Directors' Duties (Fiduciary Duty and Duty of Care)

Directors' duties are the standards the law sets for the people who run a corporation. Section 115 of the Ontario Business Corporations Act gives the board the job of managing or supervising the management of the corporation's business and affairs. Section 134(1) says how that job must be done. Every director and officer, in exercising their powers and discharging their duties to the corporation, must:

• act honestly and in good faith with a view to the best interests of the corporation; and
• exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

The first is the fiduciary duty, usually called the duty of loyalty. The second is the duty of care. Section 134(2) adds a duty to comply with the Act, the regulations, the articles, the by-laws and any unanimous shareholder agreement. Section 134(3) says that, apart from the unanimous shareholder agreement rule described below, no contract, article, by-law or resolution can relieve a director or officer of these duties or of liability for breaching them. Federal corporations are governed by the near-identical section 122 of the Canada Business Corporations Act.

The duties attach to the role, not the title, and can reach people who never consented to act. If all the directors resign or are removed without replacement, anyone who manages or supervises the business is deemed a director (s.115(4)). Shareholders who take over the board's powers under a unanimous shareholder agreement take on the matching duties and liabilities (s.108(5)). Our entry on shareholders, directors and officers compares the three roles.

The fiduciary duty is owed to the corporation, and only to the corporation. The Supreme Court of Canada settled this in Peoples Department Stores Inc. (Trustee of) v. Wise, 2004 SCC 68, and repeated it in BCE Inc. v. 1976 Debentureholders, 2008 SCC 69. Directors do not owe a fiduciary duty to individual shareholders or to creditors, and Peoples held that the duty does not shift to creditors in the vicinity of insolvency.

The best interests of the corporation are not the same as maximizing share value. Under Peoples and BCE, directors may consider the interests of shareholders, employees, suppliers, creditors, consumers, governments and the environment, and no group's interests automatically prevail. BCE describes the duty as acting in the corporation's best interests as a good corporate citizen and treating affected stakeholders fairly. Since June 2019, CBCA section 122(1.1) has listed similar factors, adding retirees and pensioners and the long-term interests of the corporation. The OBCA has no equivalent list, but the Supreme Court's approach applies to Ontario corporations.

Loyalty also means putting the corporation ahead of personal gain:

• Conflicts of interest. A director or officer with a material interest in a contract with the corporation must disclose it in writing or have it entered in the minutes (s.132), and a director generally may not attend the discussion of it or vote on it. Our guide to director conflicts of interest covers the disclosure rules and the statutory safe harbour.
• Corporate opportunities. Under Canadian Aero Service Ltd. v. O'Malley, [1974] SCR 592, a director or senior officer may not divert to themselves a maturing business opportunity the corporation is actively pursuing. The bar continues after resignation where the resignation was prompted by a wish to take the opportunity, or where the person's position, rather than a fresh initiative, led them to it.
• Secret profits. A fiduciary who profits from the position without the corporation's informed consent can be ordered to account for that profit, even if the corporation lost nothing.

The duty of care is measured objectively. Peoples held that the words "in comparable circumstances" make the test what a reasonably prudent person would have done in the same situation, not what this director believed or intended. Unlike the fiduciary duty, the duty of care is not confined to the corporation; Peoples held that creditors can be among those owed it.

The standard is not perfection. Under the business judgment rule, courts do not second-guess a decision because it turned out badly. Peoples holds that directors meet the duty of care if they act prudently and on a reasonably informed basis and make a reasonable business decision in light of what they knew or ought to have known. BCE adds that a court defers to a decision that falls within a range of reasonable alternatives, even if a better option existed. It protects a sound process, not a board that failed to inform itself, ignored warning signs or acted while conflicted.

A defensible board process usually looks like this:

1. Get the information first, including independent advice for major decisions.
2. Question the assumptions and consider alternatives before voting.
3. Deal with any conflict of interest before the vote, not after.
4. Record the deliberation, the alternatives and the reasons in the minutes.
5. Record any dissent. Under OBCA s.135, a director present at a meeting is deemed to consent to a resolution unless their dissent is entered in the minutes or delivered as the section requires; an absent director has seven days after learning of the resolution to dissent.

OBCA s.135(4) gives a reasonable diligence defence, including reliance on financial statements, officers' reports and professional advice, for the director liabilities in s.130 and the duty to comply in s.134(2). CBCA s.123 gives a similar defence and a separate good-faith reliance defence for the s.122(1) duties.

The corporation is the proper party to sue a director for breach. When the people accused are the ones in control, the OBCA opens other routes:

• Derivative action (s.246). A shareholder, director, officer or other proper complainant can ask the court for leave to sue in the corporation's name. The complainant generally gives the directors 14 days' notice and must satisfy the court that the directors will not act, that the complainant is acting in good faith and that the action appears to be in the corporation's interests.
• Oppression remedy (s.248). A security holder, director or officer, or a creditor the court accepts as a proper complainant, can seek a wide range of court orders where conduct is oppressive or unfairly prejudicial to, or unfairly disregards, their interests. BCE frames the question around the complainant's reasonable expectations, and Wilson v. Alharayeri, 2017 SCC 39, allows orders against directors personally where they were implicated in the oppressive conduct and a personal order is fit. Our guide to the oppression remedy in Ontario explains how minority shareholders use it.

Breaching a duty is different from the statutory liabilities that can fall on directors without any breach of duty, such as unpaid wages under OBCA s.131 and unremitted source deductions and HST; those are covered under directors' liability. It is also separate from piercing the corporate veil, which concerns making shareholders answer for the corporation's debts. Under the indoor management rule, outsiders can usually assume the directors followed internal procedures.

Under s.136, a corporation may indemnify a director or officer who acted honestly and in good faith with a view to its best interests, and it may buy directors' and officers' insurance. Neither replaces a careful process, which Lamba Law's corporate law advisory practice helps boards build.

Northgate Freight Ltd., a Mississauga logistics company, has three directors: Harjit Sandhu, who is also CEO, Elena Kovac and Tom Okafor. In March, the board considers a $1.8 million warehouse automation system. Management presents two vendor quotes, a consultant's payback analysis and the bank's financing terms. The directors challenge the volume assumptions, ask for a downside case and approve the project at a second meeting. The minutes record the alternatives and reasons.

The next year, volumes fall 20% and the payback period stretches from three years to six. A minority shareholder seeks leave for a derivative action, alleging the board breached its duty of care. On these facts the claim is weak: the board decided on an informed basis, chose an option within the range of reasonable alternatives, and hindsight is not the test.

Tom's position is different. At the March meeting he learned that a large retailer wanted a dedicated carrier and that Northgate was preparing a bid. Two weeks later he resigned and won the contract through a company he owns. That has the hallmarks of a diverted corporate opportunity. Northgate can sue him for an accounting of his profits, and his resignation is unlikely to protect him, because it was his board seat, not a fresh initiative, that led him to the deal.