Duties and Liabilities of Directors and Officers
| Author | J. Anthony Vanduzer |
| Pages | 269-318 |
CHAPTER
8
DUTIES
AND
LIABILITIES
OF
DIRECTORS
AND
OFFICERS
A.
INTRODUCTION
In
previous chapters,
we
discussed
the
problem
of the
agency costs
faced
by
shareholders
as a
result
of the
incentives
for
directors
and
offi-
cers
to act in
their
own
interests rather than those
of the
corporation.
In
this chapter,
we
examine some
of the
ways
the law
addresses this
problem
by
imposing duties
on
directors
and
officers
which require
them
to
meet certain standards
of
behaviour. Directors
and
officers
are
subject
to a
fiduciary
duty
to act
"honestly
and in
good
faith
with
a
view
to the
best interests
of the
corporation,"
as
well
as a
duty
of
care
to
"exercise
the
care, diligence
and
skill
that
a
reasonably prudent per-
son
would exercise
in
comparable circumstances." These duties were
developed
by the
common
law
courts
and are now
enshrined
in
statute
in
most Canadian
jurisdictions
(e.g.,
CBCA,
s.
122(1)).'
The
fiduciary
duty
and
duty
of
care
are
owed
to the
corporation
rather than
to the
shareholders directly.
Because
shareholders
are not
the
direct beneficiaries
of
these duties,
the
common
law
courts
did not
allow
shareholders
to
take action when these duties were
not
complied
with.
The
CBCA
and
statutes modelled
after
it
have greatly enhanced
access
to
shareholder remedies
by
expanding
the
circumstances
in
1
E.g., Ontario Business Corporations Act, R.S.O. 1990,
c.
B-16
[OBCA],
s.
134(1);
Alberta
Business Corporations Act,
R.S.A.
2000,
c. B-9
[ABCA],
s.
122(l)(a);
and
British
Columbia
Company
Act,
R.S.B.C.
1996 [BCCA],
c. 62, ss. 118 &
135.
269
270 THE LAW OF
PARTNERSHIPS
AND
CORPORATIONS
which shareholders
can
initiate actions
for a
breach
of
duty owed
to the
corporation
if the
directors
refuse
to do so.
Also,
the
so-called oppres-
sion remedy creates
not
only
a
process
for
obtaining
a
remedy
but a
new
substantive basis
for
shareholders
to
obtain relief where directors
or the
corporation have oppressed their interests.
As a
result,
the
oppression provisions create
a new
standard
of
behaviour
for
directors
and
officers
which both complements
and
overlaps with
the
fiduciary
duty
and the
duty
of
care. This standard will
be
discussed
in
detail
in
Chapter
9, as
will
a
variety
of
remedial
options
available under
the
CBCA
and
other corporate statutes.
In
addition
to
these obligations
under
corporate law, directors
and
officers
face
continually expanding sources
of
liability under
a
wide
range
of
regulatory statutes that seek
to
promote
enforcement
of
cor-
porate
obligations
by
imposing personal liability
on
directors,
officers,
and
employees involved
in the
failure
of the
corporation
to
meet
its
obligations.
We
briefly
discuss these statutory liabilities.
Finally,
the
courts have held directors
and
officers
liable
in
tort
in
a
variety
of
circumstances where they were acting
in the
course
of
their
duties.
The
broad application
of
tort liablity
in
this
way
erodes
the
sep-
arate legal personality
of the
corporation.
The
last
section
of
this
chap-
ter
discusses
the
range
of
circumstances
in
which directors
and
officers
may
be
found
liable
in
tort.
B.
FIDUCIARY
DUTY
1)
Introduction
The
fiduciary duty
is a
general standard
of
behaviour imposed
on
direc-
tors
and
officers
in
relation
to
their dealings with
and on
behalf
of the
cor-
poration.
