Fiduciary duties of Corporate Directors: Your obligations, responsibilities and the ‘business judgment’ rule

As a Corporate Director, remedy you are elected by the company’s shareholders to act fairly and in good faith for the long-term best interests of the corporation. It’s a position of trust and confidence as Directors control the money, property and information that are crucial to the company’s success. Fiduciary duties are held to the highest standards of care at Common Law and are governed by Provincial and Federal acts. Other examples of fiduciary responsibilities are the relationships between doctor/patient, teacher/student and lawyer/client.

As a fiduciary of a corporation, a director owes the company duties of disclosure, honesty, loyalty, candour, and the duty to favour the company’s interest over his/her own. A director must also disclose to the corporation facts that could impact the business of the company.

It’s important to note that fiduciary duties are to the corporation, not to the shareholders. Although much of the time the interests of these two entities are one and the same, it’s an important distinction, outlined in the Supreme Court of Canada in BCE Inc. v 1976 Debentureholders:

People sometimes speak in terms of directors owing a duty to both the corporations and to stakeholders. Usually this is harmless, since the reasonable expectations of the stakeholder in a particular outcome often coincide with what is in the best interests of the corporation. However, cases may arise where these interests do not coincide. In such cases, it is important to be clear that the directors owe their duty to the corporation, not to stakeholders, and that the reasonable expectations of stakeholders is simply that the directors act in the best interests of the corporation.

Directors may look to the interests of shareholders, employees, creditors, consumers, governments, and the environment, as they determine what is in the best interest of the corporation, however these interests are not to be the determinants of decisions.

Business judgement rule

If there is a question as to whether a director has met his or her fiduciary duties, the Canadian courts look to the ‘business judgment rule’. Essentially, the rule is that a court will defer to the decisions of a director so long as that director brought an appropriate degree of prudence and diligence in reaching a reasonable business decision. The court looks to see that the directors made a reasonable decision, not a perfect decision. And, provided the decision taken is within a range of reasonableness, the court is unlikely to substitute its opinion for that of the board even though subsequent events may cast doubt on the board’s determination. In other words, hindsight is 20/20, and it won’t be used to second-guess reasonable business decisions made on the information available at the time.

Duties to disclose material information/Avoiding conflict of interest?

Historically, a director was not allowed to do business with the corporation that he/she served. It was felt that otherwise, a director’s private interest might conflict with the best interests of the corporation. This law has been modified more recently, allowing the director to be involved in transactions with the business as long as he/she discloses his/her interests and abstains from voting on the issue. This amended rule allows for conflicts that are actually beneficial for the corporation, and there are safeguards in place to prevent abuse. One rationale for relaxing the rules is for practical business purposes – often a director or officer is the best source of a good price or supply for the corporation.

Finally, part of fiduciary duty is an obligation to maintain and protect confidential corporate information and to not use this information to a director’s own advantage.

Lawrence Silber