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Program Materials
How to be an Effective Board Member and
Still Sleep at Night
Table of Contents
Page
2
Document
Agenda
3
Bios
18
Exposures Facing Directors and Officers
25
Key Elements of a Written Director & Officer Idemnification
26
D & O Insurance Coverage
27
D & O Trusts
28
The Role of a Board Member on a Private 100% Held
Subsidiary Board
33
Management Reports to the Board of Directors
37
Human Resources
39
Pension Plans
41
Environment, Health & Safety
43
Taxation
44
Financial Statements and Related Matters
How to be an Effective Board Member and
Still Sleep at Night
Wednesday, May 5, 2010
Canadian Directors and Officers Recent Developments
12:00 p.m.
Welcome by Georgia Sievwright of the ACC & Introduction of the panel
12:10 p.m.
Presentation moderated by Justice Jim Farley
1:30 p.m.
!
Exposures Facing Directors and Officers
Paul Steep
!
Benefits of Contractual Indemnities
Jonathan Grant & Leila Rafi
!
D & O Insurance Coverage
Bill Scott
!
D & O Trusts
Jamey Gage
!
The Role of the Company Employee Board Member
David Tennant
!
The Director’s Perspective
David McAusland
Luncheon Reception
McCarthy Tétrault LLP
Lawyer Profile
JAMES FARLEY, QC
TITLE
Counsel
OFFICE
Toronto
LAW SCHOOL
University of
Toronto, LLB, 1966
Oxford University,
BA (Jurisprudence),
MA, 1964, 1968
University of
Western Ontario, BA
1962
DIRECT LINE
416-601-7840
E-MAIL
[email protected]
Biography
The Honourable James Farley, Q.C. was appointed to the Superior Court, then named the Supreme Court of
Ontario, in 1989. Since its inception in 1991 and until his retirement on May 1, 2006, he acted as supervising judge
of the Commercial List in Toronto. The Commercial List deals with complex corporate / commercial litigation in
addition to its insolvency foundation. He also took a periodic rotation in the Criminal List. He is a graduate of the
University of Western Ontario (BA 1962), University of Oxford (Rhodes Scholar; BA 1964; MA 1968) and the
University of Toronto (LLB 1966). He was called to the Ontario bar in 1968 and practised as a corporate /
commercial solicitor.
He has returned to the bar in August 2006 as Senior Counsel to McCarthy Tétrault LLP. He is working with the
business law, bankruptcy and restructuring and litigation groups on a firm-wide basis, including work on crossborder initiatives, providing clients with strategic business, litigation and insolvency-related advice.
He is a member of the International Insolvency Institute, Insolvency Institute of Canada, Insol International,
American Law Institute, American College of Bankruptcy, American Bankruptcy Institute, International Bar
Association and International Law Association. He has participated in the American Law Institute NAFTA
transnational insolvency project, the INSOL / UNCITRAL judicial colloquia and the World Bank insolvency practices
project. As well he has delivered papers on various topics including insolvency, corporate law, commercial courts,
ADR, WTO and law practice management in Canada, the USA, England, China, Nigeria, Bermuda, Germany, France,
the Bahamas, Jamaica, Brazil, Austria, Tanzania, New Zealand, Argentina, Australia, South Africa, India, the
British Virgin Islands and Mexico.
McCarthy Tétrault LLP
Lawyer Profile
JAMES (JAMEY) D. GAGE
TITLE
Partner
OFFICE
LAW SCHOOL
DIRECT LINE
BAR ADMISSIONS
Toronto
416-601-7539
University of
Western Ontario,
LLB, 1991
Ontario, 1993
E-MAIL
[email protected]
Biography
James Gage is a partner in our Bankruptcy and Restructuring Group in Toronto. He practises in the areas of
bankruptcy, insolvency and restructuring and has extensive experience advising creditors and debtors in work-out,
receivership, bankruptcy and CCAA proceedings in both Canadian and international contexts.
The significant matters in which Mr. Gage has been involved in recent years include acting as counsel for:
!
Chrysler Canada in respect of the restructuring of Chrysler
!
Stelco, Canada’s largest integrated steel producer, in its restructuring proceedings under the CCAA
!
a significant group of aircraft financiers in connection with Air Canada’s restructuring proceedings
!
Algoma Steel, with more than $1 billion of debt, in its restructuring proceedings under the CCAA
Mr. Gage provides advice on insolvency issues in structuring transactions and the effect of insolvency proceedings
on derivatives.
He is listed in the 2009 editions of Chambers Global: The World’s Leading Lawyers for Business, as a leading
lawyer in the area of restructuring. Mr. Gage is recognized as one of the leading lawyers in the 2007 Guide to the
U.S./Canada Cross-Border Litigation Lawyers in Canada by Lexpert in the area of insolvency and corporate
restructuring. Mr. Gage was also named by Lexpert magazine as one of Canada’s top 40 lawyers under 40.
He received his HBA in 1988 and his LLB in 1991, both from the University of Western Ontario. Mr. Gage was called
to the Ontario bar in 1993.
McCarthy Tétrault LLP
Lawyer Profile
JONATHAN R. GRANT
TITLE
Partner
OFFICE
LAW SCHOOL
DIRECT LINE
BAR ADMISSIONS
Toronto
416-601-7604
Queen's University,
LLB, 1989
Ontario, 1991
E-MAIL
[email protected]
Biography
Jonathan Grant is a partner in our Business Law Group in Toronto. His practice focuses on Canadian and
international securities offerings and mergers and acquisitions.
Mr. Grant regularly advises the firm’s corporate clients, investment banks and private investment entities on
domestic and cross-border securities offerings, acquisitions, divestitures and restructurings.
He spent a year with the Ontario Securities Commission in the office of the general counsel and the corporate
finance branch.
Mr. Grant is listed in The Legal Media Group’s 2008 Guide to the World’s Leading Capital Markets Lawyers.
Mr. Grant received his BA from the University of Toronto and his LLB from Queen’s University. He was called to the
Ontario bar in 1991.
McCarthy Tétrault LLP
Lawyer Profile
DAVID MCAUSLAND
TITLE
Partner
OFFICE
LAW SCHOOL
DIRECT LINE
BAR ADMISSION
Montréal
Toronto
514-397-7814
416-601-7814
McGill University,
1977
Québec, 1978
E-MAIL
[email protected]
Biography
David McAusland is a partner in our Business Law Group. He is a distinguished senior corporate strategist and
advisor and focuses on major corporate portfolio transactions, financial structures, divestitures, securities and
corporate finance, governance and regulatory affairs.
David is an effective and proactive leader with a unique track record of success and innovation in the global
business environment. David recently served as Executive Vice-President, Corporate Development and Chief Legal
Officer of Alcan Inc., where he led a multi-country team that completed more than 75 acquisition and divestiture
transactions, as well as complex joint ventures around the world. Particularly noteworthy is David’s leadership role
in the design and execution of major strategic initiatives, including the successful unprecedented, unsolicited
offer for Pechiney (France), the spin-off of Novelis Inc., the response strategy for the unsolicited offer by Alcoa
Inc. and the subsequent sale of Alcan to Rio Tinto plc., Canada’s largest-ever M&A transaction. Prior to joining
Alcan, David was the managing partner of a major law firm, where he had a leading practice focused on innovative
capital markets transactions and solutions.
A seasoned corporate director and authority on governance, David currently serves on the boards of Cogeco Inc.
and Cogeco Cable Inc., Cascades Inc., Equinox Minerals Ltd., World Color Press, Inc. and Khan Resources Inc. He is
also Chair of the Reform Implementation Council for the Royal Canadian Mounted Police and Chair of the National
Circus School Foundation.
David’s achievements have been recognized with various awards, including a Lifetime Achievement Award in 2008
at the Canadian General Counsel Awards, which recognize the accomplishments of Canada’s top general counsel.
He also received the Dealmaker Award at the 2005 Canadian General Counsel Awards and a Commemorative Medal
for the Golden Jubilee of Her Majesty Queen Elizabeth II for community and public service in 2002.
Mr. McAusland received his BCL in 1976 and his LLB in 1977, both from McGill University. He was called to the
Québec bar in 1978. He is a member of the Barreau du Québec, the Canadian Bar Association and the International
Bar Association.
McCarthy Tétrault LLP
Lawyer Profile
LEILA RAFI
TITLE
Associate
OFFICE
LAW SCHOOL
DIRECT LINE
BAR ADMISSIONS
Toronto
416-601-7987
University of
Western Ontario,
LLB, 2005
Ontario, 2006
E-MAIL
[email protected]
Biography
Leila Rafi is an associate in our Business Law Group in Toronto. She has a general corporate and commercial
practice that includes corporate finance, public and private mergers and acquisitions, private equity financing,
and providing securities regulatory advice. Ms. Rafi is also an instructor for the advanced securities law program
offered by the University of Windsor law school and occasionally teaches for the Institute of Law Clerks of Ontario.
Prior to joining McCarthy Tétrault LLP, Ms. Rafi practised securities law for two years at another leading firm.
Ms. Rafi received her BA (Hons.) in Political Science from the University of British Columbia in 2001 and her LLB
from the University of Western Ontario in 2005. She was called to the Ontario bar in 2006, and is a member of the
Law Society of Upper Canada, the Ontario Bar Association, and the Canadian Bar Association.
