8 Fiduciary Duties

Question 1

What are Fiduciary Duties?

Answer 1

you must put the interests of the corporation before your own
- You cannot compete with the corporation of which you are a director;
- You cannot act on both sides of a transaction;
- You cannot take opportunities that do, could, or might, in the right circumstances, belong to the corporation.
- The basic rule is that, while acting as a fiduciary, if anything happens where your personal interest (or other duties) might draw you away from your fiduciary duty, you must avoid this conflict

Question 2

What is the Source of Legislation for fiduciary duties?

Answer 2

122 (1) Every director and officer of a corporation in exercising their powers and discharging their duties shall
(a) act honestly and in good faith with a view to the best interests of the corporation; and
(b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

Question 3

Who owes fiduciary duties?

Answer 3

• Directors
• Officers
• Anyone who carries out these functions
• Anybody else who fits the definition

Question 4

To whom are fiduciary duties owed?

Answer 4

• Corporation
• Other directors and shareholders (possibly)

Question 5

What is the ratio in Lac Minerals Ltd. v. International Corona Resources Ltd.?

Answer 5

The fiduciary has scope for the exercise of some discretion or power
- The fiduciary can unilaterally exercise that power or discretion so as to affect the beneficiary’s legal or practical interests
- The beneficiary is peculiarly vulnerable to or at the mercy of the fiduciary holding the discretion or power.
- In this case, Corona was under no compulsion to deal with Lac, but chose to do so. Therefore, there is no fiduciary relationship

Question 6

What is the ratio in Hardman Group Ltd. v. Alexander?

Answer 6

Outside the established categories, what is required is evidence of a mutual understanding that one party has relinquished its own self-interest and agreed to act solely on behalf of the other party. There was no “mutual autonomy” here - there is reason to impose fiduciary obligations. Therefore, fiduciary duties in the corporate context are always owed to the corporation but may be owed to others as well

Question 7

What are the two different situations where fiduciary duties can exist

Answer 7

• The “automatic” situation – where the onus is on the alleged fiduciary to disprove the existence of the duty (directors, agents, etc.) the fact of a fiduciary element must be disproven by the alleged fiduciary
• The “nature of the relationship” situation – where the elements of the relationship must be proven to be of a fiduciary character. Must be proven by the party alleging it. Discretion, influence, vulnerability, and trust are all indicia of a fiduciary relationship outside the “automatic” category. Evidence of a mutual understanding that one party has relinquished its own self-interest

Question 8

What are some additional points to consider in determining fiduciary obligation?

Answer 8

• Separation of ownership and control
• Open-ended obligations with no specific conduct and results stipulated
• Better informed and more experienced than those to whom the duty is owed

Question 9

What is the ratio in Peoples Department Stores Inc. (Trustee of) v. Wise?

Answer 9

The statutory fiduciary duty is only owed to the corporation.
- Without fraud or dishonesty cannot be a breach of fiduciary duty. “Best interests of the corporation” means the maximization of the value of the corporation.
- Directors do not have to follow the best interests of the shareholders as a priority over other interests.
- The directors’ fiduciary duty does not change when the corporation is “in the vicinity of insolvency”
- The duty of loyalty does not extend to creditors. So long as the directors act in the best interests of the corporation, even if creditors take a loss, the directors are not personally liable for their decisions.

Question 10

What is the ratio in Re Sports Villa Resort Inc. (sub nom. Pardy v. Dobbin)?

Answer 10

in regards to competition with the corporation, membership on dual boards by a single individual is allowed (even in the same industry sector)
- However, public interest demands 1) that we uphold high standards of director conduct and 2) vibrant economic activity
- This means that we should not prohibit legitimate business and entrepreneurial spirit and aptitude

Question 11

What is the tenstion in Self Dealing Transactions?

Answer 11

The tension in these transactions is that we do not want a person to feel conflicted about whose interests to protect in a given transaction. The law says that if you are on both sides of the negotiating table, this is a self-dealing transaction, and you are excluded

Question 12

How are Self Dealing Transactions dealt with under the common law?

Answer 12

if one person was excluded, the entire board was presumptively excluded unless:
* (i) the articles or by-laws provided for some other rule; or
* (ii) the shareholders passed a resolution forgiving the breach of duty

Question 13

How are Self Dealing Transactions dealt with under the statutory law?

Answer 13

under the CBCA, the rules are different
* (i) the entire board is not excluded
* (ii) if you follow the statutory rules on disclosure and not voting (s.120 CBCA), then the transaction will be valid
* (iii) a resolution, article or by-law will not help (s.122(3))

Question 14

What is the ratio in Aberdeen Railway Co. v. Blaikie Brothers?

Answer 14

even if you could prove it was the fairest deal made, the deal still couldn’t be made. The fact that there are other directors who could’ve entered into the deal does not change that the obligation was not fulfilled. The modification of the contract after Thomas Blaikie resigned made no difference (“fruit of a poisonous tree”)

Question 15

What is the ratio in Transavaal Lands Co v. New Belgium (Transvaal) Land & Development Co.?

