Duties of Directors and Officers Flashcards
Who do directors owe their duties to?
The corporation and generally not the shareholders (Percival v. Wright). Directors also owe duties to one another (Beamish v. Solnick).
Can a corporation owe duties to its directors?
Sometimes. In Coughlan v. Westminer Canada Ltd the Court held that an amalgamated corporation breached a fiduciary duty that it owed to the former directors of one of the pre-amalgamation corporations when it sued such directors only subsequent to the expiry of applicable directors’ liability insurance placed by such preamalgamation corporation
What are the facts in Re: City Equitable Fire Insurance Company?
Company is being wound-up. Investigation reveals fraud by a corporate director resulting in a loss to the corporation. A receiver was appointed and sought to recover from the other directors and the auditors in a negligence suit.
The directors were not implicated in the fraud directly and their honesty was conceded, but it was contended that they should have discovered and prevented the fraud.
Can directors be considered trustees?
No. Even though directors may stand in a fiduciary relationship with the company, business requires risk taking. Since risk is an inherent part of busienss, directors cannot be required to be as careful with the company’s money as trustees are with people’s money.
Re: Equitable Fire Insurance Company.
At common law, what are three factors used to determine if a director has met their Standard of Care?
1) **Modified Objective Standard: **Directors are not liable for mere errors of judgment. That is, a director needn’t display knowledge greather that what could reasonably be expected from a person in their position.
2) No Continuous Attention: A director is not bound to give continuous attention to the affairs of their company.
3) Delegation: With respect to duties that, having regard to the exigencies of business and articles of association, may be left to another officer, without any grounds for suspicion that officer can be expected to perform their duties honestly.
re: Equitable Fire Insurance Company
What is the Statutory Standard of Care?
In the CBCA it is s.122(1)(b). It requires directors exercise the care, diligence and skill of a reasonably prudent person in comparable circumstances.
There is no equivalent section in the NSCA. NS companies rely on Common Law (i.e. Equitable Fire Insurance Company).
What is the “Business Judgment Rule”?
“In the absence of a breach of fiduciary duty, the court will not substitute its judgment for a particular, informed business judgment of the direction that was reasonable in the circumstances”.
Supreme Court of Canada - Peoples v. Wise.
What happened in Equitable Life ASsurance Society v. Bowley et al?
Equitable Life pursued a certain policy in relation to payment of bonuses to its members between 1993 and 1999. In subsequent litigation (known as the Hyman Litigation), the House of Lords ruled that the policy was unlawful. The instant proceedings involved a claim by Equitable Life against its former directors and non-executive directors in relation to bonus payments made from 1996 onwards. The claim was for negligence and breach of fiduciary duty for failing to take legal advice regarding the validity of the bonus policy after the problem first came to light, and later, for failure to reduce the bonuses and raise awareness about potential costs should the Hyman Litigation be lost. Certain defendants, who had all been non-executive directors during the relevant period, sought an order for summary judgment that they should be excused from all liability under Section 727 of the Companies Act 1985, on the grounds that they had been entitled to rely on the executive directors and other professional advisers. They claimed that they had acted honestly and reasonably, and ought fairly to be excused for any negligence or breach of duty.
How does Equitable Life Assurance Society v. Bowley alter City Equitable Fire Insurance’s approach to determing standard of care?
1) Modified Objective Standard: This case imports consideration of the general knowledge and experience that would be expected of someone in that position – simply not knowing or not having enough experience to have known any better is not an excuse anymore if you apply a more objective standard
2) Continuous Attention: Directors have, both collectively and individually, a continuing duty to acquire and maintain a sufficient knowledge and understanding of the company’s business to enable them properly to discharge their duties as directors.
3) Delegation: Whilst directors are entitled (subject to the articles of association of the company) to delegate particular functions to those below them in the management chain, and to trust their competence and integrity to a reasonable extent, the exercise of the power of delegation does not absolve a director from the duty to supervise the discharge of the delegated functions.
What happened in Smith v. Van Gorkom [Trans Union Case]?
*NOTE* This is a USA case from Delaware.*
This is one of the few cases in which the court found a failure to discharge the duty of care. Trans Union was a huge publically traded company. The CEO, Van Gorkom, organized a takeover bid for an arbitrary price of $55/share. Van Gorkom called an emergency Directors Meeting to approve this deal. He didn’t explain how the $55 price was obtained. Based solely on Van Gorkom’s presentation, supporting statements from Trans Union’s president and chief operating officer, a representation from the Company’s chief financial officer that $55 per share was at the beginning of the range of fair price if the transaction were structured as a debt financed buy out, legal advice that to not accept the offer may subject the directors to liability, and the directors personal knowledge of the market history of the Company’s stock, the board approved the proposed merger agreement. The merger agreement was executed by Van Gorkom later that evening at a formal social event that he was hosting. Neither he nor any other director had read the agreement. This litigation was commenced as a class action by shareholders of Trans Union seeking rescission of the merger or, in the alternative, relief in the form of damages.
What is a “Leveraged Buy Out”?
Using debt (no new cash) to buy a company; security for the debt is provided by the company being acquired. They buy the company and repay their debt for purchasing over time with corporate cash flows. This used to be prohibited under corporate law but now it’s allowed and is fairly common.
What was the finding in Trans Union and why?
There is a presumption that directors make informed business decisions. To rebut this, you must show that a director acted with gross negligence. They do this by failing to consider all material information reasonably available to them, or by failing to disclose reasonable information to stockholders before making major decisions.
*Note* Delaware uses “gross” negligence. Canada does not.
What are the facts of Peoples Department Stores v. Wise Inc.?
The Peoples case involved an action by the trustee in bankruptcy of Peoples Department Stores Inc. (the “Peoples Stores”) against the corporation’s directors. Prior to the corporation’s bankruptcy, the directors had agreed to implement a joint inventory procurement policy with Wise Stores Inc. (“Wise Stores”), the corporation’s parent company. The trustee claimed that by undertaking this action, the directors had favoured Wise Stores over the Peoples Stores to the detriment of the creditors of Peoples Stores. - See more at: http://www.mcmillan.ca/Peoples-v-Wise-Much-Ado-About-Nothing#sthash.3iiJiAew.dpuf
Do directors owe a duty of care to creditors?
Yes. But not a fiduciary duy.
Unlike s. 122(1)(a), which specifically identifies the corporation, s. 122(1)(b) does not refer to an identifiable party as the beneficiary of the duty of care. As a result, the Court held that it was “obvious” that creditors were also owed this duty.
(People’s Inc. v. Wise)
Can corporations or companies indemnify their directors/officers?
Definitely yes!
CBCA 124 permits indemnification. Since Trans Union the premiums for this insurance has skyrocketed.
NSCA Table A Regs 204-205 requires indemnifcation (in certain circumstances).