Recent transactions that Ms. Rafi has been involved in include:
!
acted for National Bank Financial Inc. and a syndicate of dealers in respect of Front Street Flow–Through
2009 — II Limited Partnership’s $32-million limited partnership units offerings;
!
acted for National Bank Financial Inc. and a syndicate of dealers in respect of Front Street Flow–Through
2010 — I Limited Partnership’s $90-million limited partnership units offerings;
!
acted for Canadian Tire Bank in it’s sale of certain assets to National Bank of Canada for approximately
$162 million;
!
acted for agents in short-form prospectus offering by First Quantum Minerals Ltd for $3.5-million;
!
acted for OMERS Realty Corporation in relation to its issuance of $170-million 4.75% Series A Dentures
due 2016; and
!
acted for West Face Capital Inc. and MSD Capital, LP as standby purchasers in connection with the
recapitalization and US $50-million rights offering by Primary Energy Recycling Corporation.
McCarthy Tétrault LLP
Lawyer Profile
WILLIAM G. SCOTT
TITLE
Partner
OFFICE
LAW SCHOOL
DIRECT LINE
BAR ADMISSIONS
Toronto
416-601-7550
University of
Toronto, LLB, 1981
York University,
LLM, 2008
Ontario, 1983
E-MAIL
[email protected]
Biography
William (Bill) G. Scott is a partner in our Litigation Group in Toronto. His practice includes the resolution of
insurance coverage disputes, reinsurance disputes and complex general liability claims. He has been certified since
1999 as a Specialist in Civil Litigation by the Law Society of Upper Canada, the governing body of the Ontario legal
profession. Mr. Scott is also regularly involved in complex commercial litigation involving negligence and
contractual disputes.
Mr. Scott has acted for numerous clients involved in insurance coverage disputes, including directors’ and
officers’, general liability policies, property, disability, life, construction, commercial, environmental matters and
motor vehicle claims. He has a special interest in alternate dispute resolution (“ADR”) and participates as counsel
in numerous mediations each year. In addition, Mr. Scott regularly speaks and teaches about ADR methods.
He has attended the Harvard Law School Basic and Advanced Negotiation and Advanced Mediation Workshops in
Cambridge and The Advocates’ Society Mediation Workshop. Mr. Scott has also successfully completed the
Advanced National Institute of Trial Advocacy Program in Boulder, Colorado. He has been a teacher of the Civil
Procedure Section of the Law Society’s Bar Admission Course and has taught at Advocacy and
Negotiation/Mediation Skills Workshops in-house, Advocacy Workshops at Osgoode Hall Law School and at the
Ontario Centre for Advocacy Training.
Mr. Scott is a member of the Advocates’ Society, the Insurance Section of the Canadian Bar Association (Ontario),
the Insurance Institute of Ontario, The Defence Research Institute and The Medico-Legal Society of Toronto.
Mr. Scott received his LLB at the University of Toronto in 1981, and was called to the Ontario bar in 1983. He
received in LLM in Civil Litigation and Dispute Resolution in 2008.
McCarthy Tétrault LLP
Lawyer Profile
R. PAUL STEEP
TITLE
Partner
OFFICE
LAW SCHOOL
DIRECT LINE
BAR ADMISSIONS
Toronto
416-601-7998
Queen's University,
LLB, 1980
Ontario, 1982
E-MAIL
[email protected]
Biography
Paul Steep is a partner in our Litigation Group. He carries on a broad commercial litigation practice with a specific
focus on securities litigation including class actions. He has an active trial practice before the Ontario Superior
Court of Justice and the Court of Appeal.
Mr. Steep has recently been involved in major commercial disputes, all forms of securities litigation, oppression
remedies, directors’ and officers’ liability cases, banking litigation, and major corporate litigation, including major
class actions. He has acted as counsel in contested take-over bids to target companies and on behalf of bidders.
Mr. Steep appears regularly before the OSC on a variety of regulatory and enforcement matters. He also regularly
acts on behalf of corporations and persons subject to OSC investigation. In addition, he has conducted trials and
appeals in major medical malpractice claims. Mr. Steep recently completed a four-year term as chair of the firm’s
Litigation Group, comprising 80 lawyers practising in virtually all areas of civil litigation before a wide variety of
courts and tribunals throughout Canada. He has also recently served as a member of the firm’s Board of Directors.
Mr. Steep is listed in the 2007-2009 editions of Chambers Global: The World’s Leading Lawyers for Business, as a
leading lawyer in the area of dispute resolution and in the 2008 and 2009 edition of LEXPERT/The American Lawyer
Guide to the Leading 500 Lawyers in Canada, as a leading lawyer in the area of corporate commercial litigation
and securities litigation. Mr. Steep is recognized in The Best Lawyers in Canada as a leading lawyer in corporate
and commercial litigation and securities law. Mr. Steep also appears in the 2009 Canadian Legal Lexpert Directory,
a guide to the leading law firms and practitioners in Canada, as a leading lawyer in the areas of class actions
litigation, corporate commercial litigation, directors & officers liability litigation, securities litigation and medical
negligence. Mr. Steep will be inducted into the American College of Trial Lawyers on March 8th, 2008.
Mr. Steep received his BA (Hons.) and his LLB from Queen’s University. He was called to the Ontario bar in 1982.
Some of Mr. Steep’s more notable cases include:
Lawyer Profile
R. PAUL STEEP
!
Cycomm International Inc., Re 1993 CarswellOnt 922 3 C.C.L.S. 201, 17 O.S.C.B. 21 Ontario Securities
Commission December 23, 1993
!
Ivanhoe III Inc., Re 1999 CarswellOnt 548 22 O.S.C.B. 1327 Ontario Securities Commission February 19,
1999
!
RT Capital Management Inc., Re 2000 CarswellOnt 2751 Ontario Securities Commission July 20, 2000
Current Securities Class Action Retainers:
!
Silver v. IMAX Corporation, et al.
!
Dobbie, et al. v. Arctic Glacier Income Fund, et al.
!
Ironworkers, et al. v. Manulife Financial Corporation, et al.
!
Gowan v. AMG Advanced Metallurgical Group N.V., Timminco Limited et al.
!
Green v. Canadian Imperial Bank of Commerce, et al.
!
Juniper v. American International Group, Inc., et al.
Other cases include:
!
BNY Capital Corp. v. Katotakis 2005 CarswellOnt 625 Ont. C.A. [In Chambers] February 11, 2005
Docket: CA C43047, C43049, C43051, M32197, M32199, M32200
!
JB Printing Ltd. v. 829085 Ontario Ltd. 2004 CarswellOnt 5137 192 O.A.C. 313 Ontario Court of Appeal
December 9, 2004 Docket: CA C39931
!
Compugen Systems Ltd. v. MFP Technology Services Ltd. 2003 CarswellOnt 2493 Ontario Court of Appeal
June 27, 2003 ... additional reasons at Compugen Systems Ltd. v. MFP Technology Services Ltd. (2002),
2002 CarswellOnt 1629 (Ont. S.C.J.)
!
Sambrook v. Altamira Management Ltd. 2002 CarswellOnt 3062 19 C.C.E.L. (3d) 184 Ontario Court of
Appeal September 17, 2002
!
EdperBrascan Corp. v. 177373 Canada Ltd. 2002 CarswellOnt 698 22 B.L.R. (3d) 42 Ontario Court of
Appeal February 26, 2002 Docket: CA C35359, C35360
!
Rio Tinto Canadian Investments Ltd. v. Bone 2001 CarswellOnt 3050 41 E.T.R. (2d) 283 Ontario Court of
Appeal September 10, 2001
!
Bonfoco v. Dowd 2000 CarswellOnt 3753 136 O.A.C. 339 Ontario Court of Appeal October 17, 2000
Page 3
Lawyer Profile
Lawyer Profile
R. PAUL STEEP
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Burger King Restaurants of Canada Inc. v. R. 2000 CarswellNat 6 2000 D.T.C. 6061, [2000] 2 C.T.C. 1,
251 N.R. 313 Federal Court of Appeal January 12, 2000
!
Belsat Video Marketing Inc. v. Astral Communications Inc. 1999 CarswellOnt 388 118 O.A.C. 105, 86
C.P.R. (3d) 413, [1999] O.J. No. 343 Ontario Court of Appeal February 12, 1999
!
Lukowski v. Hatch Associates Ltd. 1998 CarswellOnt 4998 39 C.C.E.L. (2d) 177, 118 O.A.C. 147 Ontario
Court of Appeal December 21, 1998 Proceedings: affirming (1996), 25 C.C.E.L. (2d) 17 (Ont. Gen. Div.)
!
Lakeport Brewing Corp. v. Brewers Retail Inc. 1998 CarswellOnt 1988 Ontario Court of Appeal May 15,
1998 … (March 31, 1995), Doc. 93-CQ-42703 (Ont. Gen. Div.)
!
Belsat Video Marketing Inc. v. Astral Communications Inc. 1998 CarswellOnt 659 81 C.P.R. (3d) 1, [1998]
O.J. No. 654 Ontario Court of Justice (General Division) February 18, 1998 ... Gen. Div.); affirmed
(February 12, 1999), Doc. CA C29180 (Ont.C.A.)
!
Gentra Canada Investments Inc. v. 724270 Ontario Ltd. 1995 CarswellOnt 3912 Ontario Court of Appeal
March 23, 1995 Additional reasons (September 16, 1994), Doc. B215/93 (Ont. Gen. Div. [Commercial
List])
!
