Power of directors and officers

Question 1

Fiduciary duty of directors

Answer 1

To act in the best interest of the corporation = maximization of the value of the corp;
- Not just the SH or creditors

Question 2

People v Wise

Answer 2

Facts: company goes into bankruptcy, W brothers on the board of P. Trustees of bankruptcy company want to impose personal liability for breach of duty on directors. Alleges directors unfairly favoured W to the detriment of P in the joint inventory procuring policy.

Argues that in vicinity of insolvency, fiduciary duties should shift to creditors.

para 42 - “best interest of the corp” should be read not simply as the best interest of the SH…It means the maximization of the value of the corp…it may be legitimate to consider the interest of SH, EE, Supplier, Creditors, govt, and environment. - stakeholder theory, rejection of SH primacy

para 44 - residual rights of SH - last in line to claim on asset in the event of bankruptcy

Question 3

s122(1)(a) - [Wise]

Answer 3

Statutory fiduciary duty/duty of loyalty

• requires directors and officers to act in good faith and honesty vis-a-vis the corp
• An honest and good faith attempt to redress a corp’s financial problem dose not, if unsuccessful, qualify as a breach
• The fiduciary duty does not change when the corp is in the vicinity of insolvency - owe fiduciary duty to corp

In determining whether they are acting with a view to the best interests of the corporation it may be legitimate, given all the circumstances of a given case, for the board of directors to consider, inter alia, the interests of shareholders, employees, suppliers, creditors, consumers, governments and the environment.
- No need to read the interest of creditors into the fiduciary duty in s122(1)(a) given the availability of the oppression remedy [s241(2)(c)] and action based on duty of care [s122(1)(b]

Question 4

s122(1)(b) - [Wise]

Answer 4

The standard of care is objective

• decisions of directors and officers must be reasonable business decisions in light of all the circumstances, including the prevailing socio-economic conditions, about which they knew or ought to have known
• Directors and officers will not be held in breach of duty of care if they act prudently and on a reasonably informed basis
• BJR: While courts are ill-suited and should be reluctant to second-guess the application of business expertise to the considerations that are often involved in corporate decision-making, they are capable of determining whether an appropriate degree of prudence and diligence were brought to bear in reaching what is claimed to be a reasonable business decision.

Question 5

Primary roles of directors

Answer 5

s102 - to manage or supervise the management of the corp, subject to USA
- operates as a limit on SH power in distributing companies
s103 - make, amend, or repeal by-laws, subject to articles, bylaws, and USA
s121 - appoint top officers
s122 - fiduciary duty, duty of care

Question 6

Nielson Estate v Epton [2006 Alta QB]

Answer 6

Facts: E is CEO of F. N died during work using a hoist to lift a beam. The hoist and beam are not compatible. E was not on site but gave instruction for the beam. N sued for E’s negligence, as he was aware of the safety issue but failed to take measures. E has no insurance.

Court: E owed a personal duty of care to employees.

• three-step framework
  1) Director has personal awareness of serious and avoidable danger that EE is exposed to in relation to corp activities
  2) It is withing the authority of Director to envision, establish and enforce corp policies which could reasonable avoid or reduce the danger
  3) It is within the capacity of the Director to envision, establish and enforce actions necessary to carry out these policies and avoid the danger

This has been interpreted in the U.S.: Directors’ duty of loyalty requires directors to ensure that the corporation has a functioning law compliance system.

Involves a tort law duty under which court imposes personal liability on director
Framework for when to impose this duty

Question 7

Directors in dissent

Answer 7

Directors also have an obligation to dissent where they do not agree with board decision, and recording of dissent may act as a liability shield for actions brought against directors for decision contrary to law.

Question 8

Qualifications requirements for directors

Answer 8

s105 - natural persons, over 18, not bankrupt and not of unsound mind

• Unless the articles otherwise provide, a director of a corporation is not required to hold shares issued by the corporation
• At least 25% of the directors of a corporation must be resident Canadians - subject to exceptions in s105 (3.1), which requires a majority of the board be Canadians
• Where there are less than 4 directors, at least one must be Canadian

Question 9

Elections of directors

Answer 9

s 106 - Notice of first directors, who will govern until first SH meeting, which must be held w/i 18 months of incorporation

• At the SH meeting, directors are elected by ordinary resolution [majority vote]
• Where no directors are elected, the incumbents remain directors
• Elections may be staggered - anti-takeover device + defeats cumulative voting

s111 - filling vacancies: cannot appoint a director by increasing number of directors, which req. amending the article; or from SH failing to elect min number of directors.

s133 - The first annual meeting of the shareholders must be held within 18 months of incorporation (CBCA § 133(1)(a)), and then annually from that point forward (not later than 15 months from the prior annual meeting, (CBCA § 133(1)(b)).

s145 - A corporation or a shareholder or director may apply to a court to determine any controversy with respect to an election or appointment of a director or auditor of the corporation.

Question 10

Removal of directors

Answer 10

s108 - cease to hold office if die, resign, become disqualified, or by SH resolution in s109

s109 - SH have the right by ordinary resolution to remove directors between annual meetings - CANNOT BE VARIED IN THE ARTICLE - prevent entrenchment of directors

• Ordinary resolution: passed by a majority of the votes cast by the shareholders who voted in respect of that resolution - the only matter for which the article cannot req a higher majority.
• vacancies can be filled by SH at that meeting, or by s111
• Exception: When SHs of any class or series of shares have an exclusive right to elect one or more directors, only those shareholders may remove that director.- a control device in closely held corp
• If company has cumulative voting [s107], cumulative voting rules apply to removal and election. – a control device in closely held corp

Question 11

Bushell v Faith [1970 HL]

Answer 11

Facts: B, F, and S are the 3 SH of corp, each has 100 shares. Article stated that in the case of removing director, the votes of that director is tripled. B and S voted to remove F. F argue that he’s not out due to the article.

Court: Article overwrites legislation

• This is a negotiated clause and would have protected any director.
• the Companies Act did not prevent firms from issuing shares or classes of shares w/ specially weighted voting rights
• not legis intent to fetter the right of a corp to issue shares with special rights

Dissent: this provision makes a director irremovable.

Note that this is unlikely to be upheld in Canada: s6(4)
- s184 says legis does not want directors to be able to entrench themselves.

Question 12

Authority and powers of directors

Answer 12

s102 - authority to manage or oversee management of corp.
s103 - adoption, amendment, and repeal of bylaws
s115 - delegation - directors can delegate to a managing directors their powers, except: filling vacancies for directors; securities; declare div; bylaws.
s121 - power to designate and appoint officers, determine their compensation and delegate management power to them.
s189 - power to borrow

power to remove officers - important in SH control

Question 13

Directors’ meetings

Answer 13

s114

• Quorum: Subject to the articles or by-laws, a majority of the number of directors or minimum number of directors required by the articles constitutes a quorum at any meeting of directors, and, notwithstanding any vacancy among the directors, a quorum of directors may exercise all the powers of the directors.
• Notice to directors is mandated but can be waived.

Question 14

Composition of the board

Answer 14

Outside directors:

• s102 - At least 2 directors must be outside in a public corp.
• purpose: independence: no family relationship or material financial relationship with the corp.
• But many outside directors have had prior relationship with the company
  
  • con: may not be indep.
  • pro: may know more about the corp.
• CG reform have emphasized on the role of outside directors and diversity at the board - Sarra: women and minority board members likely to enhance oversight and monitoring activities

Ombudspersons and professional directors?