Fiduciary Duties: What are they and what does this mean for directors of a corporation, really?

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Now for those who are seasoned directors, information concerning fiduciary obligations will, perhaps, be of little use or news to you. However for those starting out, particularly entrepreneurs whose interest lies in their science or technology, knowing what is required or expected of you as a director is important.

The term “fiduciary duty” has a fancy ring, doesn’t it? It sounds somewhat ominous and archaic, too. It was the subject of a fairly recent Ontario Court of Appeal case (July, 2014): Unique Broadband Systems, Inc. (Re) 2014 ONCA 538, and based on my experience over the years, it is a worthwhile subject to address.

Generally, a fiduciary is one who has undertaken to act for another person’s benefit, on some level. It is analogous to a trust. Trust, integrity and confidence are the hallmarks of a fiduciary relationship. While fiduciaries arise in many different kinds of relationships, this discussion pertains to the corporate context.

In law, corporations are separate legal entities, and sometimes referred to as “persons”. Directors are the directing minds of the Corporation and considered to be fiduciaries to the Corporation. This is true even if the Corporation has one director, who is also the sole shareholder.

In Unique Broadband Systems, the Ontario Court of Appeal upheld the lower court’s decision that the CEO, who was also a director, breached his fiduciary duty to the corporation when the board of directors approved excessive compensation to him. Not only was the CEO not entitled to the compensation that had been approved by the directors, he was not entitled to be indemnified through the director’s and officer’s indemnity he held from the corporation.

At paragraph 45, the Ontario Court of Appeal made this statement:
The imposition of fiduciary duties on directors and officers of a corporation is consistent with the origins of the doctrine in trust law. A director or senior officer of a corporation is in a position of trust. He or she is charged with managing the assets of a corporation honestly and in a manner that is consistent with the objects of the corporation. Courts will be loath to interfere with the legitimate exercise of corporate duties, but they will intervene where a fiduciary breaches the trust reposed in him or her.

For Ontario and Canada corporations, the fiduciary obligation is enshrined in the Canada Business Corporations Act (section 122) and Ontario Business Corporations Act (section 134).

Both statutes require that a director has the duty to i) “act honestly and in good faith with a view to the best interests of the corporation” and ii) “exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances”.

So what does being a “fiduciary” mean in practice? A director is required to act:
i. prudently and on a reasonably informed basis, and
ii. in good faith and honestly vis-à-vis the corporation
(Peoples Department Stores Inc. (Trustee of) v. Wise, [2004] 3 S.C.R. 461, 2004 SCC 68).

A director is also required to disclose conflicts, though disclosure in and of itself does not relieve a director from liability or responsibility when he/she has made a decision that is in his/her personal interests, rather than the interests of the Corporation. UPM-Kymmene Corp. v. UPM-Kymmene Miramichi Inc.(2002), (Ont. S.C.), aff’d (2004) (ON CA).

Decisions of the director(s) are normally documented in the form of resolutions. If there is a dispute between directors, then is it useful for directors to document the basis for their decisions. Directors can support their decisions with outside expert advice, and contemporaneous records that outline the basis for the decision(s) are important. However, neither will relieve a director from decisions made that in his/her personal interests, and contrary to the best interests of the corporation.

Being a director has its responsibilities. Please consider seeking advice if you are ever confused or in doubt about your fiduciary obligations.

Up next: a landmark decision from the Supreme Court of Canada in November 2014 recognizing a new duty on parties to perform contractual obligations honestly.

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