Arthur v. Signum Communications Ltd. 1991 CarswellOnt 2523 Ontario Court of Justice (General
Division) March 5, 1991 ... No. 1928 (Ont. Div. Ct.)
!
Armoshep Properties Inc. v. Finn 1990 CarswellOnt 1604 Ontario Court of Appeal September 21, 1990
!
Heilig v. Dominion Securities Pitfield Ltd. 1989 CarswellOnt 120 41 B.L.R. 205, 32 E.T.R. 77, C.E.B. &
P.G.R. 8076, 67 O.R. (2d) 577, 59 D.L.R. (4th) 394, 33 O.A.C. 229 Ontario Supreme Court, Court of
Appeal February 20, 1989
!
Belzberg Technologies Inc. v. ITG Canada Corp. 2005 CarswellOnt 4875 Ontario Superior Court of Justice
October 4, 2005
!
Neste Chemicals Canada Inc. v. Reichhold Ltd. 2005 CarswellOnt 3935 16 C.E.L.R. (3d) 227 Ontario
Superior Court of Justice August 26, 2005
!
ABN Amro Bank N.V. v. BCE Inc. 2003 CarswellOnt 2890 44 C.B.R. (4th) 1 Ontario Superior Court of
Justice [Commercial List] April 30, 2003 ... 2003 CarswellOnt 2749 (Ont. Div. Ct.)
!
Air Canada, Re 2003 CarswellOnt 1572 42 C.B.R. (4th) 163 Ontario Superior Court of Justice
[Commercial List] April 25, 2003
!
Compugen Systems Ltd. v. MFP Technology Services Ltd. 2002 CarswellOnt 1629 Ontario Superior Court
of Justice May 13, 2002 ...Proceedings: additional reasons to (), 2002 CarswellOnt 325 (Ont. S.C.J.)
Page 4
Lawyer Profile
Lawyer Profile
R. PAUL STEEP
Cases of Interest:
!
Canadian Imperial Bank of Commerce and CIBC World Markets Inc., Re (2010), 33 O.S.C.B. 73
!
Re Sears Canada Inc. (2006), 22 B.L.R. (4th) 267, aff'd (2007), 26 B.L.R. (4th) 199 (Ont. Div. Ct.)
!
Re Falconbridge Ltd. (2006), 29 O.S.C.B. 6783, 21 B.L.R. (4th) 321
!
Paul Ryan v. National Bank of Canada, [2008] O.J. No. 2360
!
Linedata Services S.A. v. Katotakis 2005 CarswellOnt 632 1 B.L.R. (4th) 168, 194 O.A.C. 353 Ontario Court
of Appeal February 23, 2005
!
UPM-Kymmene Corp. v. UPM-Kymmene Miramichi Inc. 2004 CarswellOnt 691 183 O.A.C. 310, 42 B.L.R.
(3d) 34, 32 C.C.E.L. (3d) 68, 40 C.C.P.B. 114, 250 D.L.R. (4th) 526 Ontario Court of Appeal February 20,
2004
!
Liuni (Litigation Guardian of) v. Peters 2001 CarswellOnt 4247 151 O.A.C. 389, 8 C.C.L.T. (3d) 207
Ontario Court of Appeal December 4, 2001
!
Verdun v. Toronto Dominion Bank 1996 CarswellOnt 3493 94 O.A.C. 211, 203 N.R. 60, [1996] 3 S.C.R. 550,
139 D.L.R. (4th) 415, 28 B.L.R. (2d) 121, 12 C.C.L.S. 139 Supreme Court of Canada April 29, 1996
!
Pente Investment Management Ltd. v. Schneider Corp. 1998 CarswellOnt 4035 113 O.A.C. 253, (sub nom.
Maple Leaf Foods Inc. v. Schneider Corp.) 42 O.R. (3d) 177, 44 B.L.R. (2d) 114, [1998] O.J. No. 4142
Ontario Court of Appeal October 20, 1998
!
Guarantee Company of North America v. Gordon Capital Corp. 1999 CarswellOnt 3171 178 D.L.R. (4th) 1,
247 N.R. 97, [2000] 1 L.R. I-3741, 126 O.A.C. 1, 49 B.L.R. (2d) 68, 15 C.C.L.I. (3d) 1, [1999] 3 S.C.R. 423,
39 C.P.C. (4th) 100, 1999 CarswellOnt 3172, 3 S.C.R. 423, [1999] S.C.J. No. 60 Supreme Court of Canada
October 15, 1999
!
Royal Bank v. Société Générale (Canada) 2005 CarswellOnt 6723 Ontario Superior Court of Justice
November 18, 2005
!
Zaheer v. Pede (December 16, 2002), jury decision, Ont. Superior Court of Justice Docket No. 00-BN-1167
OSC Descisions of Significance:
!
Re Falconbridge Ltd. (2006), 29 O.S.C.B. 6783, 21 B.L.R. (4th) 321
!
Re Chapters Inc. (2001), 24 O.S.C.B. 1657
!
Re Sears Canada Inc. (2006), 22 B.L.R. (4th) 267, aff'd (2007), 26 B.L.R. (4th) 199 (Ont. Div. Ct.)
Page 2
Lawyer Profile
Lawyer Profile
R. PAUL STEEP
!
Rosenhek v. Windsor Regional Hospital 2002 CarswellOnt 686 Ontario Superior Court of Justice February
18, 2002
!
Henderson v. College of Physicians & Surgeons (Ontario) 2001 CarswellOnt 4597 155 O.A.C. 72 Ontario
Superior Court of Justice (Divisional Court) December 21, 2001
!
Assn. of Professional Engineers (Ontario) v. Karmash 1998 CarswellOnt 2176 (sub nom. Karmash v. Assn.
of Professional Engineers (Ont.)), 109 O.A.C. 334, 39 C.L.R. (2d) 165 Ontario Court of Justice, General
Division [Divisional Court] May 27, 1998
!
Montreal Trust Co. of Canada v. Olympia & York Developments Ltd. (Administrator of) 1998 CarswellOnt
1935 19 R.P.R. (3d) 111 Ontario Court of Justice, General Division [Commercial List] May 15, 1998
!
Whitehouse v. McGrath 1997 CarswellOnt 760 26 O.T.C. 347 Ontario Court of Justice (General Division)
March 7, 1997
!
Munich Reinsurance Co. (Canada Branch) v. Minister of National Revenue 1996 CarswellNat 858 [1996] 2
C.T.C. 5, (sub nom. Munich Reinsurance Co. v. Minister of National Revenue) 111 F.T.R. 298, (sub nom.
Munich Reinsurance Co. (Canada Branch) v. R.) 96 D.T.C. 6185 Federal Court-Trial Division February 22,
1996 ... the Tax Court of Canada [1992] 1 C.T.C. 2004. ; reversing in part (1991), 91 D.T.C. 1137
(T.C.C.)
!
P. (W.) v. D. (H.B.) 1995 CarswellOnt 3535 Ontario Court of Justice (General Division) March 9, 1995
!
Greyvest Leasing Inc. v. Merkur 1994 CarswellOnt 780 8 P.P.S.A.C. (2d) 203 Ontario Court of Justice
(General Division) November 1, 1994
!
Gentra Canada Investments Inc. v. 724270 Ontario Ltd. 1994 CarswellOnt 3308 Ontario Court of Justice
(General Division) October 19, 1994
!
Toronto Dominion Bank v. Ontario (Minister of Revenue) 1994 CarswellOnt 714 39 R.P.R. (2d) 149
Ontario Court of Justice (General Division), Commercial List April 28, 1994
!
Deprenyl Research Ltd., Re 1994 CarswellOnt 1034 17 B.L.R. (2d) 102, 4 C.C.L.S. 303 Ontario Court of
Justice (General Division), Commercial List April 8, 1994
!
Chippewas of Kettle & Stony Point v. Canada (Attorney General) 1993 CarswellOnt 3814 [1994] 2
C.N.L.R. 33, 4 W.D.C.P. (2d) 604 Ontario Superior Court of Justice (Divisional Court) October 18, 1993
... its Licensors. All rights reserved. Proceedings: Affirmed, 17 C.P.C. (3d) 5, 1993 CarswellOnt 401
(Ont. Gen. Div.)
!
Aberfoyle Steel Inc. v. 471841 Ontario Ltd. 1993 CarswellOnt 4312 4 W.D.C.P. (2d) 514 Ontario Court of
Justice (General Division) September 17, 1993 ... Canada Ltd. or its Licensors. All rights reserved.
Proceedings: Additional reasons, 1993 CarswellOnt 2240 (Ont. Gen. Div.) Counsel: R. Paul Steep, for
Page 5
Lawyer Profile
Lawyer Profile
R. PAUL STEEP
Plaintiff Ann Dinnert, for Defendant Subject: Civil Practice and Procedure Civil practice and
procedure. Hermiston J.
!
Minister of National Revenue v. Chrysler Canada Ltd. 1992 CarswellNat 315 [1992] 2 C.T.C. 95, 55 F.T.R.
93, 92 D.T.C. 6061 Federal Court -- Trial Division April 24, 1992
!
Kennedy v. MTD Products Ltd. 1991 CarswellOnt 911 34 C.C.E.L. 31 Ontario Court of Justice (General
Division) January 30, 1991
!
