An Overview of
Directors’ and Officers’
Duties
Presentation by
Ava Kanner
Directors’ and Officers’ Liability
• ScotiaMcLeod Inc. v. Peoples Jewellers Ltd. (1995),
26 O.R. (3d) 481 (C.A.) at 8 (QL)
The decided cases in which employees and officers of
companies have been found personally liable for actions
ostensibly carried out under a corporate name are factspecific. In the absence of findings of fraud, deceit, dishonesty
or want of authority on the part of employees or officers, they
are also rare.
2
Directors’ and Officers’ Liability
• People's Department Store v. Wise, [2004] 3 SCR 461, 2004
SCC 68
122. (1) 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.
3
Directors’ and Officers’ Liability
• Re BCE Inc., [2008] 3 S.C.R. 560
The duties of the directors comprehends a duty to treat
individual stakeholders affected by corporate acts equitably
and fairly. There are no absolute rules. In each case, the
question is whether, in all of the circumstances, the directors
acted in the best interests of the corporation, having regard to
all of the relevant considerations, including, but not confined
to, the need to treat affected stakeholders in a fair manner.
4
Statutory Liabilities
Claims Related to Employees and Employment
• Unpaid wages (and other debts for services
performed by employees)
Maximum of six months' wages.
• Vacation pay
Greater of 4% of wages or contractual amount of
vacation pay for the last 12 months.
OBCA, CBCA, Employment Standards Act
5
Statutory Liabilities
Claims Related to Employees and Employment
• Severance and termination pay
No liability except if corporation is a federal
work, undertaking, or business subject to the
Canada Labour Code where liability is greater
of: (i) two days' wages x years of employment;
or (ii) five days' wages.
OBCA, CBCA, Employment Standards Act
6
Statutory Liabilities
Claims Related to Employees and Employment
• Source deductions for taxes not deducted,
withheld and remitted
Liability if execution against the corporation has been returned
unsatisfied or the corporation has commenced liquidation or
dissolution proceedings or if an assignment or a bankruptcy
order issued against it and a claim for the corporation's liability
has been proved within six months after the date of the
assignment or bankruptcy order. Due diligence defence is
available.
Bankruptcy and Insolvency Law Act
7
Pensions/Health & Safety
• Canada Pension Plan Directors’ liability
for the amount (plus penalties or interest)
that the corporation fails to deduct and
remit
Failure to comply with the obligations and standards of care
under pension benefits legislation. Fines up to $100,000 for
the first offence and up to $200,000 for subsequent
convictions.
8
Pensions/Health & Safety
• Failure to comply with obligations relating
to workplace safety
Fines up to $25,000 and imprisonment up to 12 months.
If proceedings by way of indictment, fines up to $1,000,000
and imprisonment up to two years; by summary conviction,
fines up to $100,000.
9
Taxes
• Unemployment Insurance Premiums
Directors’ liability for the amount (plus any interest
or penalties) that the corporation fails to deduct and
remit employment insurance premiums.
Employment Insurance Act
10
Taxes
•
Goods and Services Tax
Directors’ liability for unremitted amounts plus interest and
any penalties. Can also be imprisoned up to six months and
fined $1,000 plus 20% of amount of tax (plus interest and
penalties) that director willfully failed to pay, collect or remit.
•
Retail Sales Tax
Directors’ liability for unpaid amounts in certain
circumstances, including an assignment in bankruptcy or a
receiving order.
Excise Tax Act
11
Taxes
• Withholding tax in respect of non-residents
Withholding taxes in respect of non-residents not withheld and
remitted; if execution against the corporation has been
returned unsatisfied and the corporation has commenced
liquidation or dissolution proceedings or has had an
assignment or a bankruptcy order issued against it and a claim
for the corporation's liability has been proved within six
months after the date of the assignment or bankruptcy order.
12
Taxes
• Fines up to double the tax payable and
imprisoned up to two years if a Director
consented to tax evasion. Federal and Ontario
• Customs and excise taxes various fines and
penalties.
