DIRECTORS, OFFICERS AND SHAREHOLDERS

Transcription

1 DIRECTORS, OFFICERS AND SHAREHOLDERS James S. Kerby MacPherson Leslie & Tyerman LLP Calgary Office Third Avenue S. W. Calgary, AB T2P 4H2 Revised May 2004

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3 Saskatchewan: Bar Admission Program i TABLE OF CONTENTS I. INTRODUCTION...1 II. DIRECTORS...1 A. GENERALLY...1 B. QUALIFICATIONS...3 C. ELECTION AND TERM...5 D. MEETINGS...8 E. CEASING TO HOLD OFFICE...11 F. COMMITTEES Generally Managing Committee Audit Committee Other Committees...14 III. OFFICERS...14 A. GENERAL...14 IV. DUTY OF CARE AND LIABILITY OF DIRECTORS AND OFFICERS...15 A. THE GENERAL STANDARD...15 B. HONESTY AND GOOD FAITH...18 C. THE STANDARD OF CARE...22 D. INDEMNIFICATION AND INSURANCE...25

4 ii Saskatchewan: Bar Admission Program V. SHAREHOLDERS...27 A. BECOMING A SHAREHOLDER...27 B. RIGHTS...28 C. MEETINGS Notice Conduct of the Meeting Shareholders' Remedies Oppression Remedy...37 APPENDICES: Appendix "A" - Sample Form of Directors Consent... A - 1 Appendix "B" - Sample Form of By-law Indemnification for Directors...B - 1 Appendix "C" - Sample Form of Director/Officer Indemnity Agreement...C - 1

5 Saskatchewan: Bar Admission Program 1 I. INTRODUCTION This paper outlines some of the roles and responsibilities of directors, officers and shareholders under the Business Corporations Act of Saskatchewan, R.S.S c. B-10 (the SBCA or the Act ). To a very large extent, the directors, officers and shareholders control the operation of an SBCA corporation. An understanding of the relationship of directors, officers and shareholders towards one another, the corporation and third parties is essential to the understanding of the workings of a corporation. II. DIRECTORS A. GENERALLY A director is defined in paragraph 2(1)(n) of the SBCA to mean a person occupying the position of director by whatever name called and directors and board of directors includes a single director. Directors are elected by shareholders and, subject to the provisions of any unanimous shareholder agreement, are granted sweeping powers to direct and supervise the management of the corporation. The directors are collectively given the power to determine the direction of corporate business and are imposed with a correlative statutory obligation to exercise their powers "with a view to the best interests of the corporation". Directors must act honestly and in good faith and exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Directors of public or private corporations must be aware that, unless they properly fulfil their obligations as directors, they expose not only their reputations to attack but also their personal assets.

6 2 Saskatchewan: Bar Admission Program Specific responsibilities which a board of directors should regard as part of its overall supervision of a corporation include: (a) Assisting management in adopting a strategic plan for the corporation and assisting on an on-going basis to develop the strategic plan; (b) Understanding the principal risks which the corporation faces and ensuring that the corporation is adequately protected against those risks; (c) Ensuring that the corporation's management is of the highest possible calibre by appointing qualified senior management, ensuring that training is available for current and prospective senior management, assessing current and prospective senior management and providing for succession; (d) Ensuring that there is an effective communication process to allow the corporation to communicate with, and receive feed back from, its shareholders, customers and the public in general; and (e) Ensuring that there are effective internal controls and financial reporting systems such that the corporation's finances are protected and the corporation's financial reports may be relied upon with confidence as to their integrity and accuracy. Subsection 97(1) of the SBCA sets out the primary duties of the directors of a corporation as follows: "97(1) Subject to any unanimous shareholder agreement, the directors of a corporation shall: (a) (b) exercise the powers of the corporation directly and indirectly through the employees and agents of the corporation; and direct the management of the business and affairs of the corporation."

7 Saskatchewan: Bar Admission Program 3 Subsection 97(3) of the SBCA provides that if the articles restrict, in whole or in part, the powers of the directors to manage the business and affairs of the corporation, the shareholders shall have all of the rights, powers and duties of the directors to the extent the articles restrict the powers of the directors, and the directors are thereby relieved of their duties and liabilities to the same extent. (Note, the section fails to specifically mention that the shareholders also assume the "liabilities" of the directors, but may well be interpreted in such a manner.) This section is analogous to subsection 140(4) of the SBCA which provides that a shareholder who is a party to a unanimous shareholder agreement has all the rights, powers and duties and incurs all of the liabilities of a director of the corporation to which the agreement relates to the extent that the agreement restricts the discretion or powers of the directors to manage the business and affairs of the corporation. B. QUALIFICATIONS Boards should be made up of competent individuals with diverse backgrounds who understand their duties and are prepared to participate fully in the discharging of those duties. It is unlikely that an individual who exhibits all of the qualities of an "ideal" candidate will ever be found. However, the "ideal" director would exhibit each of the following characteristics: (a) (b) (c) (d) (e) (f) (g) (h) a questioning mind; practical experience which would add to the collective practical experience of the board; highest ethics; no conflicts with the business of the corporation; sufficient time to devote to the board's operations; limited involvement with other boards; independence from the corporation and any of its shareholders; and ability to exercise independent judgment.

