In addition to a duty of loyalty and good faith to their corporate stakeholders, all Directors of a company are legally required to act with a duty of care and diligence. Same goes for the Officers of the company.
Torys LLP published a comprehensive guide to the Responsibilities of Directors in Canada. It’s a little dated, but the concepts remain true over time and across jurisdictions. The full guide can be found HERE.
In addition to imposing a duty of loyalty and good faith, Canadian corporate statutes require directors to “exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.”
In practical terms, the directors’ duty of care, diligence and skill requires the following:
- Directors’ decisions must be informed judgments – decisions that take into account all material information reasonably available in the circumstances.
- Directors must take due care to consider the relevant information; this means, for instance, that they must take the necessary time to review key documents or summaries and to deliberate.
- Directors must take an active and direct role in key matters such as decisions concerning diversification, financings and acquisitions, and divestitures. Directors should not be passive in these important matters. Directors who rely on information provided by management or others should ask themselves whether they have reasonable grounds for doing so.
- Having regard to the very important role of the audit committee, directors should satisfy themselves, through the audit committee reports to the board and related discussions, that the committee is discharging its responsibilities effectively.
The Supreme Court of Canada has held that the duty of care is owed not only to the corporation but potentially also to stakeholders directly. These rulings significantly increase directors’ exposure to claims alleging that they have breached their duty of care.
We have been following the ongoing CannTrust Holdings ($TRST; $CTST) saga with great interest primarily because it provides a textbook example of how not to handle a crisis, regulator or turnaround. (You can catch up on the CannTrust events HERE)
For example, should an Independent Director of CannTrust have known about an illegal grow of cannabis in five rooms of the company’s primary asset? According to their Interim CEO, who was an Independent Director at the time of the illegal grow, the answer is No. The Directors relied on false reports from management.
One of the reminders from CannTrust is that all Directors and Officers have to proactively work to understand their business. It is their responsibility in law and it also adds to their value proposition. It is difficult to imagine that the Independent Directors of CannTrust, or the finance/accounting team, ever made the effort to visit or understand the company’s growing facility. If they had, they would have discovered the illegal grow before the whistleblower came forward. Alternatively, they were complicit in the scheme.
- how CannTrust should have conducted the internal investigation
- the meaning of the joint OSC, RCMP, OPP investigation
- corporate governance in an industry that attracts crime