A corporation, being a fictional person, must be directed by the acts others, including directors, officers and/or agents. Pursuant to the Ontario Business Corporations Act (the “OBCA”), directors are given broad powers, such as the power to manage or supervise the management of the affairs of the corporation (OBCA, s. 115(1)) to providing financial statements to shareholders on an annual basis (OBCA, s. 154(1)).
Canadian courts have acknowledged that the the courts are not in the best position to make business decisions on behalf of a corporation. Therefore, the courts have developed the Business Judgment Rule — that is, the courts will defer to, rather than intervene with, the business decisions made by directors on behalf of the corporation provided those decisions were made without having breached their fiduciary duties and duty of care.
Directors are required to monitor the business and affairs of the corporation with two principal duties: (1) a fiduciary duty; and (2) a duty of care. A director’s fiduciary duty requires him or her to act honestly and in good faith, with a view to the best interests of the corporation. While a director’s duty of care entails he or she to exercise the care, diligence and skill of a reasonably prudent person in comparable circumstances, the director has the benefit of the business judgment rule when discharging his or her duties.
Fiduciary Duty
Directors are fiduciaries of the corporation. In exercising their powers, directors are required to act honestly and in good faith with a view to the best interests of the corporation. Every director and officer of a corporation in exercising his or her powers and discharging his or her duties to the corporation must act honestly and in good faith with a view to the best interests of the corporation (OBCA, s. 134(1)(a)).
The Supreme Court of Canada in seminal case of Peoples Department Stores Inc. (Trustee of) v. Wise (2004 SCC 68 [“Peoples”]) stated the following:
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 (Peoples, para. 35).
Directors are not fiduciaries for shareholders or other stakeholders. It should be noted that in fulfilling their fiduciary duties for the corporation, directors may consider the interests of various stakeholders. The OBCA also includes provisions regarding directors having conflicts of interest, and how directors must disclose any interest they may have in material contracts and transactions (OBCA, s. 132).
The fiduciary duties of directors are not limited by type or nature of transaction but are at large. It is helpful to examine various components of the directors’ fiduciary duty separately. These situational applications include, but are not limited to, the following:
Conflict of interest;
Confidentiality;
Unfair competition;
Corporate opportunity;
Duty of disclosure; and
Share issues and share transfers.
Duty of Care
In carrying out their duties, directors must exercise the care, diligence and skill that reasonably prudent persons would exercise in comparable circumstances (OBCA, s. 134(1)(b)). The standard of care is based on an objective standard and not perfection. The Supreme Court in Peoples stated the following:
Directors and officers will not be held to be in breach of the duty … if they act prudently and on a reasonably informed basis. The decisions they make must be reasonable business decisions in light of all the circumstances about which the directors or officers knew or ought to have known. In determining whether directors have acted in a manner that breached the duty of care, it is worth repeating that perfection is not demanded. Courts are ill-suited and should be reluctant to second-guess the application of business expertise to the considerations that are involved in corporate decision making, but they are capable, on the facts of any case, of determining whether an appropriate degree of prudence and diligence was brought to bear in reaching what is claimed to be a reasonable business decision at the time it was made (Peoples, para. 67).
The quality of the directors’ governance process is important when they make a decision. Directors should take into account, but not limit themselves to, the following when making an informed decision:
consider the material information;
assess reasonable alternatives;
probe the benefits and risks associated with each alternative; and
rely, in good faith, on experts.
Remember that perfection is not demanded, and directors who make decisions on a reasonably informed basis will be entitled to deference under the business judgment rule (Peoples, para. 65).
This publication is not intended to constitute legal advice. No one should act on it or refrain from acting on it without consulting with a lawyer. Jaswal Law would be pleased to provide additional details or advice about specific situations if desired. No part of this publication may be reproduced without the prior written permission of Jaswal Law.