8 4 Saskatchewan: Bar Admission Program Subsection 97(2) of the SBCA provides that a corporation shall have one or more directors but a corporation, any of the issued securities of which are or were part of a distribution to the public, shall have not fewer than three directors, at least two of whom are not officers or employees of the corporation or its affiliates. It should be noted that "security" is defined in paragraph 2(1)(bb) to include not only shares but also debt obligations. As such, if a debt obligation is distributed to the public, the corporation must have at least three directors, at least two of whom are not officers or employees of the corporation or its affiliates, even if the corporation has not issued shares to the public. Subsection 100(1) of the SBCA disqualifies the following persons from being directors of a corporation: (a) (b) (c) (d) anyone who is less than eighteen years of age; anyone who is of unsound mind and has been so found by a court in Canada or elsewhere; a person who is not an individual; or a person who has the status of bankrupt. In accordance with paragraph 100(1)(c) of the SBCA, only an individual can act as a director of a corporation. There is no requirement for a director of a corporation to hold shares issued by the corporation unless the articles otherwise provide (subsection 100(2)). A majority of the directors of a corporation must be resident Canadians (subsection 100(3)). "Resident Canadian" is a term defined by paragraph 2(1)(aa) of the Act. Subsection 100(3.1) of the SBCA was added in Implementation of that section ended the requirement that at least one of the directors of an SBCA corporation had to be resident in Saskatchewan. The SBCA now provides that if none of the directors of the corporation resides in

9 Saskatchewan: Bar Admission Program 5 Saskatchewan, the corporation shall appoint an attorney pursuant to section 268 and shall comply with the SBCA as though the corporation were an extra-provincial corporation. (Section 268 requires an extra-provincial corporation to appoint an individual, resident in Saskatchewan, to act as attorney for the purpose of receiving service of process in all suits and proceedings by or against the corporation within Saskatchewan.) Subsection 100(4) of the SBCA also provides that, notwithstanding subsection 100(3), not more than one-third of the directors of a holding corporation need be resident Canadians if the holding corporation earns in Canada, directly or through its subsidiaries, less than 5% of the gross revenues of the holding corporation. C. ELECTION AND TERM Directors are elected by the shareholders. "One share, one vote" is the basic premise. However, corporate articles vary considerably as to which shareholders can vote and how these votes may be cast. When the Articles of Incorporation are first forwarded to the Corporations Branch, the incorporators will send to the Director a Notice of Directors. This Notice of Directors will name the first director or directors of the corporation (subsection 101(1)). The director or directors named in the first Notice of Directors will hold office from the issuance of the Certificate of Incorporation until the first meeting of shareholders (subsection 101(2)). Subject to rules relating to cumulative voting, shareholders will, by ordinary resolution at the first meeting of shareholders and every succeeding meeting at which an election of directors is required, elect directors to hold office for a term expiring not later than the close of the third annual meeting of shareholders following the election (subsection 101(3)). It is not necessary that all directors be elected to hold office for the same term (subsection 101(4)).

10 6 Saskatchewan: Bar Admission Program In the event a director is not elected for an expressly stated term, that director shall cease to hold office at the close of the first annual meeting of shareholders following his election (subsection 101(5)). Notwithstanding the provisions of subsections 101(2), 101(3) and 101(5), if directors are not elected at a meeting of shareholders, the incumbent directors continue in office until their successors are elected (subsection 101(6)). Unless the articles, bylaws or a unanimous shareholder agreement provide otherwise, there is no restriction in relation to re-election as a director. If a meeting of shareholders fails to elect the number or the minimum number of directors required by the articles by reason of the disqualification, incapacity or death of any candidates, the directors elected at that meeting may exercise all the powers of the directors if the number of directors so elected constitutes a quorum (subsection 101(7)). In 1995, subsection 101(9) was added, which provides that, if the articles allow, the directors may appoint one or more directors who shall hold office for a term not expiring later than the close of the next annual meetings of shareholders, so long as the number of directors so appointed do not exceed one-third (1/3) of the number of directors elected at the previous annual meeting of shareholders. Subsection 106(1) of the SBCA provides that, subject to subsections 106(3) and 106(4), a quorum of directors may fill a vacancy among the directors except a vacancy resulting from the increase in the number (or minimum number) of directors or from a failure to elect the number or minimum number of directors required by the articles. Subsection 106(2) of the SBCA provides that where there is not a quorum of directors, or if there has been a failure to elect the number or minimum number of directors required by the articles, the directors then in office are to call a special meeting of shareholders to fill the vacancy and if they fail to do so, any shareholder may do so.