13
Corporate Finance
• Issuing shares in return for property or past
services
Directors’ liability for amounts by which the consideration
received is less than the fair equivalent of the money that the
corporation would have received had the shares been issued
for money.
14
Corporate Finance
• Payment of dividends in violation of the solvency
or impairment of capital tests within 12 months
preceding bankruptcy if the dividend was paid
when the company was insolvent or if the payment
made the company insolvent
Directors’ liability for amount of the dividend not recovered
by the corporation.
15
Corporate Finance
• Share purchases, acquisitions or redemptions in
violation of the solvency or impairment of capital
tests within 12 months preceding bankruptcy if
the redemption or repurchase was done when the
company was insolvent or if the payment made the
company insolvent
Directors’ liability for the amount paid and not recovered by
the corporation.
16
Corporate Finance
• Prohibited financial assistance to any person in
violation of requirements for management proxy
circulars as per the prescribed form
Directors may be subject to a fine of $5,000 and imprisonment
up to six months.
17
Corporate Finance
• Payment of an unreasonable commission to a purchaser
(or someone who procures purchasers) on the purchase of
the corporation's shares
Directors’ liability for the amount paid and not recovered by
the corporation.
• Payment of indemnities to directors and officers who have
failed to act in the best interests of the corporation or did
not believe their conduct was legal
Directors’ liability for the amount paid and not recovered by
the corporation.
18
Corporate Finance
• Payment of amounts to security holders under
statutory dissent rights or to complainants in an
oppression remedy action in violation of the
solvency or impairment of capital tests
Directors’ liability for the amount paid and not recovered by
the corporation.
19
Securities
• Contravention by the corporation of Ontario securities
law
Directors who authorize, permit or acquiesce to a
contravention by the corporation can be fined up to
$5,000,000 and imprisoned for up to five years.
• Misrepresentation in a prospectus, take-over bid circular
or an offering memorandum
Directors in office at the time of filing of the document may
be personally liable to investors for damages.
Securities Act (Ontario)
20
Securities
• Insider trading
Fines are a minimum of the profit made or loss avoided and a
maximum of the greater of $5,000,000 and three times the
profit made or loss avoided, in addition to any imprisonment
imposed.
Securities Act (Ontario)
21
Bankruptcy
• Directors who direct, authorize, assent to or
acquiesce or participate in the commission of
a bankruptcy offence may be liable (on
summary conviction) for up to $5,000 and/or
imprisonment up to 12 months; or may be
liable (upon conviction on indictment) for up
to $10,000 and/or imprisonment up to three
years.
Bankruptcy and Insolvency Law Act
22
Bankruptcy
•
Reviewable Transactions Directors, officers and others may
be liable for the difference between the actual consideration
given or received by the bankrupt and the fair market value of
the property or services concerned.
•
Failure to Keep Proper Books of Account Directors and
officers may be liable for up to $5,000 and/or imprisonment
up to one year.
•
Unlawful Transactions Directors and officers may be liable
for up to $5,000 and/or imprisonment up to one year.
Bankruptcy and Insolvency Law Act
23
Environmental Protection
280.1 (1) Every director and officer of a corporation shall
take all reasonable care to ensure that the corporation
complies with
(a) this Act and the regulations, other than Division 3 of
Part 7 and regulations made under that Division; and
(b) orders and directions of, and prohibitions and
requirements imposed by, the Minister, enforcement officers
and review officers, other than those issued or imposed in
connection with obligations or prohibitions under that
Division or regulations made under that Division.
Environmental Protection Act (Ontario)
24
Environmental Protection
Duties of directors and officers -- Division 3 of Part 7
(2) Every director and officer of a corporation who is in a position to
direct or influence the corporation's policies or activities in respect of its
obligation to comply with Division 3 of Part 7, regulations made under
that Division, and orders and directions of, and prohibitions and
requirements imposed by, the Minister, enforcement officers and review
officers in connection with obligations or prohibitions under that
Division or those regulations, shall take all reasonable care to ensure
that the corporation so complies.
