Powers, Duties and Liabilities of Directors and Officers

Powers, Duties and Liabilities

of Directors and Officers

Catherine Graham

January 5, 2015

Powers, Duties and Liabilities of Directors and Officers

• What CAN you do?

• What MUST you do?

• What SHOULD you do?

2

What Can You Do? – Directors Can Run the Business

Directors are elected by shareholders.

“The directors of a company must, subject to this Act, the

regulations and the memorandum and articles of the company,

manage or supervise the management of the business and affairs

of a corporation.”

Directors:

• Call all shareholder meetings

• Approve all share issuances and set the price

• Declare dividends and set the price

• Appoint officers

• Approve annual financial statements

3

What Can You Do? – The Board Can Delegate Powers

BC Act: “The articles of a company may transfer, in whole or in

part, the powers of the directors to manage or supervise the

management of the business and affairs of the company to one or

more other persons.”

The persons to whom those powers are transferred have all the

rights, powers, duties and liabilities of the directors, and the

directors are relieved of their rights, powers, duties and liabilities

to the same extent.

Person = individual or company or other entity

Articles must reference the transfer, but shareholders agreement

can also be used (662/3 % voting approval vs. 100% signed

approval of shareholders).

Federal Act: Similar concept but transfer can only be to

shareholders under unanimous shareholders agreement.

4

What Can You Do? – Officers

The directors may appoint officers and may specify their duties.

Someone may be both a director and an officer, and hold multiple

officer positions.

Unless specifically delegated under articles, officers cannot:

• Call shareholder meetings

• Issue shares or set the price

• Declare dividends or set the price

• Appoint other officers

• Approve annual financial statements

5

6

What Must You Do? - Duties

Basic Duties of Directors and Officers

• Fiduciary Duty

• Duty of Care

You cannot contract out of these duties.

What Must You Do? – Fiduciary Duty

Fiduciary Duty

• What is a fiduciary?

• Legal and ethical relationship of trust between two or more parties

• A fiduciary duty is the highest standard of care at either equity or law

• Obligation of undivided loyalty

• There must be no conflict of duty between fiduciary and principal, and the

fiduciary must not profit from his position as a fiduciary (unless the

principal consents)

• Other examples:

• Doctor/patient

• Lawyer/client

• Priest/parishioner

7

What Must You Do? – Fiduciary Duty

Fiduciary Duty

Act honestly and in good faith with a view to the best

interests of the company

• An overarching duty to the corporation, which contains two

component duties

• a duty to protect shareholder interests from harm, and

• a procedural duty of "fair treatment" for relevant stakeholder interests.

• Maximizing shareholder value vs. interests of all stakeholders

8

What Must You Do? – Fiduciary Duty

Fiduciary Duty• Avoid conflict – no self dealing

• Corporate Opportunity Doctrine

• Directors and officers must not take for themselves any business

opportunity that could benefit the corporation

• Line of business – an activity as to which the corporation has

fundamental knowledge, practical experience and ability to pursue

• Consent of Company – interest disclosed / directors or shareholders

approve by resolution (with interested party abstaining from vote)

• Fiduciary duties cannot conflict

• Confidentiality vs. duty to disclose when acting for more than one

company

9

What Must You Do? – Duty of Care

Duty of Care

Exercise the care, diligence and skill that a reasonably

prudent individual would exercise in comparable

circumstances.

• Directors and Officers must discharge their duty of care.

• Addresses the attentiveness and prudence in performing their

decision-making and supervisory functions.

• Must use their training, ability, experience and education in the

same way as a reasonably prudent person would do in a similar

situation.

10

What Must You Do? – Business Judgment Rule

Business Judgment Rule

• You can be wrong, but the process must be right.

• Presumes that directors and officers carry out their functions in

good faith, after sufficient investigation, and for acceptable

reasons.

• Unless this presumption is overcome, courts abstain from

second-guessing well-meaning business decisions even when

they are unsuccessful.

11

What Should You Do? - Strategies

Strategies

• Officers

• Ensure material business decisions are approved by directors

• Decisions, transactions and material agreements outside the ordinary course

of business

• Share issuances, dividends, redemptions

• Uncomfortable? Seek board clearance.

• Know and understand what’s going on!

12

What Should You Do? - Strategies

Strategies

• Directors

• Hold regular board meetings and attend those meetings

• Approve all decisions by vote at meeting or written consent resolutions of

all directors

• Keep record in written and signed meeting minutes and consent

resolutions

• If you are present at meeting or not present, you are deemed to have

consented unless director explicitly dissents in meeting minutes or delivers

written dissent within 7 days of becoming aware

• Know and understand what’s going on!