11 Saskatchewan: Bar Admission Program 7 Occasionally the holders of a class of shares or a series of a class of shares are entitled to vote for a specific number of directors on the board. If a vacancy occurs among those directors, subsection 106(3) of the SBCA provides that, subject to the articles of the corporation, the remaining directors elected by that class or series may fill the vacancy (except a vacancy resulting from an increase in the number or minimum number of directors for that class or series or from a failure to elect the number or minimum number of directors for that class or series). Alternatively, if there are no such remaining directors, any shareholder of that class or series may call a meeting of the shareholders of that class or series to fill the vacancy (subsection 106(3)). In the event a director is appointed or elected to fill a vacancy, then that director will hold office until the expiration of the term of his or her predecessor (subsection 106(5)). Subsection 101(10), added in 1999, provides that a person cannot be elected or appointed as a director without their consent. A person who is elected or appointed to hold office as a director is not a director, and is deemed not to have been elected or appointed to hold office as a director, unless: (a) he or she was present at the meeting when the election or appointment took place and he or she did not refuse to hold office as a director; or (b) if he or she was not present at the meeting when the election or appointment took place: (i) he or she consented to hold office as a director in writing before the election or appointment or within 10 days of it; or (ii) he or she has acted as a director pursuant to the election or appointment. See Appendix A for a form of consent to be a director. Within fifteen (15) days after any change is made among the directors, the corporation is to send a Notice of Directors setting out the change to the Corporations Branch (subsection 108(1)).

12 8 Saskatchewan: Bar Admission Program D. MEETINGS Meetings reflect the board's deliberations and it is, therefore, important that meetings be conducted in an appropriate manner. It is essential that directors be well prepared for, and attend, all meetings of the Board. Directors should require that meetings be scheduled well in advance and on a regular basis. Meeting agendas should be distributed in advance, and all material and documents to be discussed at each meeting should be distributed and read by the directors prior to each meeting. Adequate time must also be devoted during the meetings to allow for a full discussion of all agenda items. Directors should ask questions with respect to matters they do not understand, and should question views being presented by others, particularly management. In some cases, the board may wish to retain outside experts to assist the board in understanding complex issues from an objective and unbiased point of view. To avoid creating potential liabilities, the board must fully understand the issues before it. Proper records must be kept of all board and committee meetings. The minutes should record the matters under consideration, the resolution of the issue, the mandate given to management as to the resolution, and the manner in which management is to report to the board to ensure that the mandate given to management has been implemented. Minutes of subsequent meetings should indicate a follow up with management on these issues. Generally speaking, the board of directors can exercise their collective power only at a meeting for which proper notice has been given. Subsection 109(1) of the SBCA provides that, unless the articles or bylaws otherwise provide, the directors may meet at any place and upon such notice as the bylaws require.

13 Saskatchewan: Bar Admission Program 9 Subsection 109(2) of the Act provides that, unless the articles or bylaws otherwise provide, a majority of the directors or the minimum number of directors required by the articles constitutes a quorum for directors' meetings and a quorum may exercise all the powers of the directors notwithstanding any vacancy on the board. Subsection 109(3) of the Act restricts the right of directors to transact business at a meeting unless a majority of the directors present are resident Canadians. Subsection 109(4) of the Act provides that, notwithstanding subsection 109(3), directors may transact business at a meeting of directors where a majority of resident Canadian directors is not present if a resident Canadian director who is not present approves in writing or by telephone or other communication facilities the business transacted at the meeting and a majority of resident Canadian directors would have been present had the director been present at the meeting. In the event there is only one director, that director may constitute a meeting (subsection 109(8)). Unless the bylaws otherwise provide, a director may participate in a meeting by telephone or other communication facilities in accordance with subsection 109(9) if: (a) (b) all the directors of the corporation consent; and the telephone or other communication facilities permit all persons participating in the meeting to hear each other. A suggested form of directors consent in relation to telephone meetings of the Board is attached to these materials as Appendix A for your consideration. Subsection 109(5) provides that a notice of meeting of directors will specify any matter that is referred to in subsection 110(3) that is to be dealt with at the meeting but, unless the bylaws otherwise provide, need not specify the purpose of or the business to be transacted at the meeting. Subsection 110(3) provides for the following matters:

14 10 Saskatchewan: Bar Admission Program (a) (b) (c) (d) (e) (f) (g) (h) (i) the submission to the shareholders of any question or matter requiring the approval of the shareholders; filling a vacancy among the directors or in the office of auditors; issuance of securities except in the manner and on the terms authorized by the directors; declaration of dividends; purchase, redemption or acquisition of shares issued by the corporation; payment of a commission to any person in consideration of that person purchasing or agreeing to purchase shares of the corporation or procuring or agreeing to procure purchases for any such shares; approval of a management proxy circular; approval of any financial statements; the adoption, amendment or repeal of bylaws. Subsection 109(6) provides that a director may, in any manner, waive a notice of a meeting of directors and attendance of a director at a meeting of directors is a waiver of notice of the meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business on the grounds that the meeting is not lawfully called. Where notice is not sent out to directors of the business that is to be transacted at a directors' meeting, it is customary to have the directors sign the minutes of the directors' meetings specifically waiving notice. Section 111 of the SBCA provides that an act of a director or officer is valid notwithstanding any irregularity in his or her election or appointment or any defect in his or her qualification. Rather than engage in a meeting, a resolution in writing signed by all the directors entitled to vote on that resolution at a meeting of directors or committee of directors is as valid as if it had been passed at a meeting of directors or committee of directors and satisfies all the requirements of the Act relating to a meeting of directors or a committee of directors (section 112(1)).