Environmental Protection Act (Ontario)
25
Environmental Protection
Liability of directors and officers -- Division 3 of Part 7
(3) If a corporation commits an offence arising out of a contravention of
Division 3 of Part 7, a regulation made under that Division or an order
or direction of, or prohibition or requirement imposed by, the Minister,
an enforcement officer or a review officer in connection with an
obligation or prohibition under that Division or a regulation made
under that Division, every director and officer of the corporation who is
in a position to direct or influence the corporation's policies or activities
in respect of conduct that is the subject-matter of the offence is a party to
and guilty of the offence, and is liable to the punishment provided for the
offence, whether or not the corporation has been prosecuted or
convicted. [Emphasis added.]
Environmental Protection Act (Ontario)
26
Environmental Protection
280.1 (1) Every director and officer of a corporation shall
take all reasonable care to ensure that the corporation
complies with:
(a) this Act and the regulations, other than Division 3 of
Part 7 and regulations made under that Division; and
(b) orders and directions of, and prohibitions and
requirements imposed by, the Minister, enforcement officers
and review officers, other than those issued or imposed in
connection with obligations or prohibitions under that
Division or regulations made under that Division.
Canadian Environmental Act 1999
27
Environmental Protection
Duties of directors and officers -- Division 3 of Part 7
(2) Every director and officer of a corporation who is in a
position to direct or influence the corporation's policies or
activities in respect of its obligation to comply with Division
3 of Part 7, regulations made under that Division, and
orders and directions of, and prohibitions and requirements
imposed by, the Minister, enforcement officers and review
officers in connection with obligations or prohibitions under
that Division or those regulations, shall take all reasonable
care to ensure that the corporation so complies.
Canadian Environmental Act 1999
28
Environmental Protection
Liability of directors and officers -- Division 3 of Part 7
(3) If a corporation commits an offence arising out of a contravention of
Division 3 of Part 7, a regulation made under that Division or an order
or direction of, or prohibition or requirement imposed by, the Minister,
an enforcement officer or a review officer in connection with an
obligation or prohibition under that Division or a regulation made
under that Division, every director and officer of the corporation who is
in a position to direct or influence the corporation's policies or activities
in respect of conduct that is the subject-matter of the offence is a party to
and guilty of the offence, and is liable to the punishment provided for the
offence, whether or not the corporation has been prosecuted or
convicted.[Emphasis added].
Canadian Environmental Act 1999
29
Environmental Protection
116. (1)Every director or officer of a corporation has a duty to take all reasonable
care to prevent the corporation from,
(a) discharging or causing or permitting the discharge of any material, in
contravention of,
(i) this Act or the regulations, or
(ii) a licence, permit or approval under this Act;
(b) failing to notify the Ministry of a discharge of any material, in contravention of,
(i) this Act or the regulations, or
(ii) a licence, permit or approval under this Act;
(c) contravening section 98;
(d) failing to install, maintain, operate, replace or alter any equipment or other
thing, in contravention of a licence, permit or approval under this Act; or
(e) contravening an order, direction, notice or report under this Act, other than an
order under section 84 or 106.1.
Ontario Water Resources Act
30
Environmental Protection
Offence
(2) Every person who has a duty under subsection (1) and who fails to
carry out that duty is guilty of an offence.
Onus
(2.1) If a director or officer of a corporation is charged with an offence
under subsection (2) in connection with a specific contravention of the
corporation, the director or officer has the onus, in the trial of the offence,
of proving that he or she carried out the duty under subsection (1) in
connection with that contravention. [Emphasis added].
Liability to conviction
(3) A director or officer of a corporation is liable to conviction under this
section whether or not the corporation has been prosecuted or convicted.
Ontario Water Resources Act
31
An Guided Tour Through a
Directors’ and Officers’
Insurance Policy
Presentation by
David Cherepacha
DECLARATIONS
• Policy limits – usually includes defence costs
• Single Loss and Aggregate Limits for Policy
Period (usually one year)
• Claims made and reported basis
33
WHO IS COVERED?
