Being asked to join a board of directors of a company, or act as an officer, can be a great honour, but it is also a responsibility that should not be taken lightly. In performing their duties, Canadian directors and officers face a minefield of personal liability, arising from both legislation and common law. This article does not purport to deal with all of these potential sources of liability, but merely: (1) provide an overview of some of the challenges facing directors and officers, and (2) offer some general advice on strategies available to mitigate their risk.
Basic Duties of Directors and Officers
In general, Canadian directors and officers must perform their duties: (1) in the best interests of the company, and (2) with a degree of care no less than that of a reasonably prudent person. These obligations are reflected in federal and provincial statutes, such as the Canada Business Corporations Act.
In Peoples Department Stores Inc. (Trustee of) v. Wise, the Supreme Court of Canada described the duty to act in the best interests of the company (also referred to as the ‘duty of good faith’ or ‘fiduciary duty’):
The statutory fiduciary duty requires directors and officers to act honestly and in good faith vis-à-vis the corporation. They must respect the trust and confidence that have been reposed in them to manage the assets of the corporation in pursuit of the realization of the objects of the corporation. They must avoid conflicts of interest with the corporation. They must avoid abusing their position to gain personal benefit. They must maintain the confidentiality of information they acquire by virtue of their position. Directors and officers must serve the corporation selflessly, honestly and loyally.
This fiduciary duty can cause special problems in situations where a director has been elected as a representative of a specific shareholder, group of shareholders or other stakeholder (labour union, creditor etc.), as the director will likely be in a conflict of interest if they are in possession of information that affects the company, but do not disclose it to the board.