15 Saskatchewan: Bar Admission Program 11 E. CEASING TO HOLD OFFICE Subsection 103(1) provides that a director of a corporation ceases to hold office when: (a) (b) he or she dies or resigns; he or she is removed in accordance with section 104; or (c) he or she becomes disqualified under subsection 100(1). Subsection 104(1) provides that the shareholders of a corporation may by ordinary resolution at a special meeting remove any director or directors from office subject to subsection 102(g). Subsection 102(g) provides that where the articles provide for cumulative voting, a director may not be removed from office if the votes cast against his or her removal would be sufficient to elect him or her and such votes could be voted cumulatively at an election at which the same total number of votes were cast and the number of directors required by the articles were then being elected. Subsection 104(2) provides that where the holders of a class of shares or a series of shares have an exclusive right to elect one or more directors, a director that is elected by the holders of that class or series of shares may only be removed by an ordinary resolution at a meeting of the shareholders of that class or series. Subsection 104(3) provides that, subject to subsections 102(b) to (e) (cumulative voting provisions), a vacancy created by the removal of a director may be filled at a meeting of the shareholders at which the director is removed or if not so filled, may be filled by the directors under section 106 reviewed earlier.

16 12 Saskatchewan: Bar Admission Program F. COMMITTEES 1. Generally Not all corporate decisions can, practically speaking, be made by the board of directors. The board must delegate to management or to its committees the day to day management of the business and affairs of the corporation. The board and management must therefore be capable of working together as a team to further the objectives of the corporation. The board must not act as a rubber stamp to management's decisions, but should question and probe management's recommendations where the board feels that such questioning is appropriate and necessary. Boards that are not inquisitive are setting themselves up for potential liability. 2. Managing Committee Subsection 110(1) provides that directors of a corporation may appoint from their number a managing director. The managing director must be a resident Canadian. Directors may delegate to the managing director any of the powers of the directors except those powers specifically enumerated in subsection 110(3). Subsection 110(1) also provides that the directors may, alternatively, appoint a committee of directors and delegate to that committee any of the powers of the directors except those powers specifically enumerated in subsection 110(3). A majority of that committee must be resident Canadians, unless the corporation is a holding corporation (subsection 110(2)). Note that section 110 does not limit the liability of a director of a corporation who is not the managing director or part of the committee of directors that has been appointed in relation to the acts or decisions of the managing director or committee. Although a managing director may be appointed, in some circumstances a managing committee is more appropriate. For example, a large corporation with upper management in transition may choose to appoint a managing committee (rather than a chief executive officer or chairman) to carry out overall management functions.

17 Saskatchewan: Bar Admission Program Audit Committee These days, shareholders scrutinize more closely the actions of directors and require more strict accountability from the board. In order to fulfil their duties, one of the directors' first responsibilities is to ensure that the audit committee of the board is functioning efficiently. The lawyer working with a corporation must be aware of the growing need for an effective audit committee for his or her corporate client. Distributing corporations must, pursuant to subsection 165(1), have an audit committee unless the Director of the Corporations Branch is satisfied that the shareholders will not be prejudiced by dispensing with the audit committee (subsection 165(2)). All other corporations may have an audit committee. The audit committee is a board committee composed of at least three directors, the majority of whom are not officers or employees of the corporation or any of its affiliates (subsection 165(1)). The audit committee's statutory duty is to review the financial statements of the corporation before such financial statements are approved by the directors under section 152 (subsection 165(3)). Another significant aspect of its role is the review of the appointment of outside auditors and the appropriate recommendation to the board. The committee should consider any factors which might impair the independence of the external auditor and the scope of the external audit, including the fees. It should also examine all problems found in conducting the audit, such as limitation imposed by management. Commissions in both the USA and Canada (the Treadway Commission and the Macdonald Commission respectively,) have recommended that audit committees undertake expanded duties.

18 14 Saskatchewan: Bar Admission Program 4. Other Committees Except for the possibility of having a managing committee, the SBCA does not provide for committees other than the audit committee. However, boards of corporations and other types of organizations may need committees to effectively carry out the management of the corporation. Some possibilities are: (a) (b) (c) Nominating Committee - to nominate persons to stand for election or appointment as directors, or officers, or both; Compensation Committee - to examine and recommend compensation levels and strategies for directors, officers, senior management, employees, or any combination of the foregoing; Ad Hoc Committee - to study and recommend action in specific areas of concern to the board. It is important to realize that directors' committees derive their authority from the board and are responsible to the board. The standard of care and fiduciary duty of a director on a committee will be similar, therefore, to those of a director in his or her position as just a board member. III. OFFICERS A. GENERAL Officers are employees of the corporation. Their function is to run the day-to-day operations of the corporation in accordance with the long-term policies laid down by the board of directors. Practically speaking, for the largest and most financially important corporations in Canada, the officers have virtually free reign in determining corporate destiny. Section 116 of the SBCA provides that subject to the articles, bylaws or any unanimous shareholder agreement, the directors may designate the offices of the corporation, appoint as officers persons of