Definition of “Insured” may include:
• Present, past and future Directors and Officers
• Outside Directors
• Members of Committees
• Employees – but only if a Director or Officer is also named as a Defendant
• Spouses of Directors and Officers
• Directors and Officers of subsidiary companies
34
INSURING AGREEMENT
In respect of a loss resulting from a wrongful
act which a director(s) / officer(s) becomes
legally obligated to pay on account of any
claim first made against him during the policy
period and reported to [the Insurer] during the
policy period or discovery period, [the Insurer]
shall pay:
35
INSURING AGREEMENT
Side A – Individual Coverage
1.1 on behalf of the director(s) / officer(s), as
and to the extent permitted or required by the
applicable law, the loss for which the
director(s) / officer(s) are not indemnified by
the insured organization;
36
Side A Coverage
Direct D&O Coverage
(Excess, Dropdown,
Difference in
Conditions)
Insurer
Directors
Company
37
INSURING AGREEMENT
Side A – Individual Coverage
• Covers claims for loss for which the corporation
cannot provide indemnification to Directors and
Officers
 Financial impairment / bankruptcy of company
 Prohibited by statute
• Usually no retention / deductible
38
INSURING AGREEMENT
Side B – Reimbursement Coverage
1.2 on behalf of the insured organization, the
loss for which the insured organization has
granted indemnification to such director(s) /
officer(s) as and to the extent permitted or
required by the applicable law.
39
Side B Coverage
Directors
Indemnity
Insurer
Company
Reimbursement
Insurance (above
retention)
40
INSURING AGREEMENT
Side B – Reimbursement Coverage
• Covers claims for loss for which the
corporation can and will provide
indemnification to Directors and Officers
• Deductible applies
41
INSURING AGREEMENT
Side C – Entity Coverage
1.3 on behalf of the insured organization, for
a Securities Claim;
42
Side C Coverage
Insurer
Company
“Securities
Claims”
Coverage
43
INSURING AGREEMENT
Side C – Entity Coverage
• Covers claims for loss for which the corporation
itself is liable
• Deductible applies
• Usually only covers certain types of claims
 Securities claims
44
Coverage A
Personal Asset
Protection for
Directors &
Officers
Insurance for
covered
NonIndemnifiable
Claims
Coverage B
Corporate
Asset
Protection
Insurance
Reimbursement
for
covered
Indemnifiable
Claims
• Statute
• Bankruptcy
Single Aggregate Limit
Nil Retention
Retention ($)
45
Coverage A
Personal Asset
Protection for
Directors &
Officers
Insurance for
covered
NonIndemnifiable
Claims
• Statute
• Bankruptcy
• Company’s
refusal
Nil Retention
Coverage B
Corporate
Asset
Protection
Insurance
Reimbursement
for
covered
Indemnifiable
Claims
Coverage C
Corporate Asset
Protection
Insurance for
Corporate
Liability when
Company is a
defendant in
covered
Securities Claims
Single Aggregate Limit
Retention ($)
Retention ($)
46
Coverage A
Excess / DIC
Additional
Personal Asset
Protection for
Directors &
Officers
Coverage A
Personal Asset
Protection for
Directors & Officers
Insurance for
covered
Non-Indemnifiable
Claims
• Bankruptcy
• Company’s
refusal
Nil Retention
Excess Limits:
• Underlying limits are eroded/exhausted
Difference in Conditions (“DIC”) Limits:
• Insurer of Underlying:
– Wrongfully refuses
– Is financially unable
– Rescinds
• Underlying insurers are not liable
• Bankruptcy; proceeds of underlying insurance are
stayed
Coverage B
Corporate Asset
Protection
Coverage C
Corporate Asset
Protection
Insurance
Reimbursement for
covered
Indemnifiable
Claims
Insurance for
Corporate Liability
when Company is a
defendant in
covered Securities
Claims
Single Aggregate Limit
Retention ($)
Retention ($)
47
INSURING AGREEMENT
• Triggering event is claim for loss arising from
a wrongful act by an officer or director
48
DEFINITION OF “WRONGFUL ACT”
“wrongful act” means any actual, alleged,
attempted or allegedly attempted error,
misstatement, misleading statement, act,
omission, neglect or breach of duty, by any
director(s) / officer(s) anywhere in the world,
individually or otherwise, but only in the
capacity of a director or officer for the insured
organization, or any claim against any
director(s) / officer(s) solely by reason of his
serving in such capacity.