Arthur v. Signum Communications Ltd. 1991 CarswellOnt 3126 Ontario Court of Justice (General
Division) January 23, 1991 ... 29, 1993), Doc. 123/91 (Ont. Div. Ct.
!
Frawley v. Asselstine 1990 CarswellOnt 754 73 O.R. (2d) 525, 70 D.L.R. (4th) 536 Ontario Supreme Court
May 18, 1990
!
Biggs v. Richter 1989 CarswellOnt 3178 Ontario District Court October 23, 1989
!
Assn. of Professional Engineers (Ontario) v. Smith 1989 CarswellOnt 931 38 Admin. L.R. 212 Ontario
Supreme Court, High Court of Justice (Toronto Weekly Court) July 7, 1989
!
Mauro v. Kitchenware Investments Ltd. 1989 CarswellOnt 799 25 C.P.R. (3d) 375
!
Szeman v. Etobicoke General Hospital 1988 CarswellOnt 1773 Supreme Court of Ontario (High Court of
Justice) November 30, 1988
!
Ontario (Ministry of Municipal Affairs) v. Thunder Bay (City) 1988 CarswellOnt 560 38 M.P.L.R. 257, 30
Admin. L.R. 180 Ontario Supreme Court, High Court of Justice May 10, 1988
!
Lipton v. Morgan 1988 CarswellOnt 1618 Supreme Court of Ontario (High Court of Justice) February 2,
1988 ... (March 3, 1988), Doc. York 52815/80 (Ont. H.C.)
!
Orpin v. College of Physicians & Surgeons (Ontario) 1988 CarswellOnt 341 25 C.P.C. (2d) 19, 25 O.A.C.
235 Ontario Supreme Court, Divisional Court January 22, 1988
!
Goyal v. 619908 Ontario Ltd. 1987 CarswellOnt 2089 Supreme Court of Ontario (High Court of Justice)
October 7, 1987 ... to appeal refused (1989), 105 N.R. 158 (note), 37 O.A.C. 159 (note) (S.C.C.)
!
Pickard v. College of Nurses (Ont.) 1987 CarswellOnt 812 25 O.A.C. 141 Ontario Divisional Court June
22, 1987
!
Jones v. F.H. Deacon Hodgson Inc. 1986 CarswellOnt 156 34 B.L.R. 1, 9 O.S.C.B. 5579, 56 O.R. (2d) 540,
31 D.L.R. (4th) 455 Ontario Supreme Court, High Court of Justice September 17, 1986
!
Crowe v. Mudie 1986 CarswellOnt 2375 Ontario Provincial Court September 9, 1986
Page 6
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Lawyer Profile
R. PAUL STEEP
!
Equitable Life Insurance Co. of Canada v. Mike Voll Investments Ltd. 1985 CarswellOnt 747 40 R.P.R. 7,
51 O.R. (2d) 327, 19 D.L.R. (4th) 747 Ontario Supreme Court, High Court of Justice July 24, 1985
!
Rodrigues v. Madill 1985 CarswellOnt 401 3 C.P.C. (2d) 1 Ontario Supreme Court July 19, 1985
!
Arthur J. Fish Ltd. v. Moore 1984 CarswellOnt 509 8 C.P.C. (2d) 77 at 79 Ontario Master's Chambers
July 10, 1984
!
Arthur J. Fish Ltd. v. Moore 1984 CarswellOnt 726 7 C.L.R. 73 Ontario Supreme Court, Master's
Chambers May 25, 1984
!
Royal Bank v. Paletta 1984 CarswellOnt 1303 6 O.A.C. 396 Ontario Superior Court of Justice (Divisional
Court) 1984
!
Canfran Investments Ltd. v. Glivar 1983 CarswellOnt 1376 42 O.R. (2d) 601, 150 D.L.R. (3d) 191 Ontario
High Court of Justice 1983
Written Articles:
Securities Related Articles
!
“Disclosure, the Leave Standard and Cross-Border Classes under Part XXIII.1 of the Ontario Securities
Act”, Osgoode Hall Law School, April 2009
!
“Effectively Challenging the Conduct of the Investigation”, Osgoode Hall Law School, December 2008
!
“M&A Litigation Issues”, M&A Valuation for CFOs, Federated Press, November 2007
!
“Management of a Dynamic Compliance Program”, Federated Press, March 2001
!
“Overview of a Securities Law Compliance Program”, Federated Press, March 2001
!
“Successful Strategies for Litigating Shareholders’ Disputes”, The Canadian Institute, October 2001
!
“A Few Observations Concerning Supreme Court of Canada Commercial Law Decisions in the Past Year”,
The Law Society of Upper Canada, October 2001
!
“Revisiting Defence Strategies and the Concept of Co-operation with respect to OSC Proceedings”, 2003
Securities Investigators Training Course, June 2003
!
“Commentary on the Supreme Court of Canada Decision in Regina v. Neil [2002[ 3 S.C.R. 631”, Corporate
Legal Executives Quorum, October 2003
!
“Criminal and Regulatory Envorcement”, Federated Press, September 2004
!
“Hearings Before the Ontario Securities Commission”, Insight, June 2005
Page 7
Lawyer Profile
Lawyer Profile
R. PAUL STEEP
!
“Expected Impact on Corporate Practices for Canadian Issuers”, Insight, October 2005
Medical/Malpractice Articles
!
“Mary Carter Agreements”, CMPA, June 2003
!
“The Obstetrics Causation Battle”, Insight Seminar, December 2003
!
“Juries/Judges”, Provincial Counsel Continuing Medical-Legal Education Conference, June 2005
Page 8
Lawyer Profile
McCarthy Tétrault LLP
Lawyer Profile
DAVID B. TENNANT
TITLE
Partner
OFFICE
LAW SCHOOL
DIRECT LINE
BAR ADMISSIONS
Toronto
416-601-7777
University of
Western Ontario,
LLB, 1979
Ontario, 1984
E-MAIL
[email protected]
Biography
David Tennant is a partner in the firm’s Toronto office.
Mr. Tennant’s main practice is the provision of advice in connection with mergers, acquisitions and
reorganizations.
Recently, he has acted for Chrysler Canada Inc. in connection with the restructuring of its parent Chrysler LLC,
Borealis Infrastructure Management Inc. in its successful unsolicited take-over bid for Teranet Income Fund,
Stelco Inc. in its sale to US Steel Corp. and for Creststreet Kettles Hill Windpower LP in its sale to ENMAX Inc. In
addition, during that time he provided advice to a number of our clients in connection with acquisitions
contemplated by them. He has also acted on a number of proxy battles, for both dissident shareholders and
defending boards.
Mr. Tennant also acts as securities law counsel for several of our public company clients, providing guidance on
board and governance matters.
From 2002 to 2007 he was the national practice group leader of the firm’s business law group and is currently the
partner responsible for co-ordinating the firm's US market practice.
During his career with the firm, Mr. Tennant has been seconded to the Ontario Securities Commission and has
lectured on corporate finance and securities laws, including at Osgoode Hall Law School. He also serves on the
boards of several corporations, including as Chairman of Major Drilling Group International Inc., the world’s largest
mineral drilling company by market capitalization.
Mr. Tennant appears in Chambers Global: The World’s Leading Lawyers for Business, as a leading lawyer in
corporate mergers & acquisitions. He is also listed in the Best Lawyers in Canada in the field of corporate law.
Mr. Tennant received his B.Math in 1978 from the University of Waterloo and his MBA and LLB in 1982 from the
University of Western Ontario. He was called to the Ontario bar in 1984.
Exposures Facing Directors and Officers
Paul Steep
The role of directors is easily summarized. By various business corporation statutes,
the management of the business and affairs of the corporation is delegated to the
directors. This delegation of authority carries with it certain duties. The primary
duty, to act in the best interests of the corporation, originated in the common law. It
has since been codified in the same statutes that delegate management authority to
the directors. These statutes set out two inter-related duties; namely, the duty to
act honestly and in good faith with a view to the best interests of the corporation
(often referred to as the “duty of loyalty); and, the duty to excise the care, diligence
and skill of a reasonable prudent person in comparable circumstances (the “duty of
care”).
Any consideration of civil liability for breach of these duties engages the business
judgment rule. Both the Canadian and American judicial systems have adopted this
rule and routinely apply it to any analysis of whether a director has breached either
the duty of loyalty or the duty of care. There are slight, but important, differences
between how American and Canadian courts have formulated and applied the business
judgement rule.
In Canada, it is a rule of judicial deference. Courts will defer to the decision making
of a board making a business decision provided it acts on a reasonable and informed
record. The policy underlying the rule is clear: courts want to avoid the bias of
hindsight in assessing business decisions. Most business decisions, by their very
nature, require the directors to take risks in order to advance the business of the
corporation. Inevitably, some of those risks will work against the corporation and
result in poor outcomes. Directors are not ordinarily judged by the results of their
decisions if they are within a “range of reasonableness”.
Over the past 12 years, Canadian courts have repeatedly emphasized a standard of
“reasonableness” and the avoidance of “hindsight” in applying the business judgment
rule. For example, in Peoples Department Stores Inc. (Trustee of) v. Wise1
(“Peoples”), adopting the language of the rule from Maple Leaf Foods Inc. v.
1
[2004] 3 S.C.R. 461.
