Law Times

Law Times • augusT 9, 2010 An online resource 1.800.263.3269 Focus On CORPORATE/COMMERCIAL LAW Directors and officers still vulnerable Liability fallout lingers from recent recession as courts get more stringent BY DARYL-LYNN CARLSON For Law Times C orporate directors and offi cers are facing in- creasing liabilities, par- ticularly in light of the recent economic downturn. Many lawyers who act as in- house counsel or are retained externally to advise corporate clients have been inundated during the past two years with requests for assistance with re- structuring issues such as insol- vencies and bankruptcies. Alex MacFarlane, head of the Toronto insolvency and restructuring group at Fraser Milner Casgrain LLP, acknowl- edges that in the past couple of years, there has been a surge in companies seeking legal advice for such issues. "Th ere have been a lot of companies faced with diffi cult decisions," he says. "We've seen a lot of com- panies facing issues relating to their own insolvency or with respect to the insolvencies of their customers or suppliers." MacFarlane notes that one of the signifi cant concerns for lawyers advising companies that are insolvent or in the zone of insolvency is ensuring that the risk of ongoing liabili- ties attached to their directors are eliminated or minimized. MacFarlane made a presen- tation to Ontario lawyers at the Six-Minute Business Lawyer conference in June in order to assist colleagues in better under- standing the challenges of advis- ing clients facing insolvency. In an accompanying paper, MacFarlane and FMC colleague Alexandra North note: "Advis- ing directors of companies that are either insolvent or in the zone of insolvency regarding the scope of their personal li- ability can be an enormously daunting task as directors can be exposed to signifi cant per- sonal liability in a variety of areas of the law." Due to recent case law and legislation, "Directors are now accountable not only to the cor- poration and its shareholders but also under certain circumstances to employees, creditors, custom- ers, suppliers, and governments." In their presentation, the pair referenced the 2008 deci- sion by the Supreme Court of Canada in BCE Inc. v. 1976 De- bentureholders, which was to be Canada's largest leveraged buy- out. In that case, the board of directors of BCE had approved a proposal whereby the Ontario Teachers' Pension Plan and its partners would acquire all of the outstanding shares of BCE at a price of $42.75 per com- mon share, which constituted a 40-per-cent premium for BCE's common shareholders. Th e SCC affi rmed the deal, which reversed a decision by the Quebec Court of Appeal, while ruling BCE's directors had acted in the corporation's best interests and had regard for all relevant considerations with respect to the various stakeholders. In the accompanying paper, MacFarlane and North point out: "Th e decision in this case turned on the scope of the BCE directors' duties in the context of the leveraged buyout. Th e court confi rmed that while directors of a corporation, when acting in Creditors Arrangement Act and the federal Bankruptcy and In- solvency Act that now provide certain enhanced protections for offi cers and directors. In addition, MacFarlane and If there's one key lesson from the recession, it's that directors need to seek legal advice early, says Alex MacFarlane. the best interests of the corpora- tion, may be required to consider the impact of their decisions on other corporate stakeholders, the directors' fi duciary duty is lim- ited to the corporation." In their paper, MacFarlane and North also note that in the run-up to or during an insol- vency or restructuring process, directors' risk increases as a re- sult of employee-related bene- fi ts, including liabilities around wages, pension plans, source de- ductions, and those arising un- der the recently enacted Wage Earner Protection Program Act. MacFarlane and North say there are certain situations in which a company's directors can limit their potential statutory li- abilities either by proactively es- tablishing due-diligence defences or ensuring there's suffi cient di- rectors' and offi cers' liability in- surance in place prior to fi ling. Th ere have also been recent amendments to the Companies' North note that the Ontario Court of Appeal's decision in Budd v. Gentra Inc. established a two-step test to determine when an oppression action may be brought against a director or offi