Directors’ Duties and Liabilities
Being the director of a corporation sounds like a cushy job, but not so fast. A director has a stringent set of rules to abide by.
The BC Business Corporations Act sets out all the duties that a director has. Particularly, a director 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 individual would exercise in comparable circumstances.
Directors must respect the trust and confidence they have been given in managing the assets of the corporation. Further, they must be truthful and open and are prohibited from realizing any secret profits or non-approved conflict of interest.
Good Faith and In the Best Interests of the Corporation
The duty of good faith can be generally referred to as the duty of loyalty or fiduciary duty. Whether a director has exercised this duty of good faith is determined on a case by case basis.
The duty of diligence puts the onus on a director to make those inquiries that a person of ordinary care in that position or in managing his or her own affairs would make. Some examples of situations where these duties of directors come into play are as follows:
- Attending meetings à A director does not have to attend all directors’ meetings but should try to do so, because they may be held liable for any prohibited matters that occur while they were absent.
- Relying on other directors à Generally, directors are not responsible for the misdeeds or decisions of any of their co-directors if they have not participated in the acts resulting in the damage and is not negligent.
- Relying on officers and professionals à Directors are allowed to rely on the expertise and knowledge of officers of the corporation or skilled professionals (eg. lawyers, accountants etc.) to assist them in making decisions, but should still be cautious of the information prior to accepting it.
Directors must respect the trust and confidence they have been given in managing the assets of the corporation and must exercise the care, diligence, and skill that a reasonably prudent individual would exercise in comparable circumstances. Further, they must avoid using their position for their personal benefit and must avoid any conflicts of interest with the corporation. Finally, directors must maintain the confidentiality of any information they obtain by virtue of their position and they must serve the corporation selflessly, honestly and loyally.
Duties Are Owed to Corporation
The long standing principle has been that directors owe a fiduciary duty only to the Corporation and not anyone else. However, recent case law has carved out exceptions where directors may be held liable to other groups such as shareholders, creditors, employees, the government and the public, among other groups.
Conflicts of Interest
As mentioned previously, directors are to avoid conflicts of interest wherever possible. However, courts consider what a reasonable person, in considering a particular situation, would think gives rise to a real sensible possibility of conflict, not what one could imagine could arise out of a situation. Essentially, the courts are not willing to look at every possible situation which could arise out of a situation as a potential conflict.
Further, directors have an obligation to disclose to shareholders any profits or gains realized from a contract or transaction with the corporation if it is material to the corporation. The Business Corporations Act has codified this requirement, by setting out a general test which requires assessing whether
- A contract or transaction which creates a conflict is “material” to the corporation; and
- The director has a “material interest” in the contract or transaction.
If answers to both parts of the test, are a “yes” then a director should disclose the interest to the shareholders of the corporation.
From a practical perspective, an assessment of whether a director is in a conflict of interest, whether they have addressed the conflict of interest, and whether they have made sufficient disclosure to interested parties is a fact based exercise. Directors would be prudent to remain as transparent as possible when dealing with any potential conflicts of interest.