Every effort has been made to ensure the accuracy of this publication, but the comments are necessarily of a general nature, are for information purposes only and do not
constitute legal advice in any matter whatsoever. Clients are urged to seek specific advice on matters of concern and not rely solely on the text of this publication.
Schneider Corp.2 (“Maple Leaf”), which had been decided in 1998, the Supreme Court
of Canada, said the following:
“The court looks to see that directors made a reasonable
decision. Provided the decision is taken within a range of
reasonableness, the court ought not to substitute its
opinion for that of the board even though subsequent
events have cast doubt on the board’s determination.”3
Maple Leaf was also the source of this statement from the Supreme Court of Canada
in the more recent decision in BCE Inc. v. 1976 Debentureholders4 (“BCE”):
“There is no such thing as a perfect arrangement. What is
required is a reasonable decision in light of the specific
circumstances of each case, not a perfect decision”5
With respect to hindsight, the Supreme Court, again in the Peoples case, said the
following:
“Courts are ill suited and should be reluctant to second
guess the application of business expertise to the decisions
that are involved in corporate decision making, but they
are capable, on the facts of any case, of determining
whether an appropriate degree of prudence and diligence
was brought to bear in reaching what is claimed to be a
reasonable business decision at the time it was made.”6
The key to engaging the protection of the business judgment rule is to ensure that the
board adopts a process that ensures it is acting on an informed record. In practice,
this usually means engaging selected management and professional advisors to ensure
that the options available to a board in any particular case are appropriately
investigated and presented. Canadian cases have tended to focus on the process
which led to the decision making and less on the actual decision. Provided the board
makes a decision that falls within the so-called “range of reasonableness”, the actual
results of the decision, whether good or ill, will not affect the court’s analysis.
2
(1998), 42 O.R. (3d) 177.
3
Peoples, supra note 1, at para. 65.
4
[2008] S.C.R. 560.
5
Ibid. at para. 155.
6
Peoples, supra note 1 at para. 67.
In Canada, challenges to directors’ decisions are typically brought by shareholders
alleging “oppression”. Breach of fiduciary duty claims are usually joined with
allegations that the directors have defeated the so-called “reasonable expectations”
of the shareholders. The onus is on the plaintiff shareholder to prove the oppressive
result and to prove any breach of the duty of loyalty or duty of care.
In the U.S., the business judgment rule is usually described as a presumption. The
court presumes that in making business decisions, directors acted in good faith, on an
informed basis and with an honest belief that their decision was in the best interest of
the corporation. To advance a claim of breach of fiduciary duty the plaintiff will bear
the onus of displacing that presumption before the court will examine the decision.
The classic formulation of the court’s approach comes from Paramount
Communications v. QVC Network.7
“[The Court] will not invalidate the decision, will not
examine its reasonableness, and will not substitute [its]
views for those of the board, if the latter’s decision can be
attributed to any rational business purpose.”8
However, if the plaintiff does rebut this presumption, the onus will shift to the
directors to prove that their decision was made in good faith on an informed record
and was, in fact, in the best interests of the corporation. American courts explicitly
recognize the virtues of risk taking in business. They therefore do not want to
promulgate judicial rules that will discourage corporations from engaging in risk
taking.
Typically, breach of fiduciary duty cases are brought as derivative actions in the U.S.
Since there is no U.S. equivalent to the oppression remedy, they are not usually
brought directly by shareholders as they would be in Canada.
U.S. courts do restrict the application of the business judgment rule in circumstances
where there may be a change of control. The theory underlying this approach is that
boards need to be more vigilant and engaged in any process where the corporation
could change hands. There is also a perception that management and, in some
circumstances, the directors will be more likely exposed to conflicts of interest in
change of control situations. Accordingly, in those circumstances U.S. courts have
left themselves room to be more actively engaged in reviewing the decision making of
7
(1994) 637 A. 2d 34 (Del. Sup. Ct.)
8
Ibid. at fn 17.
boards. This is where the U.S. version of the business judgment rule most diverges
from the Canadian version of the same rule.
In the U.S., there are three situations which commonly cause the presumption in
favour of a board’s decision making to fall away. The first is when a hostile bid is
made for a company and the target board adopts defensive measures to rebuff the
bidder.9 In that case, the decision making of the board is subject to enhanced
scrutiny by the courts. In the Delaware Chancery Court, where the enhanced scrutiny
rule was first developed, this can lead to a very robust and searching examination of
the board’s decision making. Effectively, the onus shifts to the directors to satisfy
the court that the defensive measures were taken in good faith, after a reasonable
investigation, and were necessary to protect the interests of the target corporation.
The defensive measures must be reasonable in light of the perceived threat. Only
when the Court is satisfied that these criteria have been met will it revert to the
presumption of the business judgement rule.
The second situation where the presumption falls away is when it becomes inevitable
that a target corporation will be subject to a change of control transaction10. U.S.
courts will examine the reasonableness of the process and the result.
The third situation is when a board is comprised of directors affected by an identified
conflict of interest. The classic example is a management buyout of the corporation.
In those cases, the court will examine the “entire “fairness” of the transaction. This
analysis involves an assessment of the process the board followed, the quality of the
result and the quality of the disclosure made to the shareholders. The onus is on the
directors to prove the entire fairness of the transaction, and until that onus is
discharged, the business judgment rule is not engaged.
There is really no equivalent to these exceptions to the business judgment rule in
Canada. In fact, the court of Appeal stated explicitly, in affirming the trial decision
in Maple Leaf, that Revlon was not the law of Ontario. So, in Canada, change of
control transactions have been assessed with the business judgment rule in place
throughout the court’s analysis. This was apparent in the Supreme Court of Canada’s
recent decision in BCE. When the court considered the evidence that the BCE board
faced three change of control proposals, all of them involving the addition of
substantial debt, a classic Revlon situation, it immediately affirmed the application of
the business judgment rule:
9
Unocal Corp. v. Mesa Petroleum Co., (1985) 493 A. 2d 946 (Del. Sup. Ct.)
10
Revlon Inc. v. Mac Andrew & Forbes Holdings Inc., (1986) 506 A.2d 173 (Del. Sup. Ct.) [“Revon”]
“Under the business judgment rule, deference should be
accorded to business decisions of directors taken in good
faith and in the performance of the functions they were
elected to perform by the shareholders.”11
In Canada, the duty of loyalty and the duty of care are owed to the corporation. It is
not a duty that is directly owed to shareholders. To be sure, the corporation includes
its shareholders and directors are always cognizant of the importance of their
interests. But corporations also have other stakeholders, like bondholders and other
creditors. The interests of these constituent groups often conflict, as they did in BCE.
So simply reciting that the directors owe their duties to the corporation does not
provide directors with much useful guidance in how to reconcile these competing
interests fairly.
For this reason, some commentators have suggested that the Canadian approach in
Peoples and in BCE has left the law a bit unclear in this country. In the U.S., the
Revlon standard would make it clear to directors that when a change of control
transaction becomes inevitable that their primary duty is to maximize value for the
shareholders. No such clear rule has been enunciated by the courts in this country.
In fact, the best the Supreme Court of Canada could do was to say that there is no
rule and it is always a fact specific decision:
“There is no principle that one set of interests-for example
the interests of shareholders-should prevail over another
set of interests. Everything depends on the particular
situation faced by the directors and whether, having regard
to that situation, they exercised business judgment in a
responsible way.”12
However, I dissent from the view that this open ended approach by the Supreme
Court of Canada has somehow exposed directors to an increased likelihood of liability
from disgruntled stakeholders. In my view, the trend is clearly in the opposite
direction. Canadian Courts have given wide ambit to the business judgment rule. I
believe their reluctance to state specific rules about how competing interests should
be assessed by directors is a deliberate policy decision designed to increase, and not
shrink, the ambit of the business judgment rule. Without clear direction from the
courts, the directors are free, provided they are reasonably informed and properly
11
BCE. supra note 4 at paras. 99 and 100.
12
BCE, supra note 4 at para. 84.
advised, to resolve these conflicts by their own lights. Any decision that shows a fair
consideration of these competing interests is likely to be protected under the business
judgment rule.
This is not to say that the Canadian courts have foreclosed the possibility of a more
robust examination of the decisions directors make. In UPM-Kymmene Corp. v. UPMKymmene Miramichi Inc.13 (“Repap”), Justice Lax did overturn a decision involving a
ruinously expensive executive compensation package. In doing so, she assessed not
only the board process leading up to the decision, but the result of the decision itself.
In doing so, she said the following about the business judgement rule:
“However, directors are only protected to the extent that
their actions actually evidence their business judgment.
The principle of deference presupposes that directors are
scrupulous in their deliberations and demonstrate diligence
in arriving at their decisions. Courts are entitled to
consider the content of their decision and the extent of the
information on which it was based and to measure this
against the facts as they existed at the time the impugned
decision was made. Although board decisions are not
subject to microscopic examination with the perfect vision
of hindsight, they are subject to examination.”14
Justice Lax’s decision in Repap, and this quotation in particular, has been consistently
affirmed by the Ontario Court of Appeal and the Supreme Court of Canada, most
recently in BCE. So there is still ample opportunity for courts to engage in more
vigorous examinations of the decisions of directors when it suits them, despite the
wide ambit of the business judgment rule.
