Responsibilities And Liabilities Of Directors In Manitoba

• Published date: 28 May 2020
• Author: Ms Kristen Wittman and Kelby Loeppky
• Subject Matter: Corporate/Commercial Law, Directors and Officers
• Law Firm: Taylor McCaffrey

What follows are highlights of the more important duties, responsibilities and liabilities imposed on directors of a privately-held, for profit corporation incorporated pursuant to The Corporations Act of Manitoba (the "MCA") under the provincial and federal laws applicable in Manitoba. This is not a comprehensive statement of the law applicable in Manitoba nor an exhaustive review of potential director liability and is current only to the date above.

GENERAL DUTIES AND LIABILITIES UNDER THE MCA

Section 97(1) of the MCA states that directors shall manage, or supervise the management of, the business and affairs of a corporation. The scope of a director's power is subject to any unanimous shareholder agreement, the MCA, its regulations, and the corporation's articles and by-laws. Directors may not delegate their duties, although they can create committees to report to them. A director's duties may be fettered by unanimous agreement of the shareholders of the corporation who then take on the liabilities associated with those duties. Although a director's capacity to act can be restricted by the constating documents of the corporation, or by the shareholders themselves, directors are not relieved from the duty to act in accordance with the MCA and regulations or relieved from liability.

Directors, in undertaking their duties, are subject to a certain standard of care, and owe a fiduciary duty to the corporation. The fiduciary duty and duty of care are typically seen to be owed to the corporation rather than the shareholders directly. Directors are under a general obligation to maximize the value of shareholder investment. Directors must consider the interests of the corporation's employees, customers, creditors, and other stakeholders, and not just the interests of the shareholders (Peoples Department Stores Inc. (Trustee of) v. Wise, 2004 SCC 68 (CanLII at para 42; cited with approval in Manitoba in Matic et al v Waldner et al, 2016 MBCA 60 (CanLII)). However, under certain circumstances, personal liability of directors can extend in favour of shareholders (or other stakeholders), where there has been a personal benefit (in the form of either an immediate financial advantage or increased control in the corporation), or where directors have breached a personal duty they owe as directors, or misused a corporate power. This liability may extend in situations where oppressive conduct against one or more shareholders (or other stakeholders) is found to exist, and where the facts would make a remedy against the corporation inequitable.

1) Fiduciary Duty

Directors are subject to a fiduciary duty enshrined in section 117(1) of the MCA:

Every director and officer of a corporation in exercising his powers and discharging his duties shall (a) act honestly and in good faith with a view to the best interests of the corporation

A fiduciary relationship, broadly interpreted by the case law, is a relationship between parties where one party is considered to be in a special relation of trust, confidence, or responsibility to the other. Therefore, as a director, you have a duty to act in every circumstance in the way in which you honestly believe, in good faith, to be in the best interest of the corporation. In BCE Inc. v 1976 Debentureholders ("BCE"), 2008 SCC 69, the Supreme Court of Canada clarified that the "best interests of the corporation" does not mean the best interests of the corporation's shareholders. Rather the interests of other stakeholders may be relevant. Following the principles in BCE, Parliament amended the Canada Business Corporations Act to enumerate different stakeholder interests.

The role of the director is likened to that of a trustee so that, just as a trustee owes the fiduciary duties of loyalty and good faith to the beneficiaries of a trust, a director owes those duties to the corporation. The fiduciary duty has several features. First, corporate management must avoid conflicts of interest, except with the company's knowledge and consent. Second, directors and officers are prohibited from taking secret rewards or appropriating an opportunity that should have been available for the company (see CAS v O'Malley, [1974] SCR 592, 1973 CarswellOnt 236). Last, director and officers must protect the corporation's confidential information. In Matic et al v Waldner et al, 2016 MBCA 60 (CanLII), the Manitoba Court of Appeal considered the fiduciary duty imposed upon directors. In that case, the majority shareholders of Springhill argued that one of their directors had diverted a corporate opportunity for his personal benefit. The Court of Appeal found the director had breached his fiduciary duty by allowing another company that he owned to take on a construction project which Springhill could have performed. In reaching this conclusion, the Court of Appeal acknowledged that determining whether a director has breached his or her fiduciary duty under the corporate opportunity doctrine requires an extensive contextual analysis, considering:

