believing conduct was lawful  Corporation may advance funds to D&O for these expenses  This is optional, 124(2) Indemnification & Insurance Derivative Action  If the claims against D&O concerns a derivative action, indemnification is allowed but requires court approval. 124 (4)  Reason for court approval ? Required Indemnity  corporation is required to indemnify D&O for litigation defence costs if:  D&O were not judged to be at fault; and  They met the conditions in s.124(3) (i.e., acted honestly and in good faith with a view to the best interests of the corporation and have reasonable grounds for believing their conduct was lawful)  D&O liability insurance Securities Regulators  Can impose broad range of administrative sanctions when “in public interest to do so”  Can remove D&O from this position  May consider degree of care D&O have taken in exercising their duties (Re Standard Trustco Ltd)  Directors are entitled to rely on professional outside advisers ( e.g., legal counsel, underwriters)  Reliance would be unreasonable if the director was aware of facts or circumstances … that a prudent person would not rely on the professional advice.  Re YBM Magnex – Standard of care encourages responsibility not passivity  Yet, board not homogenous group, more may be expected of persons w superior qualifications  Absent suspicion, not improper to rely on management; not unreasonable to rely on advisers unless prudent person would not Re YBM Magnex YBM under FBI investigation for investing in Arbat, a joint venture in Russia Establishes Special Committee (SC) to investigate The SC recommends no detailed disclosure of investigation necessary YBM wants to acquire Crucible, and needs to raise capital via distributing more shares. But concerned that investigation would sour the acquisition. So only discloses the Special Committee, but nothing about the investigation. FBI raids their US office-->SEC cease trades YBM shares-> OSC brings enforcement against YBM OSC staff allege YBM failed to satisfy disclosure requirements. Re YBM Magnex DUTY OF LOYALTY  Duty to avoid conflicts of interest  Duty not to take corporate opportunities  Duty to act in best interests of corporation Conflicts of Interest Common Law Rule Aberdeen Railway Co. v. Blaikie Brothers (1854)  Strict rule – directors have duty not to have their interests & interests of principal conflict Avoiding Common Law Rule  Conflict of Interest Transaction Provisions in Articles or Bylaws  Ratification – not void or voidable if shareholders ratify w proper disclosure of transaction & conflict of interest Conflicts of Interest Statutory Test – If there is:  Disclosure;  Approval by directors (w interested director(s) not voting) or approval by shareholders; &  Transaction is reasonable & fair – s.120  Then K or transaction not void or voidable; &  Director or officer is not accountable to corp Conflicts of Interest Disclosure Must make disclosure w respect to “material” K or transaction (or proposed) if director or officer ▪is party to K or transaction; ▪is director or officer (or acts in similar capacity) of party to K or transaction; or ▪has “material interest” in party to K or transaction – s.120(1) Disclosure made at earliest opportunity – s.120(2), s.120(3), s.120(4) Disclosure can be via general notice to board declaring conflict – s.120(6) Conflicts of Interest Abstention from Voting by Interested Directors Can be approved by directors if interested director does not vote – s.120(5) Restriction on voting does not apply where transaction relates primarily to remuneration, is for indemnity or insurance, or is a K w affiliated entity Must be “Reasonable and Fair” to Corporation Even If Approved Disinterested Director Approval / Shareholder Approval  Even if disclosure not met, disinterested directors can approve (s.120(7)) & shareholders can Conflicts of Interest Securities Regulation Requirements MI 61-101 Protection of Minority Shareholders in Special Transactions “Related Party Transaction” when person w direct or indirect control over corp may be in position to cause corp to enter into transactions unfavourable to corp but favourable to related parties RPTs & certain business combinations subject to “majority of the minority” shareholder voting requirement  Votes of shares controlled by issuer, related parties, or interested parties not counted Corporate Opportunities Initial Strict Rule Approach  Regal (Hastings) Ltd. v. Gulliver (HL, 1943) – if directors got opportunity “by reason of & in course of their execution of” their office then does not matter how fair transaction was, even if corp suffered no loss Relaxation on Strict Rule – Canadian Approach  Peso Silver Mines v. Cropper (BCCA, 1965) – if directors bona fide decide not to invest in corporate opportunity, director who thereafter embarks not accountable for any profits  Can Aero v. O'Malley (SCC, 1974) – Applied Peso. Approach of assessing each case & applying broad fairness standard rather than any strict rule to be applied in all cases. Cites US case Burg v. Horn (1967) Corporate Opportunities Director of Many Corps  Determination of whether taking corp opportunity depends on facts – existence of special circumstances that would make it unfair to take opportunity for themselves Corporation w Many Subsidiaries  Problem occurs when directors or officers of parent co make decision on how to allocate corp opp among numerous subs – boils down to business judgment  Note Yukon Business Corp Act Safe Harbour – same elements as s.120 CBCA, except no express power for court to consider what is “reasonable & fair” nor remedy if not Best Interests of Corporation  Peoples Department Store v. Wise (SCC, 2004)  Directors acting in best interests of corp may consider interests of, among others, shareholders, employees, suppliers, creditors, consumers, govts & environment  BCE Inc. v. 1976 Debentureholders (SCC, 2008)  Directors not confined to short-term profit but if ongoing concern, look to long-term interests of company  Balance stakeholder interests in accordance w fiduciary duty to act in best interests of corp, “viewed as a good corporate citizen”  s.122(1.1) was amended to include interests of other stakeholders  Business Judgment Rule (Canadian version) applies