Moreover, directors are not expected to be experts in every field. For this reason, Canadian law provides for a “reasonable diligence defence” against allegations of a breach of directors’ duties. A director can avail herself or himself of the defence if she or he made a decision based on reasonable and good faith reliance on the financial statements or reports of the corporation, a report or advice of an officer or employee of the corporation, or a report of a professional such as a lawyer, accountant or appraiser, subject to certain caveats. These protections, however, will not typically be afforded to directors in a position of conflict. There are several situations in which a director may be personally interested in a decision to be made, which may in turn lead the director (even inadvertently) to breach her or his fiduciary duty. In cases of an actual or potential conflict of interest, the director may be statutorily required to disclose her or his interest and/or to abstain from discussions or voting on the matter. In addition, an issuer’s board mandate, governance guidelines and/or code of business conduct and ethics, as well as specific conflict of interest policies, may impose additional procedures and protections to manage actual or perceived conflicts of interest. In cases where disclosure and/or abstention is not enough to allow the director and the board as a whole to fulfill their required duties, a special committee may provide the necessary procedural safeguards. When to Strike a Special Committee: Five Scenarios Consider the following scenarios: – The chair of the board of an issuer has received an unsolicited bid from a 15% shareholder for all of the outstanding shares of the company at a 35% premium over market value and has called a board meeting to consider the offer and formulate a response.
– Significant institutional investors of an issuer have repeatedly expressed concerns to the CEO and the board chair about the lacklustre performance of the issuer’s market price relative to what they believe to be the intrinsic value; the last three board meetings have included lengthy discussions with the CEO about strategic alternatives. – The chair of the audit committee of an issuer has received a well-documented whistleblower complaint alleging bribery of foreign government officials at the company’s foreign operations. The whistleblower has also intimated that he will likely raise the complaint directly with the RCMP. – The board of an issuer has received an open letter from a group of investors alleging various governance failures, including a lack of independence between certain board members and management, and demanding the resignation of all of the governance committee’s members, failing which the investors have threatened to launch a proxy contest to replace them. The usual legal defences will not typically be afforded to directors in a position of conflict. There are several situations in which a director may be personally interested in a decision to be made, which may in turn lead the director (even inadvertently) to breach her or his fiduciary duty.
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Governance Insights 2020
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