Duties and Liabilities of Directors and Officers

• Author: J. Anthony VanDuzer
• Pages: 373-439

373

CHAPTER 9

DUTIES AND LIABILITIES

OF DIRECTORS

AND OFFICERS

A. INTRODUCTION

In all but the smallest corporations, there is some separation between

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

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

or off‌icers. One of the issues that arises out of this separation is how

shareholders can ensure that directors and off‌icers manage the corpo-

ration effectively. In particular, what protections do shareholders have

against directors and off‌icers shirking their management responsibili-

ties or acting in their own self-interest, such as by paying themselves

excessive salar ies? In Chapter 12, we will disc uss the nature and extent

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

including the role that market 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 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 to “exercise the care, diligence and skill

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 shareholders .

THE LAW OF PARTNERSHIPS AND COR PORATIONS374

that a reasonably prudent person would exercise in comparable cir-

cumstances.” 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 benef‌i-

ciaries of this duty, the common law courts did not allow shareholders

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

the corporation could initiate such an action. The CBCA and statutes

modelled after it have greatly enh anced 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 ref use

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 amended in

2007 to provide specif‌ically that, for corporations incorporated under

that Act, the benef‌iciary of the duty is the corporation (s 134(1)(b)).

However, for corporations incorporated under the CBCA, and perhaps

other statutes, the Supreme Court of Canada h as said that the statutory

duty of care is owed not just to the corporation, but is a general stan-

dard of behaviour that ref‌lects the standard of care owed by directors

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

this standard is discussed below.

The so-called oppression remedy creates not only a process for

obtaining a remedy but also a substantive standard of behaviour for

directors and off‌icers that both complements and overlaps with the

f‌iduciary duty and the duty of care. Where corporations or directors

have oppressed their intere sts, shareholders can obtain relief using thi s

remedy. This standard will be discussed in detai l 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 obli-

gations on directors and off‌icers. In addition to these obligations under

corporate law, directors and off‌icers face continually exp anding sources

of liability under a wide range of regulatory statutes that seek to pro-

mote enforcement of corporate obligations by imposing personal liabil-

2 E.g., Ontario Busine ss Corporations Act, RSO 1990, c B.16 [OBCA], s 134(1);

Alberta Bu siness Corporations Act, RSA 2000, c B -9 [ABCA], s 122(1)(a); and Brit-

ish Columbia Busine ss Corporations Act, SBC 2002, c 57 [BCBCA], s 142.

3 Peoples Departme nt Stores (Trustee of) v Wise, [2004] 3 SCR 461 [Peo ples De-

partm ent Stores]. This approach wa s conf‌irmed by the Court in BCE Inc v 1976

Debentureholders, 2008 SCC 69 [BCE].

Duties and Li abilities of Directors and O ff‌icers 375

ity on directors, off‌icers, and employees who are involved in the failure

of the corporation to meet its obligations. We brief‌ly discuss t hese statu-

tory liabilities, focusing on those imposed by corporate statutes.

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

a variety of circumst ances where they were acting in the course of their

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

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

chapter 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 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 off‌ice r of a corporation in exerc ising their powers

and discharging their duties shall . . . act honestly and in good faith

with a view to the best interests of the cor poration . . . . (s 122(1)(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 an agency cost analysis as described in Chapter 12.

They argue that any time shareholders are not managing the corpora-

tion there is an incentive for directors and off‌icers to use their manage-

ment power to benef‌it themselves at the expen se of the corporation and

its shareholders. The wide range of self-interested activity in which f‌i-

duciaries may engage renders it infeasible for shareholders to negotiate

specif‌ic commitments to protect against such behaviour at the time of

their investment. It would be simply too costly and too ti me-consuming

to specify ful ly all the types of behaviour th at f‌iduciaries are prohibited

from engaging in. As the negotiating costs preclude an agreement that

addresses all possible situations, the imposition of a general statutory

standard through corporate law is justif‌ied. Based on this analysis, a

court trying to determine what the f‌iduciary duty requires in any par-

ticular case must ask what the shareholders would have agreed to if

they had been permitted to bargain with the corporation and there