13

What Should You Do? - Strategies

Strategies

• Know your responsibilities

• You must spend the necessary time

• You must read others’ (including experts) reports, think about

them and ask questions if they arise

• Get legal and other expert advice

• Use independent board committees – include independence

from management where possible

• If conflicted: declare your interest and directors should abstain

from voting when conflicted (legally required)

• Document your process!

14

What Should You Do? - Strategies

Indemnification & Payment

• Company may indemnify directors and officers against

proceedings to which the individual is a party or may be liable

in respect of a judgment, penalty, fine or related expenses

(including legal fees) by virtue of the individual acting as a

director or officer

• Ensure indemnity is set out in articles or separate indemnity agreement!

• Company should purchase D&O insurance

• Company must pay the expenses reasonably incurred by

director or officer after final disposition of proceeding if the

director or officer is wholly or substantially successful in the

outcome of the proceeding

15

What Should You Do? - Strategies

Indemnification & Payment

• Indemnity and payment are automatically voided if:

• fiduciary duty was violated (did not act honestly and in good faith with a

view to the best interest of company)

• in criminal, regulatory or other non-civil proceeding, the individual did not

have reasonable grounds for believing his or her conduct was lawful

• If proceeding = company suing director or officer

16

Case Study 1

“Repo 105”

17

Case Study 1

“Repo 105”

• Company has a substantial amount of debt outstanding.

• CFO uses “repo 105” accounting maneuver to minimize debt in

financial statements.

• Repo 105 is a type of short-term repurchase agreement – assets

are “sold” for cash but company agrees to buy back assets

days later.

• Cash is used to pay down debt, allowing the company to appear

to reduce its leverage by temporarily paying down liabilities—

just long enough to reflect on the company's published balance

sheet. After the company's financial reports are published, the

company borrows cash and repurchases its original assets.

18

Case Study 1

“Repo 105”

• Company wants Repo 105 to be accounted for as “sale” rather

than “loan”

• CFO seeks support from legal counsel

• Local counsel says must be accounted for as “loan” – no go

• Second opinion by foreign counsel says “sale” ok – Repos pushed to

foreign jurisdiction.

• Auditors give unqualified audit report

• Issue not specifically taken to the board

19

Case Study 1

“Repo 105”

Executives:“It’s basically window-dressing.”

“I see … so it’s legally do-able, but doesn’t look good when we actually

do it? Does the rest of the street do it? Also, is that why we have so much

BS [balance sheet] to Rates Europe?”

“Yes, No and yes. :)”

20

Case Study 1

“Repo 105”

What are CFO’s duties?

What did he/she do right?

What did he/she do wrong?

21

Case Study 1

“Repo 105”

Lehman Brothers

Bart McDade, who became Lehman’s president and chief operating

officer in June 2008, in an email called Repo 105 transactions:

“another drug we R on.”

22

Case Study 2

Canada Metals Exploration Ltd. v. Wiese

(2007 BCCA)

23

Case Study 2

Canada Metals Exploration Ltd. v. Wiese

(2007 BCCA)

• Canadian Metals Exploration Ltd. (“CME”) – mineral exploration company

• Wiese, a de facto director, staked mineral claims adjacent to CME’s property for Quorum, his management company

• CME’s consultant geologist had recommended that CME stake the claims

• Wiese believes that CME has passed on the opportunity and consents to him staking the claims

24

Case Study 2

Canada Metals Exploration Ltd. v. Wiese

(2007 BCCA)

What are Weise’s duties?

What should Weise do to avoid liability?

25

Case Study 2

Canada Metals Exploration Ltd. v. Wiese

(2007 BCCA)

• No formal directors’ meeting called or notice given

• Certain directors and certain members of management met spontaneously throughout the day to discuss the adjacent claims

• No agenda, no notes, no minutes, no resolutions of the meeting

• Not all present at meeting at the same time

• CME was being investigated by the BC Securities Commission at the time

• At the meeting, it was suggested that the claims be staked by another company to be founded by same directors and officers, not same shareholders

26

Case Study 2

Canada Metals Exploration Ltd. v. Wiese

(2007 BCCA)

What went wrong?

Any issue with claims going to new company?

27

Questions & Discussion

Questions?

28

Thank You

montréal ottawa toronto hamilton waterloo region calgary vancouver beijing moscow london

Catherine Graham

Tel: 604 891-2765

Email: [email protected]