[153] the maturity of the opportunity; whether it was actively pursued by the corporation; whether the corporation was capable of taking advantage of the opportunity; whether the opportunity was in the corporation's line of business or a related business; how the opportunity arose or came to the attention of the director; whether the other directors of the corporation had knowledge of the director's pursuit of the opportunity; and whether the other directors gave their fully informed consent to the director's pursuit of the opportunity. The overall goal of the analysis is to determine whether the opportunity fairly belonged to the corporation in the circumstances.

Furthermore, directors must exercise their powers for a proper purpose. As long as a director's primary motive is the best interests of the company, his or her actions are not necessarily improper simply because the director also benefits from the matter. Directors who breach their fiduciary duty will be held strictly liable, even if there is no evidence of loss or damage to the corporation.

2) Duty to Act Honestly

The duty to act honestly as set out in section 117(1) of the MCA, prohibits directors from taking any fraudulent action or other action intended to deprive the corporation of some asset or benefit to which the corporation is entitled for the director's personal gain. Put another way, a director's personal interests or those of any other corporation in which the director is interested and a director's duty to the corporation should not be brought into conflict. As noted, directors must act in the best interests of the corporation. What is in the best interests of the corporation will depend on the relevant circumstances.

3) Duty of Care

The duty of care is outlined in section 117(1) of the MCA:

Every director and officer of a corporation in exercising their powers and discharging their duties shall (b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

The duty of care owed by a director is dependent on the circumstances. However, directors must adhere to an objective minimum standard by practicing the "care, diligence, and skill of a reasonably prudent person."

The common law has established an objective test for the duty of care. The precise standard to be met will depend upon the personal knowledge, experience, and position of the director. A director with significant knowledge or experience may be held to a higher standard of care.

Directors must be reasonably diligent when managing the corporation. A director will have to keep himself or herself informed about the business and affairs of the corporation through a broad monitoring of the corporation's policies and affairs as well as attending board meetings regularly. Directors with less skill, knowledge or experience who seek expert and independent advice in order to discharge their duty to exercise care, diligence and skill will be looked upon favorably by the courts. However, directors cannot completely delegate their duties and responsibilities. Directors cannot blindly rely on the reports or opinions of experts without informing themselves of the material facts and the consequences of their actions. Directors should further consider the expert's qualifications and experience and should seek written advice to demonstrate their reliance on the expert.

The actions of directors will not be judged using hindsight but against the facts as they existed at the time the decision was made. Directors are required only to make a reasonable decision in the circumstances. It must be shown that they made reasonable efforts to ensure that they had the information and advice necessary to make the decision. If the decision results in a negative outcome for the corporation, the directors will not be held liable so long as they have exhibited the care, diligence and skill which could be reasonably expected in the circumstances, taking into account their skills, knowledge and expertise.

4) Defence of Due Diligence

Directors who carry out their responsibilities in a diligent manner are unlikely to incur personal liability. The director has to establish that he or she was diligent in making the decision that he or she made. To this end, there are a number of things a director could and should do:

1. Attend as many meetings of the board or any committees as possible.
2. Read the material sent to directors before a meeting.
3. Take accurate notes at board meetings and review minutes to ensure accuracy.
4. Make sure your concerns, if any, are set out in the minutes of the meeting.
5. Consult independent experts where necessary.
6. Be thoroughly familiar with the operations of the corporation.
7. Maintain familiarity with the financial status of the corporation.
8. Determine from management if there are systems in place to monitor financial variations that should be drawn to the attention of management and the board.

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