THE CALL OF DUTY
Shining a light on the duties and liabilities of Directors & Officers of Corporations

Woodbridge corporate and securities lawyer, Joseph Chiummiento, of Core Lawyers, explains the key responsibilities when taking on the role of a director or officer for a corporation.

Directors and Officers of a Corporation can have a wide variety of roles from the executive positions such as the Chief Financial Officer or the Chief Legal Officer to the directors who serve on the company’s board and may not have an additional executive role. Being appointed a director or an officer carries a special responsibility, most often requires the notification of the company’s shareholders, and being asked to serve on a board can be a prestigious engagement.

This specific role of being a director or officer comes with certain duties and liabilities all of which should be observed carefully when considering such a position.

The letter of the law

The Canada Business Corporations Act (CBCA) and the Business Corporations Act, Ontario (OBCA) set forth the duties and liabilities of directors and officers of a corporation in Canada and Ontario, respectively. The duties and liabilities of a corporation’s directors and officers under the CBCA are analogous to those in the OBCA.

Under s.122(1) of the CBCA, “every director and officer of a corporation in exercising their powers and discharging their 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.”

Fiduciary Duty

The statutory duty under s.122(l)(a) is often referred to as the fiduciary duty, and it must be maintained even where a corporation is in the “vicinity of insolvency.” In Peoples Department Stores Inc. (Trustee of) v. Wise (2004), the Supreme Court of Canada stated that this fiduciary duty includes several obligations for directors and officers of a corporation, namely:

• Acting with honesty and good faith with regard to the corporation
• Respecting the “trust and confidence” that they have been granted when managing the assets of the corporation for the purpose of achieving the corporation’s goals
• Avoiding conflicts of interest with the corporation
• Refraining from abusing their authority for their own personal benefit
• Keeping information acquired through their position confidential
• Serving the corporation in a selfless, honest, and loyal manner

Duty of Care

The statutory duty under s.122(1 )(b) is typically referred to as the duty of care, and it involves an obligation on the part of directors and officers to exhibit diligence in overseeing and managing a corporation. In Peoples Department Stores Inc. (Trustee of) v. Wise (2004), the Supreme Court held that the duty of care requires directors and officers to “act prudently and on a reasonably informed basis” in making decisions on behalf of a corporation. The duty of care is held to an objective standard; therefore, the decisions of directors and officers are judged in accordance with all of the circumstances that they knew or should have known, and not their own individual abilities. The duty of care is owed to the corporation and other stakeholders, including, creditors.

Are directors & officers personally liable?

A corporation is considered to be a separate legal person that assumes liability for actions that stem from the corporation. The directors and officers of a corporation are not held liable for such actions; however, directors and officers may be found personally liable for failing to comply with their statutory duties, applicable regulations, articles of incorporation, corporate by­laws, and any unanimous shareholder agreements. In addition, directors and officers may be held personally liable where their actions are independently tortious.

If you are considering serving on a board of directors or taking on an officer role in a corporation these are important factors in your decision making process. Ask yourself a few questions to ensure you do not have a conflict of interest by serving this company, and that you are truly ready for all of your duties and aware of your responsibilities. Have an experienced securities lawyer review your agreements with the company, such as stock option agreements or the directors & officers liability insurance.

If you have any questions or would like to discuss your individual situation please feel free to contact me directly.