CHAPTER 01 Special Committees: Governance Safeguards for Conflict of Interest Transactions and High-Stakes Situations
Legal Background: A Refresher
The creation of a special committee can help directors
DIRECTORS’ DUTIES The creation of a special committee can help directors discharge their legal duties. In exercising their authority as directors of the corporation, directors have two main legal duties: the fiduciary duty and the duty of care. – Fiduciary duty. This duty requires directors to act honestly and in good faith with a view to the best interests of the corporation. Directors must act in accordance with the trust placed in them by the corporation and its various stakeholders without abusing their positions for undue personal gains. In considering the best interests of the corporation, directors should also consider the interests of relevant stakeholders, including different groups of securityholders, as well as employees and creditors. 1 The best interests of the corporation need not be measured against short-term profits; boards can (and often should) take a long-term view. For more detail on the evolution of directors’ fiduciary duty toward more robust consideration of competing stakeholder interests, including recent amendments to the Canada Business Corporations Act (CBCA), see Davies Governance Insights 2019 . 2 – Duty of care. Directors are expected to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. They must strive to apprise themselves of the matter at hand and analyze and consider it as diligently as any other person would do in a similar situation. Documenting the matters reviewed and information considered, including advice received, is an effective way to evidence that the directors actually exercised their duty of care as required. LEGAL PROTECTIONS FOR DIRECTORS Canadian courts have recognized that directors, as opposed to judges, are best positioned to determine what is in the best interests of the corporation. They have accordingly shown deference to the business judgment of directors so long as their decisions lay within a range of reasonable alternatives. This “business judgment rule” protects directors who have made a reasonable decision from being second-guessed by the courts or being held liable for their decisions. Though the decisions need not be perfect or right, they must be made honestly, prudently, in good faith and on an informed basis.
discharge their legal duties. In exercising their authority as directors of the corporation,
directors have two main legal duties:
the fiduciary duty and the duty of care.
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