When acting as a director of a company, there are certain duties that you must adhere to.  These two broad duties are known as the fiduciary duty and the duty of care, and are owed by directors individually to the company itself, not to stakeholders such as shareholders or employees.

Fiduciary Duty

The fiduciary duty (also known as a duty of loyalty) that a director owes to the company establishes that a director must exercise his or her powers in the best interests of the company.  This means that a director must act honestly and in good faith, and set aside his or her own personal interest while doing so.  What is in the best interests of the company will depend on the context, and Canadian courts have been clear that best interests are not confined to short-term profit or share value and instead look to longer term interests.

The fiduciary duty means that a director is limited from doing certain things in connection with the company.  For example, the fiduciary duty restricts a director from entering into a transaction or contract between themselves and the company (a “self-dealing” transaction).  Doing so will result in a conflict of interest and breach of the director’s fiduciary duty.  An exception to this is where a director discloses the nature and extent of their interest in a contract or transaction, and the transaction is approved by all other non-interested directors.  In order for the transaction to be approved it must be reasonable and fair to the company.

Additionally, directors must not pursue business opportunities that belong to the company for their own benefit.  This typically arises when a director is tempted to take an opportunity that the company has for themselves.  Furthermore, directors must not disclose confidential information of the company, and must share with the company any significant information that they may have acquired from others.

Duty of Care

The duty of care holds that directors must exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.  This is a contextual analysis that considers the actual circumstances in which the director acted.

Generally, the duty of care requires directors to make informed decisions and to rely on appropriate sources.  The same duty applies to all directors, without regard to the special skills or experience that a particular director may have.  However, directors with a special skill set (such as a director who is also a lawyer or accountant, for example) are expected to apply those skills when making decisions affecting the corporation.

A director is not liable for breaching the duty of care if he or she relied in good faith on statements or reports written by an appropriate person, a statement of fact represented to the director by an officer of the company to be correct, or on any record, information, or representation that a court considers provides reasonable grounds for the actions of the director.

The Business Judgement Rule

In determining if a director has complied with his or her duty of care, the court will often defer to business decisions made by a director, provided that the director’s decisions fell within a range of reasonable alternatives.  The business judgment rule takes into account that a director is more likely to have a better idea of what makes business sense for their company than a judge in a courtroom.  The business judgment rule also acknowledges the risk of hindsight – with hindsight, it is often easy to evaluate what went wrong, but without the advantage of hindsight, decisions must be evaluated more generously.

Conclusion

A director may be held personally liable if they breach their fiduciary duty or duty of care to the company.  Therefore, it is very important to keep these duties in mind when acting as a director.  If you have any questions on director’s duties and methods to minimize personal liability while acting as a director, feel free to contact one of our lawyers practicing in the area of business law.

Author: Jane Otterstrom

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