No note on directors’ liability is complete without a comment on the entitlement of
directors to be indemnified by the corporation. Here too, the Canadian law is pretty
forgiving to directors. As a general proposition, directors are entitled to be
indemnified for reasonable good faith behaviour. The same policy objective behind
the business judgment rule is behind this principle of indemnification. It allows
corporations to attract qualified directors who know they will not later be judged by
hindsight or to a standard of perfection.
13
214 D.L.R. (4th) 496
14
Ibid. at para. 156.
It is easiest to discuss indemnification by looking at what conduct disqualifies a
director from being indemnified. Clearly, fraud and other conduct that is mala fides
disqualifies a director from being indemnified. Decisions made in bad faith are also
caught. But the concept of bad faith requires the party alleging bad faith to meet a
very high onus. This usually means proving conduct so inexplicable that it bespeaks
an absence of good faith. Such circumstances will be rare.
In assessing whether indemnification is appropriate, the conduct in question must be
measured objectively. An erroneous course of conduct cannot be supported by the
subjective belief of the director if viewed objectively the conduct would have been
obviously inappropriate.
But directors can make errors, even serious errors that breach mandatory
requirements of corporate statutes, like the disclosure requirements under the
Securities Act and still qualify for indemnification.15 This is so because it is not
always clear what is the right decision in any given set of circumstances. So a
director can, in good faith, fail to take account of relevant information available to
him or her and breach the law as a result and still qualify for indemnification. In
part, this occurs because, once a director seeks indemnification, the onus is on the
corporation to prove that the director lacked reasonable grounds for his or her
mistaken belief. Where the director has acted in apparent reliance on legal, financial
or other professional advice, this is an extremely difficult onus for the corporation to
meet.
15
Bennett v. Bennett Environmental Inc., (2009) 94 O.R. (3d) 481
Key Elements of a Written Director and
Officer Indemnification
Jonathan Grant and Leila Rafi
!
right to indemnification, subject to compliance with statutory standards of
care
!
right to costs advances pending resolution of the proceeding; obligation to
repay advances where fail to meet standards of care
!
restrictions on right to indemnification and costs advances
!
procedures for the conduct of a proceeding: notification; defence counsel;
settlement
!
obligation to maintain director and officer liability insurance
!
other matters: right of the director and officer to “first look” independent
legal advice; income tax gross up on indemnity payments; independent legal
advice; subrogation in favour of the Corporation; duration of the agreement
Every effort has been made to ensure the accuracy of this publication, but the comments are necessarily of a general nature, are for information purposes only and do not
constitute legal advice in any matter whatsoever. Clients are urged to seek specific advice on matters of concern and not rely solely on the text of this publication.
D & O Insurance Coverage
Bill Scott
1.
D&O Insurance Coverage Supplementary to a Contractual Indemnity
2.
Role of a broker
3.
“Claims made” not “occurrence based”
4.
Side A – direct coverage for directors/officers
5.
Side B – reimburses company for indemnity payments
6.
Side C – coverage of company for security claims/employment practices
liability
7.
Exclusions
!
!
!
Personal Conduct Exclusions
Insured v. Insured Exclusion (major shareholder exclusion)
Pension Liabilities
8.
Rescission
9.
Potential conflict between D&O and Company
10.
Side A DIC excess coverage
11.
D&O Leaves Company
Change in Control of Company
Insolvency of Company
!
!
Availability of contractual indemnity
Run-off
Every effort has been made to ensure the accuracy of this publication, but the comments are necessarily of a general nature, are for information purposes only and do not
constitute legal advice in any matter whatsoever. Clients are urged to seek specific advice on matters of concern and not rely solely on the text of this publication.
D & O Trusts
Jamey Gage
Purpose:
D&O Trusts are created by setting money aside, in trust, with a trustee to provide
funding for potential D&O liabilities and/or costs associated with maintaining D&O
insurance or defense of claims
Each D&O Trust is tailored to address the specific concerns or needs of the situation
Examples:
Requirements:
Issues to
Consider:
!
AT&T Canada - $13.5 million trust held by Stanley Beck, as trustee, for defense
and payment of claims against D&Os to the extent D&O insurance did not do so,
and to fund D&O insurance premiums
!
Stelco - $10 million trust held by a retired lawyer, as trustee, for defense and
payment of claims against D&Os to the extent D&O insurance did not do so, and
to fund D&O insurance premiums
!
Laidlaw - $10 million trust held by Ernst & Young Inc., as trustee, for broad
range of potential liability
!
Other examples include Air Canada and Eatons
To be effective in insolvency proceedings of debtor company, must meet
requirements of a “true trust”:
!
certainty of intention – intention to create a trust
!
certainty of subject matter – identification of trust property
!
certainty of object – persons intended to be beneficiaries and manner that trust
property is to be applied
!
available liquidity of company to fund a trust
!
Any discretion given to trustee regarding use of funds?
!
Mechanism to terminate trust, if any, prior to a specified termination date
!
Reputational issues – directors are approving a trust for their benefit
!
Preference and fraudulent conveyance challenges
Every effort has been made to ensure the accuracy of this publication, but the comments are necessarily of a general nature, are for information purposes only and do not
constitute legal advice in any matter whatsoever. Clients are urged to seek specific advice on matters of concern and not rely solely on the text of this publication.
The Role of a Board Member on a Private 100% Held
Subsidiary Board
David Tennant
Directors’ Role in a Subsidiary Corporation
What the courts have said
• “A director nominated by a particular shareholder of the
corporation is not in any sense relieved of his or her fiduciary
duties to the corporation. A nominee director is not accorded an
attenuated standard of loyalty to the corporation.”
! PWA Corp. v. Gemini Group Automatic Distribution Systems
Inc. (1993), Callaghan
• “It well may be that the corporate life of a nominee director who
votes against he interest of his appointing shareholder will be
neither happy nor long”
! 820099 Ontario Inc. v. Harold Ballard Ltd., (1993) Farley
1
Directors’ Role in a Subsidiary Corporation
Rationale
Outside Directors
! to provided expertise
! to provided local contacts
Employee Directors
! to satisfy residency requirements
! to provide a sense of self-determination
It is critical to understand what the parent company expects
from the subsidiary board and what latitude the parent will
give it.
Directors’ Role in a Subsidiary Corporation
Legal Standards
Common Law
Fiduciary Duty
! act honestly and in good faith with a view to the best
interests of the corporation
Duty of Care
! exercise the care, diligence and skill that a reasonably
prudent person would exercise in comparable circumstances
Duties are owed to corporation. Where there is only one
shareholder, if unbiased, informed consideration is given to
the interests of other constituents, any determination that an
action is in the best interests of the shareholder will generally
not subject the director to liability under the oppression
remedy
2
Directors’ Role in a Subsidiary Corporation
Liabilities
Statutory
!
!
!
!
!
!
Oppression remedy
Payment of dividends
Withholding taxes
Liabilities relating to the environment
Liabilities relating to employees
Other
In most cases a due diligence defence is available, but only if the
director acts without a conflict and is informed
Directors’ Role in a Subsidiary Corporation
Competing interests
Issues for Directors on wholly-owned subsidiary boards
!
!
!
!
!
!
decisions that may hurt internal career advancement
ability to exercise judgment without undue direction from parent
dealing with fellow board members who see their role as facilitating
the parent’s wishes in all cases
lack of information
unequal access to information
disconnect between parent and subsidiary re board role
In some situations, the direction given by the parent company is
inconsistent with the best interests of creditors, or will expose
directors of the subsidiary to liability under various statutes,
particularly in the context of taxing and labour and employment
statutes
3
Directors’ Role in a Subsidiary Corporation
Business Judgement Rule
! “The court looks to see that the directors made a reasonable decision
not a perfect decision. Provided the decision taken is within a range
of reasonableness, the court ought not to substitute its opinion for
that of the board even though subsequent events may have cast
doubt on the board’s determination. As long as the directors have
selected one of several reasonable alternatives, deference is
accorded to the board’s decision”.
! Any director who allows his or her discretion to be fettered or
compromised by the appointing shareholder would not be accorded
the protection of the Business Judgment Rule
Directors’ Role in a Subsidiary Corporation
The financially solvent subsidiary
Making sure the board is informed
! Management reports to board – see separate attachment
! Access to parent
Decision making process
! Support of subsidiary board role at parent board and within
management
! Recognition of personal liabilities of board members and
protection of same
! Formality of meetings and proper information
! Board charter and establishment of committees
4
Directors’ Role in a Subsidiary Corporation
The financially insolvent subsidiary
! Making sure the board is informed about its liabilities
! Retention of outside independent counsel
! making sure the parent understands the position of employee
directors
! formality of process
! the position of the outside director
! D&O insurance
! D&O Trust
! Process re board decisions
Directors’ Role in a Subsidiary Corporation
Use of a shareholder declaration
! a declaration by the sole shareholder may restrict, in whole or
in part, the powers of the directors to manage and supervise
! to the extent the rights are restricted, the shareholder has all
those rights and liabilities, “whether they arise under the
[CBCA] or otherwise” and the directors are relieved of such
rights powers duties and liabilities
! in some cases, an unanimous shareholder resolution can help
! tax withholding
! oppression remedies
5
Management Reports to the Board of Directors
A.
Purpose and Scope of this Memorandum
Almost all statutes imposing liability on directors of Canadian corporations give
directors a due diligence defence, consistent with the duty of care that each
director must bring to that position.