19 Saskatchewan: Bar Admission Program 15 full capacity, specify their duties and delegate to them powers to manage the business and affairs of the corporation except powers to do anything referred to in subsection 110(3) (referred to above). A director may be appointed to any office of the corporation (subsection 116(b)). One person may hold two or more offices of the corporation (subsection 116(c)). There are only three qualifications to being an officer. He or she must be eighteen (18) years of age or older, must not found to be of unsound mind by a court of competent jurisdiction and must not be bankrupt. There is no requirement for an officer to be a director of the corporation. There is nothing in the SBCA limiting the term of an officer and, as such, if it is desired to coordinate the term of office of an officer with that of a director or to otherwise limit the term of office of an officer, the by-laws or articles should so provide. The usual offices you will encounter are president, chief executive officer, chief operating officer, chief financial officer, vice president, secretary and treasurer. The duties of these officers are often set out in a general fashion in the bylaws. Any act of an officer is valid notwithstanding any irregularity in his or her appointment or any defect in his or her qualification (section 111). IV. DUTY OF CARE AND LIABILITY OF DIRECTORS AND OFFICERS A. THE GENERAL STANDARD Corporate directors and officers, who collectively make up corporate management, are constrained by a number of statutorily imposed standards of behaviour. Section 117 sets out the general standard of care as follows:

20 16 Saskatchewan: Bar Admission Program "117(1) Every director and officer of a corporation in exercising his powers and discharging his duties shall: (a) act honestly and in good faith with a view to the best interests of the corporation; and (b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. (2) Every director and officer of a corporation shall comply with this Act, the regulations, articles, bylaws and any unanimous shareholder agreement. (3) Subject to subsection (4) of section 140, no provision in a contract, the articles, the bylaws or a resolution relieves a director or officer from the duty to act in accordance with this Act or the regulations or relieves him from liability for a breach thereof." The first question one must address is to whom the statutory duty contained in section 117, is owed. The long-standing principle, first enunciated in Percival v. Wright, [1902] 2 Ch. 420, that a director owes a fiduciary duty only towards the corporation itself (and not towards individual shareholders, creditors or employees) is gradually losing favour with the Courts. For example, in certain circumstances a director may not be able to escape a corresponding fiduciary duty to the shareholders of the corporation. The cases show, however, that generally speaking no duty, fiduciary or otherwise, will arise unless there is something that would engage the equitable jurisdiction of the Court. The following is a non-exhaustive list of the circumstances in which a fiduciary duty to shareholders has been found: (a) where the director was involved in a surreptitious acquisition of shares pending a merger (Hyatt v. Allen (1914), 17 D.L.R. 7); (b) (c) where the director agreed to purchase for himself or herself shares of the corporation from a shareholder and was found to owe a duty of full disclosure to that shareholder (Pickford v. Thompson (1920), 40 N.S.R. 632); where there was a conveyance from one corporation to another in which a number of directors also had a personal interest (Roxborough Gardens of Hamilton v. Davies (1919), 52 D.L.R. 572);

21 Saskatchewan: Bar Admission Program 17 (d) (e) (f) (g) (h) (i) where directors were directors of two different corporations and took advantage of their position to promote the interests of one of the corporations to the detriment of the other (Gray v. Yellowknife Gold Mines Ltd. (No. 2), [1942] O.R. 639 (H.C.), affirmed [1947] O.R. 994 (C.A.)); where a departing director was in breach of a duty to the corporation not to unfairly compete he was also found in breach of a duty to the shareholders to disclose the "conspiracy". (DCF Systems Ltd. v. Gellman (1978), 5 B.L.R. 98 (Ont. H.C.); where the directors of a corporation sent inaccurate or misleading information to shareholders (Goldex Mines Ltd. v. Revill (1975), 7 O.R. (2d) 216); where the director failed to disclose confidential information of a takeover offer in which he had a personal interest by being a director/shareholder in the corporation and by purchasing, directly or indirectly, a shareholder's shares in the corporation. (Dusik v. Newton (1985), 62 B.C.L.R. 1 (C.A.); Tongue v. Vencap Equities Alberta Ltd., [1994] 5 W.W.R. 674 (Alta. Q.B.); where there was a misapplication of funds by the corporation to a number of shareholders, albeit for a bona fide business purpose. (Angus v. R. Angus Alberta Ltd. (1988), 50 D.L.R. (4th) 439); and where a director misrepresented the corporation's intention to list the corporation's shares publicly (DeLazari v. Bond (1989), 14 A.C.W.S. (3d) 99 (B.C. Co. Ct.). Similarly, with respect to creditors, the long-standing legal view that no statutory, common law or equitable duty is owed by directors to creditors has recently been relaxed, especially in the insolvency context. It is arguable that when a corporation is insolvent, or is operating on the verge of insolvency, directors have a duty to creditors which is fiduciary in nature and which may supplant the duty owed to shareholders. This duty may arise either under the oppression remedy or the provision for leave to bring a derivative action under the SBCA. (See M.R. Gillen, "Fiduciary Duties Revisited: Developments in the Fiduciary Duties of Directors, Officers and Shareholders Since the Enactment of the CBCA", Meredith Memorial Lectures 153 at ; J.S. Ziegel, "Creditors as Corporate Stakeholders: The Quiet Revolution - An Anglo-Canadian Perspective" (1993), 43 U.T.L.J. 511; J. A. Van Duzer, "Who May Claim Relief From Oppression: The Complainant in Canadian Corporate Law" (1993), 25 Ottawa L. Rev. 463.)