Answer 15

• If one was the director of one company and the shareholder of another company, this would be enough to disqualify the director under the rule promulgated in Aberdeen
• If a person was a trustee for someone else’s shares, this would also be enough to disqualify the director under the rule promulgated in Aberdeen
• this case indicates that there could be protection of the self-interested director by the articles, this is not the case under the CBCA (s.122(3))

Question 16

What is the ratio in Liquidators of the Imperial Mercantile Credit Association v. Coleman and Knight?

Answer 16

The director must give sufficient disclosure to tell the other directors the true state of affairs (this is also true under the statute). This involves not merely the declaration of the existence of an interest but the nature of that interest

Question 17

What is the ratio in Exide Canada Inc v. Hilts?

Answer 17

a material interest includes a personal relationship with the person who was a party to a material contract. Even where a director has no monetary interest in the person, but the negotiation involves a close personal friend of one of the directors a transaction ought to be suspect. the materiality threshold is very low

Question 18

What defines material interest?

Answer 18

the interest must be such that people believe it would draw the member away from their fiduciary duty

Question 19

What is the ratio in UPM-Kymmene Corp v. UPM-Kymmene Miramichi?

Answer 19

The best interests of the corporation have to come first. This means whenever your personal interests are at stake, they must be supressed in favor of the corporation’s interests

Question 20

What is the TEST from UPM-Kymmene Corp v. UPM-Kymmene Miramichi?

Answer 20

Berg failed to disclose:
1) prior board resistance,
2) no research or benchmarking, and
3) differences from earlier drafts

Question 21

What is the ratio in North-West Transportation Company Ltd. v. Beatty?

Answer 21

If the result is procured by unfair or improper means by the majority, it will not be binding on the corporation
- every shareholder has a perfect right to vote upon any such question…although he may have a personal interest in the subject-matter.
- Any such dealing may be affirmed or adopted by the company, provided such affirmance or adoption is not brought about by any unfair or improper means, and is not illegal or fraudulent or oppressive towards those shareholders who oppose it

Question 22

What is a Corporate Opportunity?

Answer 22

the option provided to the corporation (whether the corporation takes advantage of the option or not) which could reasonably be seen as being to the advantage of the corporation
- On one hand, diversification of investment is valuable for corporate management
- On the other hand, fiduciary duty wants to tell people to protect their corporations first and to subrogate their own needs and desires

Question 23

What is the relationship between corporate opportunities and competition?

Answer 23

1) The two concepts are interrelated, in they are driven by the same basic problem
2) Nonetheless, a corporate opportunity issue is more specific than a competition issue, in that competition does not focus on a single transaction or proposed transaction
Note: on the exam, do NOT suggest disclosure as a remedy for corporate opportunities. A disclosure by the self-interested director under s.120 will NOT help in a corporate opportunity

Question 24

What is the ratio in Cook v. Deeks?

Answer 24

Intentional exclusion
- The majority cannot make a present to themselves as this is oppressive to minority.
- Directors cannot sacrifice the interests which they are bound to protect, to divert in their own favour business which should properly belong to the company they represent.
- Pre or post transaction resolutions can be oppressive to minority

Question 25

What is the ratio in Regal (Hastings) Ltd. v. Gulliver?

Answer 25

Opportunity Criteria
- An allegation of fraud or damage to company is not needed, when arguing for missed corporate opportunity.
- The fact that the company cannot take the opportunity does not allow for the directors pursue the opportunity themselves.
- Did the opportunity arise only because they were directors?
- Did the company lose something, did the directors profit?

Question 26

What is the ratio in Peso Silver Mines Ltd. v. Cropper?

Answer 26

Bona Fide Rejection
- A corporation only holds an interest until there was a bona fide rejection of the opportunity. The matter would be different if the company actually desired it
- Once the company considers and rejects an opportunity, it ceases to fall under the doctrine of corporate opportunity and the director is free to pursue it.

Question 27

What is the ratio in Canadian Aero Service Ltd. v. O’Malley?

Answer 27

Resignation prompted by opportunity
- If a person, who owes a fiduciary duty, is associated with a maturing business opportunity, he is precluded from so acting on it after his resignation (without the corporation’s approval), where the resignation may fairly be said to have been prompted by a wish to acquire for himself the opportunity sought by the company.

Question 28

What is the TEST in Canadian Aero Service Ltd. v. O’Malley?

Answer 28

The general standards of loyalty, good faith and avoidance of a conflict of duty and self-interest to which the conduct of a director or senior officer must conform, must be tested in each case by looking at many factors. Consider all the factors:
o position or office held,
o the nature of the corporate opportunity,
o its ripeness,
o its specificness [specificity] and
o the director’s or managerial officer’s relation to it,
o the amount of knowledge possessed,
o the circumstances in which it was obtained,
o whether it was special or, indeed, even private,
o the factor of time in the continuation of fiduciary duty where the alleged breach occurs after termination of the relationship with the company, and
o the circumstances under which the relationship was terminated, that is whether by retirement or resignation or discharge.