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Rationale for the Current Canadian Regime of Director Liability

This is the second in a series of posts on this subject.  The full version of the article was published by the Institute of Corporate Directors in its Journal and and as a web resource.

The mood prevailing upon enactment of Canada’s contemporary corporate law was to make directors more, rather than less, accountable in the exercise of the duty of care.

The Canada Business Corporations Act (CBCA) was based in large part upon the recommendations of a 1971 Dickerson Report which proposed a duty of care that was stricter than that then prevailing duty:
Recent experience has demonstrated how low the prevailing legal standard of care for directors is, and we have sought to raise it significantly.

An enhanced duty of care was ultimately enshrined in the CBCA.

Several objections to the Delaware model have been made by observers. An initial object to limited director liability, as raised in the Dickerson report, was that it gives rise to “a steady supply of marginally competent people” to serve as directors. However, despite over twenty years of legal history in the U.S., I have seen no facts to support this opinion.

Another argument advanced in the 1990s was that limiting directors’ liability essentially transfers the risk, and potentially the cost, from them, their corporations, and their insurers back to the injured party.

However, the intent is only to limit indeterminate liability for errors. It would not apply to self-dealing, to bad faith or to liability for specific debts and obligations imposed by statute such as the liability for employee deductions or overdue GST remittances. It would not bar action for insider trading. It would also not apply to the vast majority of claims of majority shareholder oppression. It would not restrict legislated secondary market liability for prescribed wrongs for which directors, officers and others face the prospect of class action lawsuits brought by investors such as those for misrepresentation, non-disclosure and market manipulation.

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