When a corporation is insolvent and there is not enough capital to satisfy everyone, there is a greater risk that affected parties will feel that their legitimate expectations were not met. Directors should implement the proper infrastructure to allow for ongoing, meaningful engagement with key stakeholder groups and ensure these groups are kept up-to-date on the organization’s strategic direction. The Supreme Court of Canada has said that personal liability is more likely to be imposed on a director whose conduct was carried out in bad faith, a director who took an active role in originating the conduct, and a director who personally benefited from the transaction or behaviour. 53 When the board makes a decision “within a range of reasonable choices,” a court is likely to defer to its business judgment. 54 Derivative actions are especially relevant to publicly traded corporations. Here, shareholders of the corporation can “step into its shoes” and seek redress on its behalf if permitted by a court. The shareholder needs to establish that: (1) something wrong or improper was done to the public issuer, (2) the relief sought would benefit the issuer, and (3) the shareholder has no personal interests that are especially affected by the wrongful conduct. 55 In an insolvency context, this may be relevant if the shareholders have reason to believe that the company’s financial challenges were the result of mismanagement rather than circumstance. Derivative and oppression actions are similar in many ways and can be sought simultaneously, as shown in Ernst & Young v Essar Global Fund Limited . 56 Ernst & Young, the monitor of a corporation under Companies’ Creditors Arrangement Act (CCAA) protection, started an oppression action against Essar Global Fund Limited, claiming that it had been exercising de facto control over the corporation to prioritize its interests. 57 Essar argued that Ernst & Young should have used a derivative action since the claim asserted was a corporate claim belonging to the debtor company. 58 The Court of Appeal rejected this argument by confirming that either an oppression or a derivative action would have been appropriate under these circumstances since Essar’s actions harmed both the corporation and its shareholders. 59
When a corporation is insolvent and there is not enough capital to satisfy everyone, there is a greater risk that affected parties will feel that their legitimate expectations were not met. Directors should implement the proper infrastructure to allow for ongoing, meaningful engagement with key stakeholder groups and ensure these groups are kept up-to-date on the organization’s strategic direction.
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Governance Insights 2020
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