22 18 Saskatchewan: Bar Admission Program With respect to employees, it has been held that directors do not owe a fiduciary duty to employees (Parke v. Daily News Ltd., [1962] 1 Ch. 927). However, section 114 imposes liability on directors of a corporation for unpaid wages in accordance with the Labour Standards Act. Often a director is elected by the holders of a particular class of shares. In that instance, the shareholders of that class expect the director to represent that class on the board. This puts the director in a difficult position as the director's primary responsibility is to the corporation as a whole, and not to that particular class of shareholders. B. HONESTY AND GOOD FAITH Paragraph 117(1)(a) of the SBCA codifies the common law duty of a director to act honestly and in good faith with a view to the best interests of the corporation by reason of his or her fiduciary position in relation to the corporation (see, for example, Re Smith and Fawcett Ltd., [1942] Ch. 304 (C.A.) and Parke v. Daily News, supra.) An action in the best interests of the corporation is one which the Courts have generally considered to be focused upon the maximization of profit. It has been held that there are three components that must be fulfilled: (a) (b) (c) the transaction must be reasonably incidental to the carrying on of the company's business; the transaction must be bona fide; and the transaction must be done for the benefit and to promote the prosperity of the company. (In Re Lee Behrens and Co. Ltd., [1982] 2 Ch. 46)

23 Saskatchewan: Bar Admission Program 19 One area incidental to the notion of good faith and honesty in the fulfilment of directors' duties relates to loyalty, avoidance of conflicts and the avoidance of taking advantage of corporate opportunities. The common law position was set out in the leading case of Canadian Aero Service Ltd. v. O'Malley, [1974] S.C.R. 592 where Mr. Justice Laskin, as he then was, held at 607: "An examination of the case law... shows the persuasiveness of a strict ethic necessary of law. In my opinion this ethic disqualifies a director or senior officer from usurping for himself or diverting to another person or company with whom or with which he is associated a maturing business opportunity which his company is actively pursuing... " This duty, as demonstrated in the Canadian Aero Services Ltd. case may subsist even after a director or officer is no longer associated with the company. One area that has not yet been fully addressed in Canadian law, however, relates to the obligation of a director or officer to account to a corporation for corporate opportunities which a director or officer comes across in his or her personal capacity rather than by reason of his or her corporate position. There are numerous American decisions which have so held but the Canadian case law is not conclusive on this point. Section 115 of the SBCA deals extensively with the duties and obligations of directors and officers in relation to conflicts associated with material contracts. Subsection 115(1) requires a director or officer to disclose in writing to the corporation (or request to have entered in the minutes of meetings of directors) the nature and extent of any interest that a director or officer has in a material contract or proposed material contract with the corporation or of any material interest in any person who is a party to such a contract. Subsection 115(2) requires such disclosure to be made by a director:

24 20 Saskatchewan: Bar Admission Program (a) (b) (c) (d) at the meeting where the contract is first considered; if the director was not interested in the proposed contract at the meeting at which the contract was first considered, then at the first meeting after the director becomes so interested; if the director was not interested in the contract at the time the contract was made, at the first meeting after the director becomes so interested; or if the person who is interested in the contract later becomes a director, at the first meeting after that person becomes a director. Pursuant to subsection 115(3), the disclosure of an interest in a material contract by an officer who is not a director is to be made: (a) (b) (c) forthwith after becoming aware that the contract is to be considered or has been considered at a meeting of directors; if the officer becomes interested after the contract is made, forthwith after he or she becomes so interested; or if a person who is interested in a contract later becomes an officer, forthwith after he or she becomes an officer. Often a material contract is not one which would ordinarily require formal directors' or shareholders' approval. In such event, a director or officer would be obliged to notify the corporation in writing or request to have entered in the minutes of meetings of directors the nature and extent of the interest of the director or officer in the material contract or proposed material contract after the director or officer becomes aware of the contract or proposed contract (subsection 115(4)). Pursuant to Subsection 115(5), no director shall vote on any resolution to approve a contract referred to in subsection 115(1), unless the contract is: (a) (b) an arrangement by way of security for money lent to or obligations undertaken by the director for the benefit of the corporation or an affiliate; a contract relating primarily to his or her remuneration as a director, officer, employee or agent of the corporation or an affiliate;