The
CBCA
provides
the
following pithy formulation
of the
duty:
Every director
and
officer
of a
corporation
in
exercising their powers
and
discharging their duties shall
...
act
honestly
and in
good
faith
with
a
view
to the
best interests
of the
corporation
...
(s.
122(l)(a)).
Even
though countless cases have addressed
the
fiduciary
duty,
its
con-
tent
and
even
its
rationale remain elusive. Some commentators
from
the
law
and
economics school seek
to
justify
and
give content
to the
fiduci-
ary
duty based
on the
agency-cost analysis
referred
to in
Chapter
7.
They argue that
the
duty
is
necessary
to
counteract
the
incentive
for
directors
and
officers
to
benefit
themselves personally
at the
expense
of
the
corporation.
The
wide range
of
self-interested activity
in
which
fidu-
Duties
and
Liabilities
of
Directors
and
Officers
271
ciaries
may
engage renders
it
infeasible
for
shareholders
to
negotiate
to
be
protected against such behaviour
at the
time
of
their investment.
It
would
be
simply
too
costly
and too
time-consuming
to
specify
fully
all
the
types
of
behaviour that
fiduciaries
are
prohibited
from
engaging
in.
Because
the
negotiating costs preclude
an
agreement which
addresses
all
possible
situations,
the
imposition
of a
general statutory standard
is
justified.
Based
on
this analysis,
a
court trying
to
determine what
the
fiduciary
duty requires
in any
particular case
must
ask
what
the
share-
holders would have agreed
to if
they
had
been permitted
to
bargain
and
there were
no
costs associated with
the
bargaining
process.2
Another
theory
to
explain
the
fiduciary duty
is
that
it
promotes
the
basic values
of
responsibility
and
integrity which
are
common
to all
members
of
society.
A
third
is
that
the
duty
is
imposed because directors
and
officers
have
the
power
to
expose
the
corporation
to
risk
of
loss. Despite these
analyses
and
others, there
is no
generally accepted theory that assists
in
deciding
what
the
obligation requires
in any
particular case.
Nevertheless,
the
CBCA
formulation
does provide some guidance.
The
duty
to act
"honestly" seems straightforward enough: directors
and
officers
are
prohibited
from
acting fraudulently
in
relation
to the
corpo-
ration.
They must
not
intend
to
deprive
the
corporation
of
some asset
or
benefit
to
which
it is
entitled
for
their personal gain. Beyond honesty,
directors
and
officers
must
try to do
what
is
best
for the
corporation.
As
noted,
the
duty
is
owed
to the
corporation,
not to the
sharehold-
ers or to any
other
stakeholder
or
group
of
stakeholders.
Thus,
in
each
case,
the
content
of the
duty will
be
defined
by
reference
to the
inter-
ests
of the
corporation
in the
circumstances.
Unfortunately,
while
it is
fairly
simple
to
determine
the
interests
of
particular
stakeholders,
it is
often
difficult,
in the
abstract,
to
think
of
what
the
interests
of the
cor-
poration are, particularly
if we
think
of the
corporation
as
essentially
the
focus
of
stakeholder claims
as
discussed
in
Chapter
1.
Also,
the
nature
of
stakeholder claims
on the
limited resources
of the
corpora-
tion
is
that, inevitably, they will
be in
conflict.
To
take
a
simple
exam-
ple,
the
interests
of
employees
in
high wages
may
conflict
with
creditors' interest
in
getting paid. While high wages
may
lead
to
happy,
productive workers,
it may
reduce cash
flow
available
to pay
off
credi-
tors.
To
what extent
do the
"best interests"
of the
corporation require
directors
to
accommodate
the
divergent interests
of
these groups,
and
on
what basis should such accommodation
be
effected?
In
Canada,
the
courts have tended
to
disregard
the
interests
of
other stakeholders
and
2 For
example,
EH.
Easterbrook
&
D.R. Fischel, "Corporate Control Transactions"
(1982)
81
Yale
LJ.
689.
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