49
DEFINITION OF “WRONGFUL ACT”
Ensure:
Not restricted to negligence claims only
Avoid “sole capacity” wording
50
DEFINITION OF “LOSS”
• Fines and penalties are not usually covered
• Defence costs for such claims covered – may have to be repaid if
defence fails
• Punitive and exemplary damages sometimes are
covered
• Statutory claims for taxes and wages
• Where silent, policies usually cover statutory claims
51
DEFINITION OF “CLAIM”
“Claim” means any verbal or written claim or
allegation made anywhere in the world against
or in respect of a director / officer which may
reasonably result in a loss.”
52
DEFINITION OF “CLAIM”
“Claim” means:
(i)
A written demand for monetary damages or non-monetary
relief:
(ii) A civil proceeding commenced by the issuance of a notice of
action, statement of claim, writ of summons, complaint or
similar pleading;
(iii) A criminal proceeding commenced by the laying of an
information or the return of an indictment or similar legal
document; or
(iv) A formal administrative or regulatory proceeding
commenced by the filing of a notice of charges, formal
investigative order or similar legal document;
53
EXCLUSIONS
• Bodily injury, sickness, disease, death
• Emotional distress, mental anguish
• Loss of reputation, libel, slander, defamation, invasion of privacy
• Pollution
• Pension fund claims
• Breach of contract
• Prior to Retroactive Date
54
EXCLUSIONS
Fraud
“Fraud or dishonesty of the director / officer
determined by a final judgment or adjudication
and which was material to the outcome of the
judgment or adjudication ...”
55
EXCLUSIONS
Fraud
“This exclusion does not apply to:
Claim Expenses incurred in defending Claims
alleging the foregoing conduct [i.e., dishonest and
fraud] until there is a judgment, final adjudication,
adverse admission or finding of fact against the
Insured as to such conduct at which time the Insured
shall reimburse the Insurer for Claim Expenses
incurred up to that date;”
56
EXCLUSIONS
Fraud
• Clear severability provision so that only affects
insured who actually committed the fraud
“This exclusion does not apply to any Insured
who was neither the author of, nor an
accomplice to, the foregoing conduct.”
57
EXCLUSIONS
Insured vs. Insured
•
•
•
Claims by present and past directors and officers
Claims by the corporation
Claims by shareholders, creditors or others brought in the
name of the corporation (derivative claims)
Exceptions
•
•
Claims by receiver or trustee in bankruptcy
Arms-length derivative action
58
DEFENCE COSTS
•
Right to appoint and instruct counsel
•
Pre-determined allocation formula to split
legal costs between covered and non-covered
claims
•
Payment of costs on a current basis rather
than retroactive basis
59
Corporate Counsel Issues
for D & O Insurance
Presentation by
Jordan S. Solway
General Counsel and
Vice President, Claims,
Munich RE
Why do Corporations Buy D&O
Insurance?
“The answer to this question, it seems has two parts. First,
corporations buy side A coverage in order to attract risk averse
individuals to their boardrooms and executive suites. The
second part of the answer is more complex and, perhaps, more
sinister. Corporations buy entity-level coverage under Side B
and C of the D&O policy because they are run by selfish
managers who are willing to invest corporate assets in negative
net present value projects in order to protect their own
compensation
packages.”
Professor Sean J. Griffith: Unleashing a Gatekeeper: Why the SEC Should Mandate
Disclosure of Details Concerning Directors’ and Officers’ Liability Insurance Policies
61
The Governance Issue
“You ever heard of D&O Coverage? Directors’ and
Officers’ Coverage? They are not drafted very well, these
policies and they cover both directors and officers. Guess
who commits the fraud? A lot of them are officers. Guess
what cases go forth, first? The criminal cases. They cost a
lot of money. The directors are looking at whether they can
even defend themselves – if there’s anything going to be
left in the policy.”
