Important Takeaways For D&O Duty Of Loyalty And Contractual Compensation From Recent Supreme Court Decision

• Published date: 21 December 2023
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Directors and Officers, Civil Law, Shareholders
• Law Firm: McCarthy Tétrault LLP
• Author: Canadian Securities Regulatory Monitor, Jean-Philippe Mathieu and Olivier Weir

Interest of the decision and key findings

In a recent decision of interest in corporate and contract law, Ponce v. Société d'investissements Rhéaume ltée, 2023 SCC 25, the Supreme Court of Canada considers the scope of the duties of loyalty, information and good faith that can be imposed upon the presidents of business corporations, under both the Civil Code of Quebec and the Canada Business Corporations Act, as well as the common law, in the particular context of a contractual relationship between the presidents and the shareholders of the corporation.

The Court first emphasized that there is a fundamental distinction between :

• the obligation of fiduciary or "maximalist" loyalty of presidents (, which is specific to the relationship between them and the corporation (as a legal entity distinct from its shareholders) and generally requires presidents to subordinate their decisions to the interest of the company; and
• the obligation of "contractual" loyalty", which in Quebec civil law - notably through the Civil Code of Québec - may implicitly require the presidents to "take into consideration" the interest of their direct co-contractors including the corporation's shareholders, if applicable, even in the absence of any explicit contractual obligation to do so.

In this case, on the basis of this distinction and the evidence adduced at trial, the Court concludes that the presidents of three Quebec corporations incorporated under the Canada Business Corporations Act have no obligation of fiduciary or "maximalist" loyalty towards the shareholders. They do, however, have implied obligations of "contractual" loyalty, information and good faith, requiring them both (i) to maximize the value of the shareholders' shares with a view to their eventual sale, and (ii) to inform the shareholders of the interest shown by a third party in purchasing these shares. Having failed to meet these obligations, the presidents are ordered to pay over $11 million to the shareholders for the profits lost as a result of the sale of their shares.

More generally, the Court notes that, in the context of Quebec civil law, the obligations of presidents, like those of any co-contractor, may extend not only to what is specifically stipulated in the contract providing for their roles and responsibilities, but also to everything that is incident to the nature of the contract and in conformity with usage, equity or law (art. 1434 C.C.Q.), as well as by virtue of their general obligation of good faith (art. 1375 C.C.Q.).

In this respect, the Ponce case is particularly relevant to the drafting of agreements setting out the roles and responsibilities of presidents, in this case an "incentive pay agreement"...