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The Case for Empowering Canadian Corporations to Limit Directors’ Personal Liability: Revisiting the “Charter Option”

By Dan Parlow (posts)

This is the first 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.

It is in the interests of society to foster a business environment in which corporations can achieve their primary objectives of raising capital, expanding earnings and improving profitability.  To that end, it is necessary to attract directors who are highly competent and motivated to take risks in the best interests of the corporation.

Directors are subject to a number of duties that may give rise to personal liability. These include:

• the fiduciary duty to act honestly, in good faith and without self-interest;
• the duty to refrain from making misrepresentations in documents which may be distributed to investors in the primary or secondary markets;
• the duty to refrain from insider trading or tipping;
• the duty to ensure that the corporation receive proper consideration for shares issued;
• the duty to ensure that employees and government entities receive statutorily prescribed payments;
• the duty to refrain from conduct that is oppressive or unfairly prejudicial to others; and
• the duty to exercise care, diligence and skill in directing the affairs of the corporation.

Persons agreeing to assume the important role of a director are aware that they must act honestly and loyally, that they must refrain from misconduct, and that there are potential statutory liabilities with prescribed limits.

However, the potential breadth of the Duty of Care is so great that it is very difficult for a director or prospective director to predict or anticipate under what circumstances he or she may be in breach of that duty and thereby subject to personal liability in favour of an aggrieved party. That person may thereby be less inclined to act as a director, and less inclined to take bold, calculated risks if they do accept that role.

In my view, to foster economic activity and encourage job growth, Canadian lawmakers should follow the Delaware lead to permit corporations to regulate, through their charters, the potential liability of their directors for breaches of the duty of care, but not in cases of bad faith, misconduct or other liabilities prescribed by statute.

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