25 Saskatchewan: Bar Admission Program 21 (c) (d) a contract for indemnity or insurance under section 119 of the SBCA; or a contract with an affiliate. Subsection 115(6) provides that a general notice to the directors by a director or officer declaring that he or she is a director or officer of, or has a material interest in, a person and is to be regarded as interested in any contract made with that person, is a sufficient declaration of an interest in relation to any contract with that person. The term "person" is defined in subsection 2(1)(w) to include an individual, partnership, association, body corporate, trustee, executor, administrator or legal representative. Subsection 115(7) provides that a material contract in which the director or officer has an interest is neither void nor voidable by reason only of the interest of the director or officer or by reason only that such director is present at or is counted to determine the presence of a quorum at a meeting of directors or committee of directors that authorize the contract if: (a) (b) (c) there was adequate disclosure by the director or officer in accordance with subsection 115(2), (3), (4) or (6); the contract was approved by the directors or the shareholders; and it was reasonable and fair to the corporation at the time it was approved. Subsection 115(8) provides that if a director or officer fails to disclose his or her interest in a material contract, a court may, upon the application of the corporation or a shareholder of the corporation, set aside the contract on such terms as it thinks fit. The SBCA was amended in 1992 to include subsection 115(8.1), which provides that, notwithstanding subsections (1) to (8) of section 115, the shareholders of a corporation may, by unanimous resolution passed at an annual meeting or a special meeting held for the purpose, approve a material contract or proposed material contract that the directors are unable to approve by reason of the material interest of some or all of the directors in the contract. Revised 2001

26 22 Saskatchewan: Bar Admission Program In addition, subsection 115(9) allows shareholders, by unanimous agreement, to: (a) exclude the provisions of section 115 from applying to the corporation, or (b) set forth provisions relating to disclosure of interests in material contracts and voting on those material contracts by directors that are in addition to those set forth in section 115, or (c) to do both the things mentioned above. C. THE STANDARD OF CARE As noted earlier, paragraph 117(1)(b) requires every director and officer of a corporation in exercising his or her powers and discharging his or her duties to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Paragraph 117(1)(b) differs from the common law standard of care and skill that a director must meet. The leading case in this regard is that of Re City Equitable Fire Insurance Co., [1925] Ch. 407, affirmed [1925] Ch. 500 (C.A.). In that case, the Court recognized that the common law standard of care is partly subjective so that a director need not exhibit in the performance of his or her duties a greater skill than may reasonably have been expected from a person of his or her knowledge and experience. Most commentators have suggested that the objective element of paragraph 117(1)(b) has raised the standard of care and skill that might be expected from directors and officers. Similarly, the requirement to exercise prudence would suggest a requirement to act carefully and cautiously and, where necessary, to go beyond the information presented at the board level prior to making a decision. At common law, it is not necessary that a director give continuous attention to the affairs of the company and a director is not bound to attend at all meetings although he or she ought to attend whenever reasonably possible (Re City Equitable Fire Insurance Company, supra, at 429). Similarly, at common law, a director that was not present at a meeting could escape liability for a transaction which was approved in his or her absence (Re Denham & Co. (1983), 25 Ch. D. 752).

27 Saskatchewan: Bar Admission Program 23 Officers of a corporation, however, may be subject to more objective and strict standards of diligence and duty under the SBCA (L.C.B. Gower, "The Principles of Modern Company Law", 5th Ed. (1992) at 587). Section 118 of the SBCA provides that a director who is present at a meeting of directors or committee of directors is deemed to have consented to any resolution passed or action taken at that meeting unless: (a) he or she requests that his or her dissent be entered in the minutes of the meeting; (b) his or her dissent is entered in the minutes of the meeting; (c) he or she sends his or her written dissent to the secretary of the meeting before the meeting is adjourned; or (d) he or she sends his or her dissent by registered mail or delivers it to the registered office of the corporation immediately after the meeting is adjourned. A director is not however entitled to vote for or consent to a resolution at a meeting and then dissent pursuant to subsection 118(1) (subsection 118(2)). If a director is not present at a meeting, he or she will be deemed to have consented to any resolution or action taken at that meeting unless within seven (7) days after he or she becomes aware of same, he or she either causes his or her dissent to be placed with the minutes of the meeting or sends his or her dissent by registered mail or delivers it to the registered office of the corporation (subsection 118(3)). Subsection 118(4) of the SBCA provides that directors (but not officers) may avoid liability under section 117 of the Act if they rely in good faith upon financial statements of the corporation, represented to them by an officer of the corporation or in a written report of the auditor of the corporation, to fairly reflect the financial condition of the corporation or if they rely in good faith upon a report of a lawyer, accountant, engineer or appraiser or other person whose profession lends credibility to a statement made by such person.

