Duty of Care Owed by Managers & Directors

Duty of Care owed by Managers & Directors Common law around duties of directors was historically relaxed: Re City Equitable Fire Insurance [1925] F: Order made to wind-up/liquidate insurance company that was once very profitable • Investigation showed deficit of 1.2M pounds at the time there were large trading profits • The losses resulted from failed investments and diversion of funds by managing director into another company • Managing director was jailed for fraud – liquidator brought action against directors and auditors alleging negligence and breach of duty A: Directors are trustees, but merely in the sense of a fiduciary relationship to the company – little resemblance to a trustee of a will or marriage settlement • The duty is impossible to describe in general terms – it changes based on the size of the company, the nature of the company, and the matters left to the officers and directors • If a director acts honestly, he cannot be liable unless guilty of gross or culpable negligence in a business sense • He does not need to take all possible care, he is only bound to take “reasonable care” measured by the care an ordinary man might be expected to take in the circumstances o If a director exercises reasonable care, having regard to knowledge and experience, and acted honestly, they have discharged both their equitable and legal duties to the company o Directors are not liable for mere errors in judgement o Not bound to give continuous attention to the affairs of his company § The duty is intermittent – to be performed at periodical board meetings and committees that he is reasonably able to attend • Exclusion clause - Article 150 holds that directors are not to be answerable for any loss that may happen in the execution of their respective offices unless it occurs through “wilful neglect or default” o Directors and auditors are guilty of negligence but are protected by this article R: Standard was quite low at common law – as long as there was no wilful neglect or deceit and you were honest, you were pretty much okay Directors were not required to give full time attention – just intermittent attention at meetings Common law failed to establish professional standard for a director Legislature responded: BCA 142(1) (CBCA 122) director, when exercising powers/functions of director (not as a shareholder eg. AGM) must (a) act honestly and in good faith with a view to the best interests (duty of loyalty/fiduciary) of the company (b) exercise the care, diligence and skill that a reasonably prudent individual would exercise in comparable circumstances (duty of care / standard of care) (c) act in accordance with this act and regulations (d) subject to a-c, act in accordance with memorandum (NoA) and articles of the company Liability of Directors BCA 154(1) – directors are liable if money is paid and not recovered as a result of a resolution when: (a) company does something contrary to s 33 (articles of the company), or (c) votes to pay a dividend contrary to s 70(2) (5) – director who is present at a meeting of directors is deemed to have consented to the resolution in (1) unless the dissent is recorded in minutes, is put in writing and it provided to the secretary, or sent promptly to mailing address to company after the meeting (8 – if not at meeting, deemed to consent unless dissent within 7 days) • email is not good enough – must be in writing physically (6) a director who votes in favour is not entitled to dissent in section (5) 157(1) – limitations on liability – not liable If the director relied in good faith on: (a) financial statements represented by officer, or a written report of auditor; (b) a written report by a professional that lends credibility (lawyer, accountant, engineer, etc.); (c) statement of fact represented to the director by an officer; (d) any record that the court considers provides reasonable grounds for the actions of the director, whether the record was forged/etc. (judges have much discretion here) 158 – liability if the company’s name is not displayed (1) director who knowingly permits the company to contravene s 27 (naming rules) is personally liable to indemnify the following persons who suffer damages by being misled: (a) purchaser, (b) supplier, (c) person holding a security of the company Peoples Department Stores [1992] F: 3 brothers are owners of Wise; Marks and Spencer sold chain to Wise Stores • contract forbade Wise from merging with Peoples until purchase price paid; so used strange inventory maneuver • Had to run Peoples as a subsidiary corporation (so that if it was given back to seller, had to keep it separate) • David Clement, VP admin and finance suggested weird inventory maneuver to directors • Trustee alleges Wise brothers breached fiduciary duty and duty of care A: The standard of care is objective – factual aspects of the circumstances surrounding the decisions of the director are relevant here • Subjective motivations of the director or officer are only relevant to the statutory fiduciary duty (duty of loyalty) • The brothers accepted the suggestion without studying the indirect impact it could have – Clement was not qualified to have Wise brothers rely on his representation as a bar to a suit under the duty of care (Does not absolve directors of duty of care) o The named professional groups that absolve are named in provision as lawyers, accountants, engineers, etc. – Clement was only a BComm with 15 years experience o Although he may be better equipped to find a solution than the wise brothers, this is not enough C: Wise brothers cannot invoke the defence under s 123(4)(b) of CBCA R v Bata Industries [1992] F: In the yard of Bata’s shoe factory, there was large