Leo Strine, Vice Chancellor, Delaware Court of Chancery at the 2005 Symposium On
Director Liability, Harvard Law School Program on Corporate Governance
“Symposium on Director Liability," 31 Delaware Journal of Corporate Law
1011-1045 (2006).
62
STARTING POINT
Risk Management Process
Identify
Risks
Measure
Risks
• Past experience
• Market information
• Information on
potential risk
(legal/financial)
• Data analysis
• Simulations and
sensitivity analysis
• Identifying priorities
Manage
Risks
• Risk management
techniques
• Strategic choices
• Tradeoffs
Knowledge Management Process
63
Risk Management for Property &
Casualty Companies
63
RISK ASSESSMENT
• Company’s Basic Characteristics
 Corporate structure
 Type of business and operations
•
•
•
•
•
•
•
•
•
Financial Picture & Accounting Practices
Corporate History & Geography
Shareholding Structure
Retrospective Risk - Claims History
Going Forward Risk – Vulnerabilities
Stock Price Volatility
Management & Executive Compensation
Disclosure practices
Corporate Governance
64
D&O INSURANCE – STRUCTURE &
PROCESS
• Who are the key stakeholders?
1.
2.
3.
4.
the purchaser (management, board and independent directors)
the advisors (outside legal counsel, general counsel, risk manager,
broker)
underwriters, managing general agents and reinsurers
Shareholders
• What are the real risks facing the corporation and by implication, its directors
and officers?
• What are the key issues?
• Whose interests are paramount, who is the decision-maker
and what is the level of accountability?
• Balance sheet protection vs. personal asset protection
• Dynamics of the marketplace versus establishing long-term relationships
• Who is being covered, for what and on what basis?
65
D&O INSURANCE – STRUCTURE &
PROCESS
• Broker will be responsible for assembling
documentation and information required for submission
to D&O Insurer:
–
–
–
–
–
outstanding shares and shareholdings
financial statements (audited if applicable)
history of claims and litigation
names and backgrounds of directors and officers
warranty (knowledge of matters which might reasonably
give rise to a claim within the scope of the D&O
insurance being procured)
66
D&O INSURANCE – STRUCTURE &
PROCESS
• Factors impacting amount of D&O Insurance:
– Size of corporation (asset value)
– For profit or not-for profit
– Public listing
» Canada
» U.S.
– Market capitalization
– Countries in which corporation operates
– Activities of corporation (M&A etc.)
– History of operations of corporation
– Structure of D&O coverage
– Nature of underlying business
67
D&O INSURANCE – STRUCTURE &
PROCESS
•
•
•
•
•
•
Who is your client?
Are their conflicting interests?
Arranging the right insurance and limit
Internal Communication
- the Directors
- Management
- In-house legal teams
- managing expectations
Claims Management
External Communication
- brokers & insurers
- Lawyers
68
RISK REDUCTION STRATEGIES
• Document Retention & Destruction
• Formalize Indemnities & how they work
- Main Board & Subsidiary Board
- Contractual Indemnities / Employment Contracts
- Provisions for Defence Costs and advancement
69
RISK REDUCTION STRATEGIES
• Incident Escalation
- dealing with incidents
- dealing with claims
- internal reporting mandates
• Claims Reporting
- reporting requirements
- Flow Charts
• Legal Panels
- which firms should you use?
- dealing with conflicts
- managing defence costs
70
OBSERVATIONS
• The risks directors face and their exposure to personal liability is real
• Recognise the variety of D&O insurance/indemnification solutions
available – one size doesn’t fit all
• Understand the principles of a D&O Policy
• Risk management ownership within the organization
• Risk reduction strategies
71
CONCLUSIONS
• Complex, technical area
• Importance of input from
Corporate risk managers
Insurance advisers
Legal advisers
• Solutions tailored to circumstances
• Regular review
72
QUESTIONS
?
73
Thank You
Davies Howe Partners
(416) 977-7088
www.davieshowe.com