CBCA Amended to Codify Fiduciary Duties of Directors

CBCA Amended to Codify Fiduciary Duties of Directors

Amendments to the CBCA received Royal Assent on June 21, 2019, codifying what directors can consider when exercising fiduciary duties.

The Fiduciary: A Position of Trust

As directors are trusted with a corporation’s finances, property and key information, they are in a special relationship with the corporation and owe a “fiduciary duty” or “duty of loyalty” to the corporation.  This duty entails that the director shall act honestly and in good faith with a view to the best interests of the corporation.

Duty of Care

The duty of care requires a director to exercise the care, diligence and skill of a reasonably prudent person in comparable circumstances and is used as a remedy for stakeholders in civil actions for breach against directors.

Director Duties

The key question is to whom the director owes the fiduciary duty. Is it to the shareholders, who have invested their hard-earned income in the company for which the directors are making key growth decisions? Is it to the lenders, who expect their loan to be returned as soon as possible without having to take steps to seize the corporation’s assets to collect? Or is it to employees of the corporation, who expect the company to operate in the most sustainable manner to ensure they have a job next week?

Key Case: BCE

The answer was clarified in 2008 by Canada’s highest court in BCE Inc. v 1976 Debentureholders (“BCE”).  BCE was subject to a proposed leveraged buyout which would result in $30 billion of new debt for BCE. This decreased the value of the company’s existing debentures by 20% and prompted debentureholders to launch a claim against the company under the oppression remedy, alleging that the arrangement was not fair and reasonable.

The Decision: Consider them All!

The Supreme Court of Canada rejected the arguments of the debentureholders and stated that the only reasonable expectation of the debentureholders was that the BCE directors would consider their position when making a decision in accepting offers for the buyout. The directors honoured the contractual commitments of the debentures and thus fulfilled their duties as directors.

The court further confirmed that the directors of a corporation owe a fiduciary duty to the corporation and in considering the best interest of the corporation, the directors may look to the interests of shareholders, employees, creditors, consumers, governments and the environment to inform their decisions.

So long as a director makes a business decision that lies within a range of reasonable alternatives the courts will defer to the director’s judgment. This means that there is no “one-size-fits-all” answer to how a director can act in the best interests of the corporation as it will vary based on the corporation, the industry, the reasonable alternatives and the circumstances faced by the directors. However, at a minimum, the duty requires the directors to ensure the corporation meets its statutory obligations.

The Change: Federal Legislation

The amendments by Bill C-97 to the Canada Business Corporations Act (“CBCA”) confirm that when acting with a view to the best interests of the corporation, directors and officers of the corporation may consider (but are not limited to) considering the interests of the following stakeholders (that were included in BCE):

• shareholders;
• employees;
• creditors;
• consumers;
• environment; and
• governments;

and adds the following stakeholders to consider:

• retirees and pensioners; and
• the long-term interests of the corporation.

The new rules apply to all federal companies incorporated under the CBCA, whether public or private.

These changes codify not only the key principals of BCE, but they go a step further by adding retirees and pensioners to the list of stakeholders that directors must consider. As these principles are now embedded in statute, there may now be less flexibility in interpreting them than is afforded by common law.

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