Directors duties: Finally some guidelines from the Supreme Court of Canada
April 2005 – In today’s corporate environment, directors face numerous challenges and pitfalls. Directors must oversee their company’...
September 2008 – Do companies have social responsibility toward their shareholders and other stakeholders? We are seeing headlines in newspapers and magazines such as “L’investissement socialement responsable est devenu une valeur admise” [Socially responsible investment is now expected – our translation]. How do companies and their directors and shareholders react to this heavy burden? Here are some legal aspects that should be kept in mind.
Sound governance is essential for preserving and creating value in a company. This governance generally involves setting up a strong and independent Board of Directors whose members have a high degree of expertise, integrity, diligence, judgement and independence. The main roles of boards are to examine and approve the company’s goals, strategies and operating plans and oversee the work of management in relation to the interests of stakeholders in the company’s activities. The implementation of this management may be different depending on whether the company is a private company or a reporting issuer.
Regulation 58-101 respecting Disclosure of Corporate Governance Practices and Policy Statement 58-201 to Corporate Governance Guidelines are essential tools for setting up and developing sound governance practices by a reporting issuer. However, the evolving nature of governance and the socio-economic interests of shareholders and stakeholders should be kept in mind. For example, there are still too few governance policies relating to business risks involving the environment. However, according to The Carbon Disclosure Project Report 2007, responsibility for managing environmental risks and opportunities, and in particular with respect to climate change, should be mainly up to the Board of Directors. The respect of the rights of other stakeholders by the Board of Directors should therefore be a priority of Boards in their role as leaders and in making decisions with social implications.
In this regard, issuers must now improve disclosure of their potential environmental liabilities in their continuous disclosure documents according to Staff Notice 51-716 on Environmental Reporting issued on February 27, 2008 by the Ontario Securities Commission. Issuers outside the Province of Ontario should be aware of this notice because certain comments are relevant for all issuers. The main items which must be disclosed are:
Note also that some Canadian sectors are more sensitive, including transportation, industrial products, mines, oil and gas and environmental and public services, potentially leading to greater environmental liability for them.
Along the same lines, with growing public concern for the environment, it would not be surprising to see more and more sanctions or penalties relating to non-compliance with environmental laws and regulations. It is therefore essential for directors to ensure their company’s compliance with, among other things, the Environment Quality Act and the Canadian Environmental Protection Act to avoid or minimize their statutory or civil liability. All directors should therefore pay close attention to the company’s environmental compliance even if the company is not involved in a business directly dealing with the environment.
Section 122 of the Canada Business Corporations Act states that, in exercising their powers and discharging their duties, directors must “act honestly and in good faith with a view to the best interests of the corporation”.
The Supreme Court of Canada examined the duties of directors in Peoples in 2004 and held that the duty of directors to act “in the best interests of the corporation” does not simply mean to act “in the best interests of shareholders”. Traditionally, to act in the interests of a corporation was to maximize value for shareholders4 and several decisions of Canadian and American courts reflected this interpretation, although inconsistently. However, directors’ decisions can have an impact on the interests of the various stakeholders in the business of the company: shareholders, other security holders, creditors, clients, governments and the community.
These groups of stakeholders sometimes have divergent and competing interests, the importance of which may vary with each situation. As explained in the BCE inc. decision by the Quebec Court of Appeal on May 21, 2008, this approach to only maximize shareholder value may be erroneous depending on the relevant facts. In Canada, corporate directors have a much broader duty. The power of directors to consider the interests of the other stakeholders when making decisions therefore seems to be clearly recognized.
Along these lines, directors should act in a manner which maximizes the value of the company depending on the particular context, without favouring or giving more weight to the interests of one particular stakeholder (ex.: the shareholders) to the detriment of the others. The BCE inc. decision also held that directors’ efforts to earn the greatest value for shareholders cannot be made in a vacuum without taking other factors into account, such as adequately considering the interests of other stakeholders. It is also understood that, a priori, stakeholders are not all considered equal, and that the advantages given to some stakeholders do not all have to be divided up equally.
The Supreme Court of Canada took the appeal of the BCE case under advisement on June 17, 2008 and authorized the transation on June 20, 2008. One can only hope that the country’s highest court will give a general indication of what discretion and duties directors have in relation to the interests of shareholders in the context of transactions in Canada. The court’s reasoning in the BCE case actually matters far more than the decision itself allowing the transaction.
Shareholder interventions Institutional investors
Certain institutional investors have issued guidelines regarding the voting rights of securities they hold in reporting issuers. Certain principles, including the company’s viability, the consequences for minority shareholders, regional and community development, social responsibility and the environmental repercussions of companies may be taken into account by some institutional investors when making an investment.
The Fonds de solidarité FTQ, a Quebec fund which invests primarily in small and medium-sized businesses (public and private), has issued its own voting guidelines, with particular emphasis on the social responsibility of public companies. Like other investors, they can submit a shareholder proposal to a reporting issuer.
For example, in the winter of 2008, Bâtirente filed four shareholder proposals with reporting issuers in which it holds shares. The purpose of one of the proposals filed is to encourage companies in the air transportation sector to set up procedures to mitigate the environmental risks specific to their activities, including with respect to the reporting of greenhouse gas emissions. Groupe Investissement Responsable also provides financial-related consulting services for investments. It encourages institutional investors to take a more active role in environmental, social and corporate governance issues.
Shareholder proposals In accordance with section 137 of the Canada Business Corporations Act, a shareholder may submit to the corporation notice of any matter that the person proposes to raise at the meeting and discuss that matter at the meeting. A shareholder may write a statement in support of his proposal and require that the corporation attach his proposal and statement to the proxy circular attached to the notice of meeting. A corporation may refuse to distribute the shareholder’s proposal for certain specific reasons. A shareholder wishing to submit a proposal must be a registered holder or beneficial owner of shares and provide his name, address and the exact number of securities held in the corporation.
The reasons for the proposal must not be to enforce a personal claim and it must relate in a significant way to the business or affairs of the corporation. If the proposal is admissible and submitted on time, the fact that it appears in the circular should ensure that it can be validly discussed at the meeting, even if the notice of meeting does not mention it. If the shareholder proposal is approved at the meeting, the corporation is bound by the vote, provided the matter falls under the decision-making powers of the shareholders.
There is an important nuance for private issuers not soliciting proxies. The right of shareholders to submit proposals (other than to amend the articles) does not really exist in companies which do not solicit proxies because the meeting chairman can refuse to consider any matter which does not appear on the meeting notice.
Corporate governance, in its essence, and the position taken by shareholders, not only influences the way in which businesses are managed but the viability of the Canadian economy as well. One can only conclude that the interests of majority shareholders or certain creditors should take precedent over that of other stakeholders of businesses in good financial condition so as to allow for the efficient management of such businesses within a frame that is both clear from a legal standpoint and viable from an economic one. An ethical solution that continues to set Canada apart!
It's best to watch this in landscape mode.