cer. Th e criteria include: — Are there acts pleaded against specifi c directors or of- fi cers that could provide the basis for fi nding that the cor- poration acted oppressively? — Is there a reasonable basis in the pleadings on which a court could decide that the oppression alleged could be properly recti- fi ed by a monetary order against a director or offi cer personally? MacFarlane points out that if there's one key lesson to be learned from the recent eco- nomic downturn, it's that direc- tors need to recognize the bene- fi ts of seeking independent legal advice sooner rather than later. Rie Ishizuka, a civil litigation lawyer who practises commer- cial law at Pace Law Firm in To- ronto, says that in general, the threshold for liability is low even though the recession put a lot of directors and offi cers at risk. As well, she says the courts have been relatively consistent in asserting liability. "Th ey have basically said that directors of corporations owe a fi duciary duty to their corpora- tions in all circumstances, and these recent cases confi rm that offi cers and directors are not immune and can't hide behind the corporate veil." Ishizuka and two other lawyers from the fi rm recently made a presentation about developments in directors' li- ability to the Toronto Japanese Association of Commerce & Industry at which they ad- dressed the oppression remedy. Cameron Fiske, a Pace law- yer who attended the presenta- tion, agrees that the recession yielded a number of tough rul- ings from the courts. "Recent cases indicate the courts are getting more strin- gent in defi ning liability for di- rectors and offi cers of corpora- tions," says Fiske, who suggests that in light of the courts' re- sponse, in-house counsel who have doubts about their com- pany's exposure should seek a second opinion. "Outside counsel can prob- ably look at situations much more objectively," he says. In an eff ort to resolve the heightened exposure to liabil- ity, the Law Commission of Ontario began public consul- tations last spring to recom- mend changes to the Ontario Business Corporations Act. In announcing the con- sultations, the commission acknowledged that the joint- and-several liability provision in Ontario's legislation can unfair- ly cost a single defendant a sig- nifi cant amount of money. As a result, the province is at a com- petitive disadvantage in attract- ing business, particularly when it comes to the cost of insurance for directors and offi cers. Th e results of the consulta- tions and formal recommenda- tions are expected to be released later this year. LT Federal & Ontario Corporate & Business Legislation 2010-2011 Key statutes and regulations include: Also includes: • • • • • • • • • • NEW • • and regulation and regulations , R.S.O. 1990, c. B.16, and regulations , R.S.O. 1990, c. B.17, and regulations , R.S.O. 1990, c. B.19 , S.O. 1994, c. 32, , R.S.C. 1985, c. C-44, , S.C. 2009, c. 23 , R.S.O. 1990, c. C.39, and regulation , R.S.O. 1990, c. E.27, and regulation , R.S.O. 1990, c. L.16, and regulation , , S.O. 2006, c. 8 , Bill 65, 2nd Sess., 39th Leg. Ont., 2010 (not yet assented to and not yet in force) , R.S.O. 1990, c. P.5 , • Part III and related sections of the Ontario 1990, c. C.38 • Part II and related sections of the 1970, c. C-32 • Part VI, "Interpretation", of the 21, Sch. F • Fees under the Ontario • Summaries and web sites for Policy Statements and Information Kits under the ORDER your copy today Perfectbound • Approx. 810 pp. • September 2010 On subscription $63 • P/C 0814140000 • One time purchase $73 P/C 0814010000 • Multiple copy discounts available ISSN 1481-1995 , R.S.O. , R.S.C. , S.O. 2006, c. PAGE 9 For a 30-day, no-risk evaluation call: 1.800.565.6967 LT0809 Canada Law Book is a Division of The Cartwright Group Ltd. Prices subject to change without notice, to applicable taxes and shipping & handling. www.lawtimesnews.com Canada Business Corporations Act Canada Corporations Act Legislation Act, 2006 Corporations Act Business Corporations Act Consulting Editor: Stephen N. Adams, Q.C. Business Records Protection Act Business Corporations Act Business Names Act Business Regulation Reform Act Canada Business Corporations Act Canada Not- , 1994 Extra-Provincial Corporations Act Corporations Information Act Limited Partnerships Act for- for-profit Corporations Act Partnerships Act Not- Securities Transfer Act Profit Corporations Act 2010 2006

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