Directors’ Fiduciary Duties

Generally, Corporations have limited liability, meaning that the liability of a Corporation (as with the liability of any natural person) is limited to the value of the assets (less liabilities) owned by that Corporation. Generally, Directors are not personally liable for the debts of the Corporation.

Directors may become liable for the debts of the Corporation basedupon their personal misconduct or permitting the Corporation to breach certain statutory obligations.

One of the areas where a Director may be liable to the Corporation is the breach of a fiduciary duty to the Corporation which the Director has.

A Director’s fiduciary duties are set out in corporate statutes. For example, the CanadaBusiness Corporations Act and the Alberta Business Corporations Act respectively provide as follows:

 

Canada Business Corporations Act

122. (1) Every director and officer of a corporation in exercising his powers and discharging his 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.

Alberta Business Corporations Act

122(1) Every director and officer of a corporation in exercising his powers and discharging his 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.

The CBCA and ABCA require directors and officers in exercising their powers and discharging their duties to “exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances”, therefore applying an objective standard. The objective standard is applied by measuring every director’s performance against that which might be expected from a reasonable person, regardless of that particular director’s background.

The statutory phrase ”in comparable circumstances“ permits the court, when assessing the director’s performance, to consider all of the relevant factors that may have played a part in the decision-making process. These factors include the nature of the information available to the director, the time constraints under which the decision was made, the importance of the action to the corporation, etc.

The CBCA (s. 123(4)) and ABCA relieve directors from liability from failing to meet the statutory standard where they in good faith rely upon the report and advice of an auditor, lawyer, accountant, engineer, appraiser, or other professional.

Provided that the directors exercise care in choosing a reasonable course of action, the courts will not fault the directors if, in retrospect, a different course might have been better. Directors come from diverse backgrounds, but they are not required to bring any special qualifications to their office.

In the United States, the courts will interfere with decisions of the board based upon a guideline called the “business judgment rule”, a term that is slowly finding its way into the Canadian cases. According to the rule, the directors, in the absence of self-dealing or fraud, are presumed to have acted properly in making a business decision if they acted on an informed basis, in good faith, and in an honest belief that the actions taken were in the best interests of the corporation.