Duties and Liabilities of Directors and Officers

• Author: J. Anthony VanDuzer
• Profession: Faculty of Law University of Ottawa
• Pages: 338-401

338

CHA PTER 9

DUTIES AND LIABILITIES

OF DIRECTORS

AND OFFICERS

A. INTRODUCTION

In all but the sm allest corporations, there is some separation between

shareholders, on the one hand, and directors and off‌icers, on the other

hand, in the sense that at least some shareholders are not also directors

or off‌icers. One of the issues t hat ar ises out of t his separation is how

shareholders can ensure that directors and off‌icers manage the corpor-

ation effectively. In particular, what protections do shareholders have

against directors and off‌icers shirking their management responsibil-

ities or acting in their own sel f-interest, such as by paying themselves

excessive salaries? In Chapter 12, we will discuss the nature and extent

of the problems that shareholders face in this regard in a broad context,

including the role that m arket forces and other factors play in deter-

mining how directors and off‌icers behave.1 In this chapter, we examine

some of the ways the law addresses these problems by imposing duties

on directors and off‌icers that require them to meet certain standards

of behaviour. Directors and off‌icers are s ubject to a f‌iduciary duty to

act “honestly and in good faith w ith a v iew to the best interest s of the

corporation,” as well as a duty of c are to “exercise the care, diligence

1 As discu ssed in Chapter 12, the cost s to shareholders associate d with the

separation bet ween shareholders and the di rectors and off‌icers who manage t he

corporation on the ir behalf, are often desc ribed as “agency costs” becau se direc-

tors and off‌icers act l ike the agents of the shareholder s.

Duties and Li abilities of Directors and O ff‌icers 339

and skill that a reasonably prudent person would exercise in compar-

able circumstance s.” 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)).2

The f‌iduciary duty is owed to the corporation rather than to the

shareholders directly. Because shareholders are not the direct benef‌ici-

aries of thi s duty, the common law courts did not allow shareholders

to sue for relief personally when the duty was not complied with. Only

the corp oration could initiate such an action. The CBCA and statutes

modelled after it have greatly enhanced access to shareholder remedies

by expanding the circumstances in which shareholders can initiate ac-

tions for a breach of duty owed to the corporation if the directors refuse

to do so. Shareholder remedies are discussed in Chapter 10.

Until recently, most commentators understood the duty of care to be

a duty owed solely to the corporation. The OBCA was recently amended

to sp ecif‌ically provide that, for corporations incorporated under that

Act, the benef‌iciary of t he duty is the corporation (s. 134(1)(b)). How-

ever, for corporations incorporated under the CBCA, and perhaps other

statutes, the Supreme Court of Canada h as said that t he statutory duty

of care is owed not just to the corporation, but is a general standard

of behav iour that ref‌lect s the standard of care owed by directors and

off‌icers to corporate stakeholders, like creditors.3 The nature of th is

standard is di scussed below.

Also, the so-called oppression remedy creates not only a process for

obtaining a remedy but also a new substantive sta ndard of behaviour

for directors and off‌icers that both complements, and overlaps, with the

f‌iduciary duty and the duty of care. Where corporations or d irectors

have oppressed their interests, shareholders can obtain relief using this

remedy. This standard will be discussed in detail in Chapter 10, as will

a variety of other remedial options available under the CBCA and other

corporate statutes.

Corporate law statutes also impose a number of more specif‌ic

obligations on di rectors and off‌icers. In addition to these obligations

under corporate law, directors and off‌icers face continually expanding

sources of liability under a wide range of regulatory statutes th at seek

to promote enforcement of corporate obligations by imposing personal

2 E.g., Ontario Busin ess Corporations Act, R.S.O. 1990, c. B-16 [OBCA], s. 134(1);

Alberta Bu siness Corporations Act, R.S. A. 2000, c. B-9 [ABCA], s. 122(1)(a); and

British Columbi a Business Corporations Act, S.B.C. 20 02, c. 57 [BCBCA], ss. 142.

3 Peoples Departme nt Stores (Trustee of) v. Wise, [2004] 3 S.C.R. 461 [Peoples De-

partment Stores]. This approach w as conf‌irmed by the Court i n BCE Inc. v. 1976

Debenture Holder s, 2008 SCC 69, [2008] 3 S.C.R. 560, 52 B.L.R. (4th) 1 [BCE].

THE LAW OF PARTNERSHIPS AND COR PORATIONS340

liability on directors, off‌icers, and employees who are involved in the

failure of the corporation to meet its obligations. We brief‌ly discuss

these statutory liabilities, focussing on t hose imposed by corporate

statut es.

Finally, the courts have held directors and off‌icers liable in tort in a

variety of ci rcumstances where they were acting in t he course of t heir

duties. The broad application of tort liability in this way erodes the

separate legal personality of the corporation. The last section of this

chapter discusse s the range of circumstances in which directors and

off‌icers may be found liable in tort.

B. FIDUCIARY DUT Y

1) Introduction

The f‌iduciary duty is a general stand ard of beh aviour imposed on dir-

ectors and off‌icers in relation to their dealings with, and on behalf of,

the corporation. The CBCA provides the following pithy formulation of

the duty:

Every director and off‌icer of a corporation in exercising their powers

and discha rging their duties shall . . . act honestly and in good faith

with a view to t he best interest s of the corporation . . . . (s. 122(1)(a)).

Even though countless cases have addressed the f‌iduciary duty, its con-

tent a nd even its rationale remain elusive. Some commentators from

the l aw and economics school seek to justify and give content to the

f‌iduciary duty based on an agency cost an alysis as described in Chap-

ter 12. They argue that any time shareholders are not managing the

corporation them selves there is an incentive for directors and off‌icers

to benef‌it personally at the expense of the corporat ion. The wide range

of self-interested activity in which f‌iduciar ies may engage renders it

infeasible for shareholders to negotiate specif‌ic commitments to protect

them against such behaviour at the time of t heir investment. It would

be simply too costly and too time-consuming to specify fully all the

types of beh aviour that f‌iduciarie s are prohibited from engaging in. As

the negotiating costs preclude an agreement that addresses all possible

situations, the imposition of a general statutory st andard th rough cor-

porate law is justif‌ied. Based on this analysis, a court try ing to deter-

mine what t he f‌iduciary duty requires in any particular case must ask

what the shareholders would have agreed to if they had been permitted

to bargain and there were no costs a ssociated with the bargaining pro-