In addition, the business judgement rule adopted by the courts in reviewing board
conduct generally means that a plaintiff will not be successful if:
1.
the decision was made by disinterested and independent directors,
2.
there is no evidence of bad faith, and
3.
the board’s decision making process supports a conclusion that the decision
was made on an informed basis.
The purpose of this memorandum is to provide some suggestions as to what risks
exist and how a board can ensure that it is properly informed with respect to the
risks facing the corporation. .
As it is management that is best positioned to identify risks, there needs to be
some mechanism for making sure that that the board has established a formalized
process that requires management to identify risk and bring those risks to the
board.
We have developed guidelines for management reports to the Board regarding
each of the following topics:
4.
Human Resources
5.
Environment, Health and Safety
6.
Pensions
7.
Taxation
8.
Financial Statements and Related Matters
Each of the attachments to this memorandum is intended to serve as a guideline
regarding the key elements that should be included in quarterly reports to the
Board. Additional issues will need to be addressed as they arise, and will vary
with the circumstances.
The management reports will assist the directors in two ways:
McCarthy Tétrault
1.
They will facilitate in the directors discharging their duties, particularly in
respect of making decisions on a reasonably informed basis, but are not
intended to fully satisfy such obligations; and
2.
They should help directors identify risk in the organization so as to make
the company stronger by appropriately dealing with such risk.
Directors and officers insurance is very likely in place or otherwise available to
protect directors with respect to many of the potential liabilities discussed in this
memorandum. However, each of ABC’s insurance policies should be reviewed to
see if the insurance that is currently in place will be sufficient to cover these
potential liabilities. Often this insurance is written for the entire company, and
the limits can be reached in one jurisdiction in which the company operates
leaving little if any insurance available for directors and officers in other
jurisdictions in which the company operates.
There are many statutory duties affecting directors and officers.
In this
memorandum, we will summarize the main obligation, which is the common law
duty of care owed by the directors to the corporation.
B.
Summary of Duties and Obligations of Directors
The common law imposes duties on corporate directors as described below. There
are a number of statutes that also impose liability on directors. Some of these are
referred to in the attached slide deck presentation, and we would be pleased to
provide you with detail about any of them. This summary deals with the common
law duties of directors.
Fiduciary Duty
The common law and corporate statutes impose duties on corporate directors.
One of these is a fiduciary duty of directors not to place themselves in a position
in which their duty to act in the best interests of the corporation conflicts with
their personal interests. Directors of a corporation must act honestly and in good
faith with a view to the best interests of the corporation when exercising their
powers and discharging their duties.
As a practical matter, this means that the directors must make decisions that are
in the best interests of the corporation, without other influences. This can be
difficult in situations involving subsidiaries and parent companies, but the role of
the directors of ABC is to do what is in the best interests of that company.
Duty of Care
McCarthy Tétrault
The reason we are providing you with this memorandum is that directors also have
a duty of care. The standard for the care, diligence and skill required of
corporate directors is derived from the common law which requires directors to
exercise the care, diligence and skill that a reasonably prudent person would
exercise in comparable circumstances. Directors are thus required to use their
training, ability, experience and education in the same way a reasonably prudent
person would in a similar situation.
The Supreme Court of Canada decision in Peoples Department Stores Inc. v. Wise
affirms that the duty of directors to act in the best interests of the corporation
should be read as meaning something more than acting in the best interests of the
shareholders. This was reaffirmed by the same court in the recent BCE decision1.
However, the court does not demand perfection from directors in discharging their
duty of care but rather expects a suitable level of prudence and diligence to be
used by the board in making its business decisions.
The legal principle is that in determining whether or not directors are acting with
a view to the best interests of the “corporation”, it is legitimate, given all the
circumstances, for the board of directors to consider not only the interests of the
shareholders but also, inter alia, the interests of shareholders, employees,
suppliers, creditors, consumers, governments and the community.
The court will apply the business judgement rule and directors will not be in
breach of their duty of care if they are independent, are without conflict, and act
prudently and on a reasonably informed basis.
In managing a corporation in accordance with their best judgment, the key is for
directors to establish a proper basis for the exercise of judgment. Where an
action is brought by a plaintiff challenging a decision of a board, there is a
presumption with respect to the soundness of the decision made by the board
which requires the plaintiff to establish, as a condition to review, that:
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the directors did not act prudently and in an informed way in making
their decision
the directors were not disinterested or independent
the decision appears to have had no rational corporate purpose, or
the decision was made in haste
Generally, a plaintiff will not be successful in establishing grounds for review if:
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the decision was made by disinterested and independent directors
there is evidence of good faith, and
the decision making process supports a conclusion that the decision
was made on an informed basis
BCE Inc. v. 1976 Debentureholders, 2008 SCC 69
McCarthy Tétrault
Communication with management, including coverage of the topics addressed in
the attachments to this memorandum, will assist the Board in making decisions on
an informed basis.
C.
Management Reports to the Board of Directors
Attached to this memorandum are five lists of topics that you have suggested
should be included in the quarterly reports of the applicable members of
management of ABC to the Board regarding matters related to human resources,
pension plans, environment, health and safety, taxation and financial statements
and related matters.
In each of the attachments, we have suggested key areas to be included in such
reports. The list of topics is not meant to be exhaustive, and should be refined
through discussion with you and between you and those responsible for such areas.
Any significant issues not mentioned therein that arise over a quarterly period
should be brought to the attention of the Board. In each case, unless otherwise
mentioned in the attachments, information should be provided to the extent it has
arisen or changed since the last quarterly report.
HUMAN RESOURCES
Organizational Structure, Retention and Succession Planning
1.
Does the corporate organizational structure continue to meet ABC’s
business and operational needs?
2.
Describe ABC’s succession plan with respect to its executive officers. Are
there any key positions for which a succession plan is not in place?
3.
Have there been any changes to ABC’s succession plan since the last report?
4.
Are there any pending or planned departures of key employees? Is ABC at
risk of losing any of its executive officers or other key employees?
5.
Are any changes required to current compensation and benefits programs to
continue to attract and retain a strong and effective management team and
employee base?
Employment Contracts and Compensation
6.
Describe any special employment contracts, including offers of
employment, retirement allowance agreements and any agreements to take
effect in the context of termination or change of control.
7.
Describe any new change of control or severance arrangements pertaining
to executive officers and any potential issues arising from termination or
severance payments.
8.
Have background checks been conducted on all new employees and people
promoted to new positions, particularly those with responsibility over
financial reporting or who are involved in the preparation of financial
statements?
9.
Describe any changes to long term incentive plans, stock option plans or any
other compensation programs in which ABC’s employees participate.
10.
Have any issues arisen with respect to the tax, dilutive, accounting and
cash-flow implications of any long term incentives?
11.
Have there been any significant changes to any benefits programs
applicable to ABC’s employees?
12.
Is there a clear link between pay and performance? Are performance
measures and standards appropriate? Are performance targets clear and
measureable?
13.
What systems are in place to capture, summarize and report on
performance measures specified in compensation arrangements? What
controls are in place with respect to measuring and reporting on
performance?
14.
How do current compensation plans compare to ABC’s competitors?
15.
Describe the process in place to monitor all payments to and other benefits
received by executive officers. Have there been any irregularities in
expenses or other benefits provided to ABC’s executive officers?
Workplace Policies
16.
Have there been any violations of ABC’s code of conduct, sexual harassment
policy, occupational health and safety policy or other work place policies?
Are there any incidents you are aware of that may lead to a violation?
17.
Have there been any changes or proposed changes to any of ABC’s code of
conduct, sexual harassment policy, occupational health and safety policy or
other work place policies?
18.
Have there been any complaints to the ethics officer or person in a similar
role?
19.
Have there been any changes or proposed changes to ABC’s occupational
health and safety policies, standards, accountabilities and programs?
20.
Describe ABC’s emergency response planning and procedures. Are sufficient
measures in place to respond to a crisis or emergency? Have any changes
been made or proposed in light of events arising since the last report?
WSIB, Employer Health Tax and Other Employee Payments
21.
Confirm that ABC has made all required payments related to the WSIA, the
EHTA and similar legislation to which ABC is subject.
22.
Confirm that ABC has made all required payments related to vacation pay,
severance or termination pay.
General
23.
Have any material issues arisen over the past three months related to any
Human Resources matters of which the Board should be aware, that are not
otherwise described above?
PENSION PLANS
Retirement Philosophy and Retirement Design
1.
Confirm that the pension plans applicable to ABC’s employees (collectively,
the “Pension Plans”) and all individual retirement arrangements remain
consistent with ABC’s retirement philosophy and retirement design?
2.
Has there been any proposal to terminate any Pension Plans, convert any
Pension Plans from defined benefit to defined contribution arrangements,
merge Pension Plans or change any underlying funding arrangements?
Investments
3.
Review the performance of the pension plan investment manager over the
past three months.
4.
Describe any recommended changes with respect to the statements of
investment policies and procedures in respect of the Pension Plans.
5.
Are any changes required to the investment philosophies, policies, asset
mixes and strategies?
6.
Describe the performance of the assets held under ABC’s registered Pension
Plans (the “Funds”) during the past three months and compared to the same
period the previous year.
7.
Are the Funds in compliance with all applicable regulatory restrictions
under the Pension Benefits Act (Ontario) (the “PBA”) and the ITA?
