Lexpert US Guides

DIRECTOR LIABILITY principle. Bresner says the wording may be more unique than any liability arising from it, and that, in most cases, it's likely made redundant by the "alter ego" principle. Still, it persists as an apparently open-ended potential cause of action. GOVERNANCE Both countries have moved to tighten corporate governance since the Enron, Tyco and WorldCom accounting scandals in 2001 and 2002. Put simply, statutes, securities regulations and case law have dashed the once-popular notion that board positions are sinecures for which the only essential qualification is being the friend of a well-connected friend. In the US, the Sarbanes-Oxley Act of 2002 made officers of publicly traded companies personally responsible for the accuracy of financial statements and imposed greater responsibilities on corporate directors, board committee members and auditors. But Bresner says it also preserved the directors' defense of "reasonable reliance" on financial statements and professional opinions — absent willful blindness. In Canada, the Securities Act (Ontario) was also amended, Bresner says. It imposed "personal liability on directors and officers of public companies for false or misleading statements in public documents, such as prospectuses, offering memoranda and financial statements, as well as oral statements and for failure to make timely disclosure of material changes. Part of those changes included extension of the potential [directors'] liability to purchasers of securities in the secondary market." Most importantly, and in contrast with the US, Canadian law upholds the oversight responsibility of the full board, even over its own committees. "In Canada, yes, you can delegate — but that doesn't get you off the hook." Bresner cites the 2002 Repap case, in which board chairman and US citizen Steven Berg proposed to the Repap Enterprises Inc. board that he be named "senior executive officer," above the existing president and CEO, with a salary, signing bonus, option grant, eight-year pension credit and $27-million termination provision, all of which the court found out of proportion with the company balance sheet. OPPRESSION All but two members of the Repap board resigned and a newly named board approved the Berg contract on the recommendation of its new compensation committee. Shareholders, led by TD Asset Management, then filed an oppression action. They alleged Berg violated fiduciary duties as a board member and that the board breached its duty under s. 122 of the CBCA "to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances." The Ontario Superior Court of Justice set aside Berg's entire compensation package and ruled that directors failed in their duty of care. Repap confirmed that directors in Canada have an obligation to make an informed decision — regardless of any delegation of responsibilities, Bresner says. Another oppression finding of compelling interest to American directors of Canadian companies is Ford Motor Co. of Canada, Ltd. v. OMERS (Ontario Municipal Employees Retirement System). In that case, the Ontario Court for Appeal ruled in 2006 that the internal pricing policy of parent Ford Motor Company (Ford) was unfairly oppressive to Ford Canada's minority shareholders. Ford planned to take the Canadian subsidiary private and valued its shares at C$185 per share. But the court found that transfer pricing of products had depressed Ford Canada profits by $2.6 to $3 billion between 1985 and 1995, unfairly reducing share value. The court also ruled that Ford Canada's financial statements had incorrectly led shareholders to believe transfer payments between parent and subsidiary were negotiated at arm's length. BUSINESS JUDGMENT Ford Canada relied on the business judgment rule, widely recognized in both Canada and the US, which says that courts should not second-guess goodfaith business decisions in order to impose liability on officers and directors. But in Ford v. OMERS the court found that Ford Canada had simply accepted transfer prices of its parent, without applying business judgment of any kind. Ford v. OMERS says that parent-company nominee directors of a Canadian subsidiary "can't just do what the mother ship tells them to do," Cobb says. "You really have to remember there's a duty to all stakeholders." The leading expression of this duty of care to all stakeholders is found in BCE Inc. v. 1976 Debentureholders, where the Supreme Court of Canada ruled in 2008 that the BCE (Bell Canada Enterprises) board was required to take account of debentureholders' interests in arranging a leveraged buyout of the corporation. After reviewing the buyout process, the court found that due consideration had been given and that no oppressive conduct occurred. BCE clarified a wider Canadian fiduciary duty than the "Revlon duty" in US law, Cobb says. In Revlon, the Delaware Supreme Court said that whenever the sale of a company becomes inevitable, directors become "auctioneers" whose sole duty is to maximize shareholder value by selling to the highest bidder. Revlon holds US shareholder interests paramount, while BCE upholds the fiduciary duty of directors in Canada to act in the best interests of the corporation itself, including all stakeholders (shareholders, creditors and others). PROCESS Loranger says there's increasing court focus on board process in both the US and Canada. Reluctant to impose their own judgment over that of boards of directors, courts in both countries have increasingly relied on reviewing board process to adjudicate claims. In both countries, she notes, courts have added up the minutes spent on making decisions in order to assess the exercise of due care. They look at whether "red flags" – signs of mismanagement or wrongful acts – have been closely scrutinized by the board, whether the right questions have been asked and the credentials of outside consultants have been adequate. She stresses that every director should carefully review board minutes and ensure that his or her own dissenting votes and reasons for them are fully captured. As a director herself, she says, she keeps her own notes to compare with the official minutes before signing off. Brian Burton is a writer on energy and legal matters based in Calgary. www.lexpert.ca | LEXPERT • December 2013 | 15

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