Legislation increases director flexibility, clarifies legal obligations

Originally published in The Lawyer's Daily -

The recently passed Bill C-97 articulates meaningful changes to directors’ duties in Canada. By amending the Canada Business Corporations Act (CBCA), this legislation broadens the class of stakeholders to whom directors must turn their minds when stewarding a corporation. Bill C-97 codifies past judicial treatment of this issue and adds new contours to directors’ legal obligations. Understanding these developments is of vital importance for boards of directors in discharging their legal duties.

Bill C-97 clarifies directors’ duties of loyalty to the corporation, sometimes referred to as their “fiduciary duty.” Specifically, the bill elucidates those factors that directors may consider when acting in the best interests of the corporation, seeking to make legislation more consistent with the Supreme Court of Canada’s decision in BCE Inc. v. 1976 Debenture Holders 2008 SCC 69. The bill has received royal assent and is in force.

Bill C-97 amended the CBCA by setting forth factors that directors may consider when acting in the “best interest of the corporation.” To elaborate, directors may take into account considerations about the environment, government, creditors, the long-term interest of the corporation, among others.

Further, the legislation as drafted suggests that none of these interests automatically prevails over any other. Thus, acting in the best interest of the corporation means more than taking into account the interests of shareholders alone. Directors may consider the interests of other stakeholders (creditors, government, environment, bondholders, etc.). This statutory provision is an explicit legislative rejection of a shareholder primacy approach to corporate governance.

The CBCA currently provides that: “Every director and officer of a corporation in exercising their powers and discharging their duties shall (a) act honestly and in good faith with a view to the best interests of the corporation; and (b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.”

In BCE, the court explained that the duty is not owed to shareholders alone or any other particular stakeholder group in the corporation. Rather, “the directors owe a fiduciary duty to the corporation, and only to the corporation …”

The court then listed a number of stakeholder groups that may be considered by directors as they discharge this duty, some of which are noted above.

While Bill C-97 codifies this judicial precedent, directors already had the option to consider concerns other than shareholders’ interests under the BCE case. But Bill C-97 is potentially broader than the BCE case. For example, the bill specifically enumerates retirees and pensioners, stakeholder groups not mentioned in the BCE case. Furthermore, the proposed list in Bill C-97 is non-exhaustive and directors can therefore consider stakeholders that are not enumerated in the legislation.

This discussion leads to the question of how ESG — environmental, social and governance factors — fit into Bill C-97 and the BCE case. Boards often make reference to ESG with representations that they are observing corporate culture, prioritizing risk and ensuring that they have comprehensive internal policies. But given their lack of specificity, these statements may not constitute useful guidance for investors or “best practices” for boards.

The key question is: when does an ESG factor engage the “best interests” of the corporation? When does an ESG factor become “material” under the law? The response to these questions is nebulous because ESG factors themselves differ widely in terms of subject matter and import in any given situation. Some ESG factors will be riskier than others in a given corporation depending on the corporation’s business, among other factors.

Boards and asset managers would do well to develop a pragmatic approach, one that does not simply group all ESG factors together but teases them apart and treats them as separate issues (i.e. potential risks) in their own right. In this way, the relative importance of issues lumped under the banner of ESG will be clearer for all to see.

In summary, while some may say that Bill C-97 and the BCE case “watered down” directors’ duties, it likely will not change directors’ decision making significantly. At the cost of greater specificity in terms of identifying who is the recipient of their fiduciary duty, Bill C-97 provides directors with more flexibility, allowing them to take into account the interests of various stakeholders when making a decision.

Even in the M&A context, where the interests of target shareholders are paramount, Bill C-97 will likely not mean much change for directors, though one could argue that it raises the onus on directors to consider stakeholder groups that they may not otherwise have considered.

Anita Anand is Scholar-in-Residence at Torys and holds the Kimber Chair in Investor Protection and Corporate Governance at the University of Toronto.

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First published in The Globe and Mail - Since 1995, Ontario’s Securities Act has contained