28 24 Saskatchewan: Bar Admission Program A leading U.S. decision was to be indicative of a trend picked up by the Courts in analysing provisions like section 117 of the SBCA and analogous provisions in other corporate statutes. That case is Smith v. Van Gorkom 488 A. 2nd 858 (1985), a decision of the Delaware Supreme Court often referred to as the "Trans Union" case. In that case, Mr. Van Gorkom was the long serving president and chief executive officer of the corporation. The company had substantial investment tax credits but an insufficient cash flow to offset them. For this reason, the company was an attractive take-over target. Mr. Van Gorkom was nearing retirement age, and he inquired about board approval of an acquaintance as to whether or not he knew of any one who would be interested in a leveraged buy-out of Trans Union. The acquaintance advised Mr. Van Gorkom that a corporation that he controlled would be interested in a merger which would see the holders of the shares of Trans Union get paid out in cash at a premium for their shares. Within a week the transaction had been put together, and the buyer and Mr. Van Gorkom agreed on a purchase price of $55 per share. Prior to this, the shares were trading at $37 to $38. Mr. Van Gorkom had settled on the $55 per share price after having the corporate comptroller do some confidential calculations. There were no other valuations done. Shortly thereafter, Mr. Van Gorkom presented the draft agreement to the board of Trans Union. The directors did not have any prior notice of the purpose of the meeting and there was no documentation presented to the directors. The discussion lasted approximately one and one-half hours. The directors approved the merger and Mr. Van Gorkom signed the agreement without reading it later that day. The senior management personnel of Trans Union were very much against the transaction in that they felt there should have been an attempt to obtain competing bids. Van Gorkom then negotiated a ninety day extension to permit him to obtain competing bids. A couple of bids were made but Mr. Van Gorkom proved very difficult to deal with and the original merger was subsequently submitted to the shareholders who approved it by a majority of eighty-nine percent. Dissident shareholders sued seeking rescission or damages as against the directors. The Delaware Supreme Court upheld the claim of the shareholders. The defendants paid a total of $23.5 million to the shareholders, $10 million of which was covered by a directors' and officers' liability policy with the balance being

29 Saskatchewan: Bar Admission Program 25 paid by the buyers' corporate group. The majority opinion of the Court stressed the fact that there was no disclosure to the board as to how the $55 figure had been determined and that the directors failed to question Mr. Van Gorkom about the origin of this figure. The Court stated that the directors had a duty to act in an informed and deliberate manner in determining whether to approve an agreement of merger before submitting the proposal to shareholders. In other words, the directors were found liable for failing to apprise themselves of all material information reasonably available to them before making a business judgment. Directors are not liable for errors in judgment per se, but they may be liable for making an uninformed, or not properly considered, decision. The net result of the Trans Union case has been a dramatic increase in premiums for directors' and officers' liability insurance. While the "business judgment rule", that the Court will not interfere in the management of a corporation unless the director's actions are tainted with fraud, illegality or a conflict of interest has not been adopted in Canada, it has clearly had an impact on the approach that Canadian Courts have taken to the analysis of fiduciary law and the oppression remedy. For example, in Brant Investments Ltd. v. KeepRite Inc. (1991), 3 O.R. (3d) 289, the Ontario Court of Appeal concluded that a Court is not to substitute its own business judgment for that of managers, directors or committees under an oppression remedy application. D. INDEMNIFICATION AND INSURANCE Directors and officers may be indemnified by the corporation in certain circumstances. For example, a director or officer may be entitled to the indemnification for expenses reasonably incurred in the defence of a civil, criminal or administrative action to which the director or officer is a party by reason of the position if the director or officer:

30 26 Saskatchewan: Bar Admission Program (a) (b) acted honestly and in good faith with a view to the best interests of the corporation; and in an administrative or criminal action, he or she had reasonable grounds for believing the conduct was lawful; provided that the action is not initiated by or on behalf of the corporation (subsection 119(1)). If the conditions for payment as set out in subsection 119(1) are met, but the corporation chooses not to indemnify the director or officer, subsection 119(3) states that any interested person may apply to the court for an order that the corporation indemnify the director or officer and the court may grant such an order if it is satisfied that the person seeking indemnity was substantially successful on the merits of the defence of the action and otherwise satisfied the conditions of paragraphs 119(1)(a) and (b). With the approval of a court, a director or officer may also be entitled to indemnification in respect of an action by or on behalf of the corporation to which the officer or director is made a party by reason of their position if the conditions in paragraphs 119(1)(a) and (b) are otherwise met (subsection 119(2)). Subsection 119(4) permits a corporation to purchase and maintain insurance for the benefit of the directors and officers of the corporation as against any liability incurred by the director or officer in his or her capacity as director or officer of that corporation or another corporation in which the director or officer acts at the request of the original corporation, except where the liability relates to a failure to act honestly and in good faith with a view to the best interests of either corporation. Subsection 119(5) permits a corporation, director or officer or former director or officer to apply to court for an order approving any indemnity under this section and the court may make such an order or any further order it thinks fit. If however, any such application is made, the Director of the Corporations Branch must be given notice of the application and is entitled to make an