Liability for breaching duty of care and skills.

Question 1

Statutory provisions

Answer 1

s122(1)(b)

• Standard: gross negligence in the process used to make a decision
• BJR is powerful defense

Note min qualifications for corp directors in s105

Question 2

Barnes v Andrews

Answer 2

Facts: A is director of corp, only went to 1 of 2 board meetings; Corp collapsed, is A responsible?

Court: To have a cause of action, p must show that the director breached duty of care, and that breach caused the loss

• Although there’s breach of duty of care, no causation can be established between the breach and the financial loss.
• Directors are general advisers of business, need not have any technical talent.

Question 3

People v Wise

Answer 3

S122.1.b is an objective std
- depends on the organization

Reliance on VP Finance
- VP Finance is not a professional listed under s123(5), who are subject to regulatory overview by the professional organization

Question 4

UPM-Kymmene Corp [2002]

Answer 4

Facts: Berg was a director and chair of board at R; B’s compensation was considered by two board meetings. It was refused by the first meeting. After the meeting, a compensation committee was formed to evaluate this. Later, composition of board and CC were changed. Also hired a consultant. Proposal was passed at 2nd board meeting. Board relied on report of consultant.

Court: The process leading up to the 2nd meeting and the proceedings there fall far short of the exercise of prudent judgment in the interests of the shareholders that is expected of directors

• CC failed to seek sufficient information to make a reasonable decision
• Board is entitled, indeed encouraged to retain advisors, but this doesn’t relieve them of the duty of due care
• No protection of BJR: directors’s decision was not informed or reasoned.

Question 5

Business Judgment Rule

Answer 5

A principle of deference: courts will not second-guess the substance of a business decision, assuming that

1) the directors were not grossly negligent and were well informed in the process of arriving at the decision; and
2) assuming there is no fraud, illegality, bad faith, or allegation that the decision being challenged is a conflict of interest transaction.

Stated in another way, if shareholders allege facts to show fraud, illegality of the decision, lack of good faith or that they are challenging a C/I transaction, then the BJR will not apply and directors will need to try to defend the substance of their decision.

Rationale: SH can protect themselves from mismanagement by divesifying their holdings. It is not in SH or society’s best interest for directors to be too risk averse, which would happen if every decision could lead to personal liability.

BJR is a “presumption that in making a business decision, the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.”
- standard is also gross negligence [Van Gorkam]

Question 6

Smith v Van Gorkam

Answer 6

Facts: V is CEO of TU, ask R, CFO of TU, to run some numbers on how to finance a LBO; R said at $50/share is easy to pay back, and at $60 is difficult. V approached JP, who is a noted financier and offer to show him how to buy TU. P negotiated a lock up option (right to buy 1m shares at $38 if LBO at $55) and some conditions. V called emergency board meeting - no notice, no copies of offer from JP, no valuation study of TU. At the meeting, CFO said $55/share is within the fair price range for TU. No directors asked questions.

Court: no facts to question the GF of directors, but no benefit of BJR b/c directors were grossly uninformed.
- The board has a right to reply on reports of officers, but it req “GF, not blind reliance”

Without BJR, directors need to defend the substance of the decision - While $55 is above market price, it cannot justify approval absent other sound valuation information,

• meaning of market price: solely measures the value of a minority position, missing control premium.
• separate proceeding
• insurance paid!

Question 7

Directors’ right to reply

Answer 7

s123(4) - Directors not liable if he relies in good faith on financial statemetns prepared by officers or auditors, or reports by a lawyer, acct, engineer, etc

• Not blind faith: directors need to ask questions
• Van Gorkam
• Worldcom: overstatement of rev - a red flag
• UPM

Question 8

Exculpation

Answer 8

Canada has not permitted exculpation: See CBCA § 122(3), 146(5) - also applicable for SH under USA

Delaware law permits corp to exculpate their directors for breaches of the duty of care by inserting an exculpation clause in their articles.

• Only for duty of care
• There is no cause of action for breach of duty of care in these corp.

Question 9

Indemnification and Insurance

Answer 9

s124(3) - allows broad indenimification/insurance for directors and officers, both for costs of defense and ultimate liability if they acted honestly and in GF.

• They can still be indemnified or insured with approval of court if they were judged to have violated duty of care.
• The corp cannot indemnify or insure its direcotrs for fruad or bad faith

In derivative actions
s124(4) - damages paid to the corp, requires court approval

Question 10

Dissent of absent directors

Answer 10

s123(3) - Absent director are deemed to have consented unless notify corp w/i 7 days after becoming aware of resolution.