chemical waste storage site that stored known carcinogens in rusting and uncovered containers – court found that the containers had been a matter of concern for years A: Directors are responsible for reviewing the environmental compliance reports provided by officers of the corporation, but are justified in placing reasonable reliance on reports provided to them by informed parties • Directors should substantiate that the officers are promptly addressing environmental concerns brought to their attention by gov agencies or other concerned parties (s 136-1 of BCA) o Directors should be aware of the standards of their industry and other industries which deal with similar environmental risks • Directors should immediately and personally react when they have notice the system has failed • Of the 3 directors in question, one was exculpated because he had little operational impact on activities, and acted appropriately in response to being alerted of violations (likely semi-retired) • The other two were guilty: o one had knowledge 6 months before any action was taken (not a timely OR appropriate manner) o The other was on-site manager and failed to discharge duty to ‘walk-about’ on a regular basis to ensure no violations occurred Business Judgement Rule • Courts reluctant to look retrospectively based on results/outcome to determine what the directors should have done (“hindsight is 20/20”) • directors are not expected to be judges – when there is no evidence of fraud, illegality, or conflict of interest in relation to business judgement, directors are presumed to have acted in good faith and due care (fuses FD/DoC) UPM-Kymmene Corp [2002] F: Forestry company that was bogged down by debt • Company hired chairman that wasn’t needed but whose compensation package put the company on verge of bankruptcy – claimed breach of fiduciary duties by directors A: Only get benefit of business judgement rule if you have used your best judgement – not in this case, they basically just made a silly decision without any thought • The court looks to see that the directors made a reasonable decision, not a perfect decision o However, only protected to the extent that their actions actually evidence their business judgement • Courts are entitled to consider the directors decision, what they relied on, what facts were available to the directors at the time that they made their decision o In the space of 30 minutes, made decision to recruit someone they did not know, with a massive compensation package with bonuses and other rights that will bankrupt them § Stock options amounting to 13.4% of the company § Change of control protection, lengthy employment term C: Decision was not an informed decision, nor a reasoned one – therefore, the business judgement rule cannot be applied in the circumstances to protect them from judicial intervention Indemnification and insurance • Directors are often held liable for decisions that are not made personally – made often by officers/others o Policy: is the goal of lawmakers to punish, or deter? • A corporation may indemnify a director for: any expense reasonably incurred in defending/settling/satisfying a judgement for any action against director o BUT, director must have fulfilled their fiduciary duty • A modern corporation may also purchase insurance for the benefit of a director (or the corporation); but director must still uphold fiduciary duty o Can insure for wider amount of situations that indemnification though (some are insurable but not indemnifiable – beyond scope of course though) • Potential agency problem – costly insurance expense may reduce amount of money available to pay dividends – valid and justifiable business expense that the shareholders do not like Re BCE [2008] “The fiduciary duty of the directors to the corporation is a broad contextual concept; it is not confined to shortterm profit or share value. Where the corporation is a going concern, it looks to the long-term interests of the corporation. The content of this duty varies with the situation at hand. At a minimum, it requires directors to ensure that the corporation meets its statutory obligations. But, depending on context, may also be other requirements. The fiduciary duty is mandatory – directors must look to what is in the best interests of the corp” • Directors did what they thought was reasonable, their duty is to the corporation, no breach of fiduciary duty RECAP: Duty of Care • A Director must exercise the care, diligence and skill that a reasonably prudent individual would exercise in comparable circumstances • Directors are making decisions for the future, and judges do not expect Directors to be able to see, with certainty, the future results of those decisions (BJR) • Directors must make reasonable decisions, but do not need to make perfect decisions • Directors must do what a reasonably prudent person would do in similar circumstances Examples of breach of duty of care: • Relying on a report written by a person whose profession is not found in s 157(1) or equivalent (People’s) • Quickly reading then barely discussing an important contract, then voting on it right away (UPM) • Director had knowledge of environmental violations for 6 mos before acting, then didn’t act appropriately (Bata) • A factory manager who fails to walk around the site, and fails to fix broken carcinogen storage containers (Bata) • Examples of NOT breaching duty of care: • Creating a business plan in hopes of saving two failing businesses (People’s) • Creating competitive bidding process, then choosing one of 3 bids, where all three bids were not perfect (BCE) • A director who has little operational impact, who acted appropriately and promptly when alerted to environmental violations (Bata)