8.
Are the Funds in compliance with the statements of investment policies and
procedures?
9.
Describe the adequacy of internal reporting, authorization, monitoring,
accuracy, completeness and compliance controls and procedures related to
pension and investment matters.
Funding, Expensing and Custody
10.
Describe any amendments to the contracts appointing the actuary and
funding agents for the Pension Plans and any concerns with their
performance.
11.
Confirm that all contributions to the Pension Plans have been remitted in
accordance with the PBA, if applicable, are within the ITA contribution
limits and are in accordance with the terms of the funding agreements.
12.
Confirm that all required actuarial valuations and certificates have been
filed.
General Administration
13.
Confirm that all required information and returns in respect of the
registered Pension Plans have been filed with the regulatory authorities and
all fees have been paid in compliance with the PBA and the ITA within the
prescribed time period and accompanied by the prescribed supporting
documents.
14.
Confirm that all required information has been provided to Pension Plan
Members in compliance with the PBA and within the prescribed time period.
15.
Have there been any gaps or errors demonstrated in the processes and
procedures established to administer the Pension Plans?
16.
Have any inconsistencies come to your attention with respect to benefit
payment practices and policies and related human resources policies?
17.
Have there been any new developments in applicable laws related to the
Pension Plans?
General
18.
Confirm that the Pension Plans and related Funds are administered in
accordance with the PBA and ITA.
19.
Describe all actions taken since the last report with respect to all known
incidents of non-compliance and the related recommended course of
corrective action.
20.
Describe the controls and processes in place with respect to the
administration of all Pension Plans and supplementary Pension Plans.
ENVIRONMENT, HEALTH AND SAFETY
Permits, Approvals and Regulatory Matters
1.
Confirm the status of all permits and permit applications. Does ABC hold all
of the permits required to carry on its operations in material compliance
with all applicable environmental and health and safety laws?
2.
Describe ABC’s compliance with all applicable permits, approvals and
regulatory requirements. Have there been any instances of non-compliance
in the past three months? What actions have been taken to resolve any such
issues and to prevent them from occurring in the future?
3.
Has ABC received any notices of non-compliance from any government
agency?
4.
Describe ABC’s compliance with its environmental, health, safety and
security policies. Has there been any non-compliance with policies in the
past three months?
5.
Have there been any material incidents that require reporting to the
appropriate regulatory authorities? Was all required reporting completed?
What remedial action has been taken with respect to such incidents?
6.
With respect to any incidents described in the foregoing items, were
environmental management procedures effective in resolving such
incidents? Should any changes be made to ABC’s environmental
management procedures as a result of the successful or unsuccessful
resolutions of such incidents?
7.
Have any new regulatory requirements related to health, safety or the
environment been put in place or introduced that affect ABC’s operations?
Climate Change and Environmental Risk
8.
Has management developed scenarios of potential impact that climate
change may have on ABC’s business, industry and strategic planning?
9.
Has ABC taken any steps to mitigate its carbon exposure? Does it have an
inventory of its direct and indirect emissions of all regulated greenhouse gas
emissions?
10.
Describe any risks presented by climate change, including strategic risk,
regulatory and legal liability, infrastructure, price/market risks, risks to
products, technological risks, credit rating risks and reputational risks; and
the risk management strategy with respect thereto.
Legal Matters, Actions and Proceedings
11.
Have any new civil or criminal proceedings or other actions been taken by
or against ABC related to environmental, health, safety or security matters
since the last report? Describe the status of such actions, as well as any
changes to the status of any actions described in previous reports. Have
any such actions been threatened against ABC?
12.
Have any new legislation or regulations been passed related to
environmental, health, safety or security matters? What are the
implications for ABC and its operations?
General
13.
Does ABC have sufficient insurance in place to cover potential
environmental, health and safety incidents?
14.
Have there been any incidents not otherwise described above giving rise to
environmental, health and safety risks?
TAXATION
1.
Is ABC in compliance with all tax laws, regulations and filing requirements
and up to date with all of its financial reporting requirements?
2.
Has ABC filed all tax returns, elections, designations and other filings
required to be filed by it within the prescribed filing deadline?
3.
Has ABC made all required withholdings and deductions from its payroll and
remitted the full amount of any taxes withheld?
4.
Is there any reason ABC may be late in filing any tax returns or mailing or
otherwise delivering any other filings or any tax payments?
5.
Are you aware of threatened or potential assessment or other proceedings,
negotiations or investigations in respect of taxes against ABC?
6.
Is ABC party to any agreement, waiver or arrangement with any taxation
authority that relates to any extension of time with respect to the filing of
any tax return, any payment of taxes or any assessment?
7.
Has ABC acquired property from any person in circumstances in which it did
or could become liable for any taxes of such person? Has ABC entered into
any agreement with, or provided any undertaking to, any person pursuant to
which it has assumed liability for the payment of income taxes owing by
such person?
8.
Describe any transaction entered into in the last three months between ABC
and any person with whom ABC was not dealing at arm’s length. Was the
consideration paid in each case equal to the fair market value with respect
to the subject matter?
9.
Is ABC in compliance with all registration, reporting, payment, collection
and remittance requirements in respect of GST and provincial sales tax or
harmonized tax legislation?
10.
Has ABC provided for adequate tax reserves?
11.
Are you aware of any concerns with inter-company payments or risks
related to transfer pricing?
12.
Have there been any changes in the conservatism or aggressiveness of ABC’s
approach to taxation matters?
13.
Have any material issues arisen over the past three months related to any
tax matter not otherwise described above?
FINANCIAL STATEMENTS AND RELATED MATTERS
Financial Statements and Business Plan
1.
Have there been any issues with respect to the quality or integrity of the
financial statements?
2.
Are there any operational risks that are likely to manifest themselves in the
financial statements?
3.
Is ABC at risk of failing to meet any of its loan covenants? What are the
consequences of any such failure?
4.
Are resources being allocated in accordance with ABC’s strategic plan?
5.
Describe the business continuity plan for financial resources, records, systems
and activities. Have there been any changes to or exceptions from such plan?
Accounting Standards [if ABC is a public company in Canada]
6.
What are the major differences between IFRS and Canadian GAAP for ABC’s
organization? What will be the likely impact on our financial statements,
including disclosures?
7.
How will ABC’s financial reporting systems be able to capture the data required
by IFRS?
8.
What is the estimated directional impact on profit and equity if ABC’s financial
statements were presented under IFRS? What other impacts might the
transition to IFRS have?
! earnings per share?
! dividend policy?
! financing arrangements / covenants?
! performance management?
! employee compensation and incentive plans?
! statutory and regulatory reporting?
Every effort has been made to ensure the accuracy of this publication, but the comments are necessarily of a general nature, are for information purposes only and do not
constitute legal advice in any matter whatsoever. Clients are urged to seek specific advice on matters of concern and not rely solely on the text of this publication.
! communications to analysts and stakeholders?
9.
Does ABC have adequate resources to manage the transition efficiently?
10.
What is the impact on new and existing internal controls over financial
reporting for certification purposes?
11.
What are the training needs of ABC’s finance and other personnel?
Accounting Policies
12.
Have there been any changes to ABC’s accounting policies or investment
strategy?
13.
Confirm that the accounting policies, key estimates and judgements used in
preparing the financial statements remain relevant and appropriate for the
business of ABC.
14.
How do the key accounting policies used affect the presentation of the results
of ABC’s operations?
15.
Review the accounting processes used in the preparation of the financial
statements and the effect thereof on the reported results of key reserves and
estimates, unusual items, any new accounting policies or pronouncements, any
restatements of prior financial statements and any changes in the conservatism
or aggressiveness of accounting policies.
16.
Confirm that the key assumptions and estimates used in preparing ABC’s
strategy remain relevant and appropriate.
Risk Management
17.
Have there been any departures from ABC’s risk management policy?
18.
Are there any operational risks likely to manifest themselves in the financial
statements?
19.
Are there any other significant financial risks affecting ABC?
20.
Do the current guidelines and policies used to assess and manage risk remain
adequate for ABC’s needs and operations?
21.
What are the key features of business strategy and risk management proposed
for the next year or longer? Have there been any changes since the last report?
22.
Describe any new opportunities or risks related to commodity prices, foreign
exchange, interest rates, legislation, regulations, accounting requirements,
competitive landscape, technology and general economic conditions.
Internal Controls
23.
Describe any significant weaknesses or material deficiencies in ABC’s internal
controls that have come to light during the past three months.
24.
Do ABC’s internal controls provide reasonable assurance regarding the
effectiveness and efficiency of its operations, the reliability of financial
reporting, compliance with applicable laws and regulations and preparation of
the financial statements in accordance with generally accepted accounting
principles?
25.
Describe compliance with ABC’s antifraud programs and controls? Have there
been any exceptions to or non-compliance with such programs and controls?
Legal and Regulatory Matters
26.
Are ABC and its subsidiaries in compliance with all applicable legal and
regulatory requirements?
27.
Have there been any significant legal, compliance or regulatory matters that
may have a material effect on the financial statements or ABC’s business?
28.
Have there been any external factors, such as interest rates, currency
exchange rates or commodity prices that have had or can reasonably be
expected to have a significant effect on the business?
29.
Confirm that ABC’s insurance coverage remains adequate and appropriate in
light of its operations.