SkyLaw Presents on Fiduciary Duties

Kevin West and Priya Ratti talk Fiduciary Duties at the 21st Annual Conference of the Governance Professionals of Canada

Fiduciary duties are a hot topic in Canada and the United States

The GPC Conference

Kevin West and Priya Ratti were delighted to attend the 21st Annual Conference of the Governance Professionals of Canada in Quebec City this year.  This is the sixth year that Kevin has been invited to participate as a speaker.

SkyLaw hosted two back-to-back roundtable discussions on the importance of understanding the fiduciary duties of directors – a hot topic that has made recent headlines in cases such as SNC Lavalin, CannTrust and Aimia, just to name a few.

You can find a copy of our presentation here.

Fiduciary Duties in Canada

In Canada, the law on fiduciary duties is set out in the Supreme Court of Canada decision in 2008 BCE Inc. v. 1976 Debentureholders.  The Court 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.

The Canada Business Corporations Act has recently been amended to codify the fiduciary duty standard set out in BCE and adds some additional stakeholders: retirees and pensioners, and the long-term interests of the corporation.  See our recent blog here on this topic.

We discussed at the GPC conference the potential impact of these recent amendments to the CBCA.  It is not clear how courts will interpret these provisions or how the new language will affect decisions that implemented the BCE decision.

Fiduciary Duties in the United States

During our presentation, we contrasted the approach to fiduciary duties in Canada with the approach taken in the United States.  It is well settled in U.S. case law that the duty of the board is primarily to maximize shareholder value.

However, on August 19, 2019, the very same day Kevin and Priya were presenting in Quebec City, the Business Roundtable released a Statement on the Purpose of a Corporation signed by 181 CEO’s entitled “Corporation to Promote ‘An Economy That Serves All Americans’ – Updated Statement Moves Away from Shareholder Primacy, Includes Commitment to All Stakeholders”.  The Economist had this to say about it:

…the Business Roundtable has either seen the light or caved in, depending on whom you ask.  On August 19^th the great and good of CEO-land announced a change of heart about what public companies are for.  They now believe that firms should indeed serve stakeholders as well as shareholders.  They should offer good value to customers; support their workers with training; be inclusive in matters of gender and race; deal fairly and ethically with all their suppliers; support the communities in which they work; and protect the environment.”

Kevin’s former firm Sullivan & Cromwell LLP on August 20 provided analysis of the Business Roundtable’s statement as it would apply to fiduciary duties and stated among other things that “…it is unclear how a Court applying Delaware law would think about factors other than shareholder value in evaluating a board’s fulfilment of its duties under Delaware cases, such as Revlon, involving a sale of control.”

Key Takeaways

1. Train directors on their fiduciary duties. It is important for directors to understand their fiduciary duties from the outset, to whom they owe the duties and how to ensure they meet their obligations. Consider preparing a training package for every new director which highlights these key points. This training can come in many formats – whether it is a high-level written summary, a presentation or both! There should also be an opportunity for directors to ask follow up questions based on their understanding of these materials.
2. Provide key information in advance of meetings. Decisions of directors will be based on the information and knowledge they had at the time the decision is made. It is essential that they have enough time to understand and digest the information presented to them so that they make an informed decision. Take advantage of online platforms specifically designed for boards in order to provide timely information and keep the information organized. Provide an agenda in advance.
3. Document the Process. There is often a debate about how detailed meeting minutes should be. Keep sufficient notes and records to demonstrate that the board has discharged its duty of care.  Track the information provided to directors prior to the decision as well as the time spent on discussions. Document the underlying basis for the decisions to show that a decision was within the range of reasonable alternatives. Determine at an early stage the extent to which your board wants detailed minutes of meetings.  Assume that everything that is written down will become publicly available.
4. Seek expert advice. If there is any uncertainty surrounding the process or potential outcomes of director decisions, seek independent, expert advice. An expert can be essential to show that the board discharged its duty of care, for example obtaining advice from independent financial advisors.
5. Set up protocols to identify conflicts of interest. Establish a clear process for directors to disclose and report any potential conflicts of interest or issues they may wish to disclose. Ensure during training that the directors understand this process. Give examples of situations in which directors might disclose conflicts so they understand what type of information needs to be disclosed and documented, for example having a material interest in a contract that is being approved by the board. Regularly circulate questionnaires and make sure directors keep the corporation informed of outside interests that could lead to a conflict of interest.
6. Use special committees.  It is common for boards to designate a smaller group of disinterested directors to form a special committee to examine an issue and then report to the larger board. This can be a useful tool to make sure the board’s work is done efficiently and to manage potential conflicts of interest.
7. Understand the Business Judgment Rule. Boards are not expected to be perfect. Boards face difficult decisions and must balance many diverse interests. While a court will defer to a director’s business judgment on a decision, the rule will not act as a shield where a decision was made that was dishonest or not in the best interests of the corporation. Courts understand that directors must be given a degree of latitude to make decisions as they presumably have the knowledge and expertise to do so provided the business decision lies within the range of reasonable alternatives.
8. Consider indemnification agreements and liability insurance.  Corporations can indemnify directors for costs they incur defending themselves against actions brought against them in their capacity as directors. It is also common to have liability insurance in place. However, directors should understand that these may not be available unless the director acted in good faith in discharging their duties. There may be no coverage if a director is found to have breached her or his fiduciary duty.
9. “Putting your head in the sand” is usually not an option.  There are many situations where directors must act in order to discharge its duty of care, for example where a significant violation of law has been discovered. Boards should be available to meet on short notice and have the tools and information readily accessible to act quickly.

This blog post is not legal or financial advice. It is a blog which is made available by SkyLaw for informational purposes and should not be used as a substitute for professional advice from a lawyer. This blog is subject to copyright and may not be reproduced without our permission. If you have any questions or would like further information, contact us at 416-759-5299 or online through SkyLaw.ca. We would be delighted to speak with you.

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