Officer and Director Liability

As a director, you play a pivotal role in the strategic guidance and oversight of the company. However, this role comes with responsibilities and potential liabilities. To protect oneself, a director should adhere to the following practices:

1. Exercise Due Diligence and Loyalty: Always make decisions after conducting proper research and ensuring no conflict of interest. This includes:

   • Spending adequate time understanding proposals and ensuring timely, relevant information forms the basis of decisions.
   • Taking external expert advice for significant decisions, like mergers.
   • Staying informed about sensitive issues like executive compensation, disclosure policies, related-party transactions, climate change, and cybersecurity.
     
     

2. Leverage the Business Judgment Rule: As affirmed by the Supreme Court of Canada in cases like Peoples and BCE, this rule protects directors who act prudently and on a reasonably informed basis. Ensure the decision-making process is thorough, even if the outcome isn’t perfect.

3. Follow Corporate Governance Practices: Demonstrable good corporate governance can protect directors. However, it’s essential to understand the board’s unique situation and set achievable standards.

4. Participate in Director Orientation and Education:

   • Undergo orientation to understand the company’s business, operations, and personnel.
   • Engage in continuous education to stay updated on the industry, competitors, and any changes.
   • Establish relationships with senior management for diverse perspectives.
   • Attend dinners or sessions organized by the company to discuss relevant business matters.
     
     

5. Conduct Regular Risk Reviews: Implement a practice to routinely identify and understand company risks, ensuring there are strategies to mitigate them. The board should oversee, not manage these risks. Include a “Risks in the Business” agenda item in all board meetings.

6. Keep a Record:

   • Maintain detailed board and committee minutes, indicating significant discussion topics and decision factors.
   • Preserve materials, presentations, and correspondence that evidence the decision-making process.
     
     

7. Implement Disclosure Policies and Committees:

   • Directors of public companies must ensure accurate public disclosure. Adopt a policy to ensure all material developments are timely reported to senior officers and directors.
   • Establish a disclosure committee to oversee compliance with disclosure obligations.
   • Review and approve important news releases before issuance.
   • Plan public statements carefully, avoiding impromptu remarks and ensuring any forward-looking information is appropriately cautioned.
     
     

8. Manage Conflicts Proactively:

   • Directors should avoid conflicts of interest and ensure the company’s interest remains paramount.
   • Transactions involving insiders or benefiting them should be scrutinized thoroughly.
   • If conflicts arise, the board should consider independent committees and external advice separate from regular company advisers.
   • Ensure transparency in dealings between related parties, and develop processes that represent each party’s interests fairly.
     
     

9. Attention to Meeting Records:

   • It’s vital to maintain accurate minutes that capture the essence of discussions and conclusions.
   • Strive for consistency in documentation to avoid confusion or future disputes.
   • Aim to have minutes that detail the reasoning behind decisions, beyond just recording the outcomes.
   • Once the official minutes are agreed upon and recorded, individual notes should typically be discarded, unless there’s a specific reason to keep them.
     
     

10. Protection through Insurance and Indemnification:

    • Secure comprehensive indemnification agreements and insurance plans for directors.
    • In addition to standard protections, individual indemnification contracts can offer added security.
    • It’s essential to balance the need for comprehensive director insurance with potential conflicts, especially concerning premium costs.
      
      

11. Expert Consultation:

    • When faced with unfamiliar challenges, seek guidance from specialized professionals.
    • Relying on expert advice can offer protection against certain liabilities.
    • There are times when hiring an independent advisor or legal expert is more appropriate than relying on in-house resources.
      
      

12. Emphasis on Internal Oversight:

    • Internal controls play a crucial role in risk mitigation.
    • These controls should be designed and implemented based on the organization’s specific requirements.
    • Some core areas of internal control to consider include:
      • Ensuring duties don’t overly concentrate with one person.
      • Establishing clear authorization processes for transactions.
      • Keeping thorough and consistent documentation.
      • Safeguarding physical and human resources.
      • Implementing checks and balances through third-party verifications.

Ultimately, by being informed, diligent, and proactive, directors can best position themselves to manage responsibilities effectively and avoid potential pitfalls.

The protection afforded by Directors and Officers (D&O) insurance is unique compared to standard liability insurance policies:

1. Defence Responsibilities:

   • Typically, D&O policies don’t directly commit the insurer to defend the insured. Instead, they promise to pay back or reimburse the insured for legitimate defence expenses arising from covered claims.
   • This structure allows insured individuals more flexibility in choosing their legal representation. There’s a catch, though: the choice may be confined to a predefined list of lawyers the insurer endorses.
     
     

2. Insurer’s Role in Defence:

   • Even if the insurer isn’t directly providing defence, they often want a seat at the table. This means the insurer might want updates on the case’s progress, especially when specific defence costs or settlement decisions require their approval. They are obligated to give consent reasonably.
     
     

3. Defence Cost Guidelines:

   • Insurance companies might lay out specific rules for how defence costs are managed. If these aren’t followed, the insurer might contest the cover for certain defence expenses. These rules can touch upon aspects like hourly billing rates, how often the insured needs to update the insurer during litigation, and billing methods.
     
     

4. Forwarding of Defence Costs:

   • It’s common for D&O policies to pledge to pay “reasonable” defence costs as they arise. But what’s deemed “reasonable” is a subject of contention. A landmark case in Canada, for instance, established that costs are deemed reasonable if they directly support the case’s core arguments and are within the bounds of the legal team’s primary responsibilities.
   • The responsibility to validate the reasonableness of a cost typically rests with the person insured.
     
     

5. Deciding on Defence Costs:

   • The crux of D&O policies is that they’ll cover costs linked to policy-covered claims. So, challenges can crop up when a claim has parts that are covered and others that aren’t.
   • Some policies are proactive, permitting the insurer to cover all costs upfront, but later recuperate funds tied to non-covered claims. Alternatively, some may require that costs be earmarked according to their relevance to covered and non-covered claims during the billing process.

In a nutshell, a D&O policy might not provide direct defence to an insured director or officer, but it does offer a framework for compensating valid defence expenses. It’s pivotal for the insured party to be conversant with their policy details and perhaps consult legal counsel to ensure they’re leveraging their coverage effectively.

Organizational structures may differ across companies, but one common feature is the presence of a board of directors. This board is the ultimate authority for the corporation, responsible for its management and decision-making. Directors, with this power, also shoulder potential liabilities. They can delegate specific tasks to officers, management, and employees but continue to supervise the organization as a whole.

Role of Officers: Officers are appointed by the board of directors, who also outline their specific roles and responsibilities. Even though the board of directors has overarching power over the corporation’s management, the daily operational tasks typically fall to the officers and management. The structure and number of managerial tiers vary, with responsibilities and accountability changing based on the size and nature of the organization.

Role of Directors: Directors are the backbone of a corporation, primarily tasked with charting its direction and ensuring its objectives are met. It’s essential for a board to have a clear understanding of their duties, often solidified through a written mandate. For example, guidelines for reporting issuers are highlighted in National Policy 58-201 concerning Corporate Governance Guidelines:

• Directors must maintain and promote the integrity of the CEO and other executive officers, cultivating a culture of organizational integrity.

• They should adopt a strategic planning process, annually reviewing and approving a plan considering both opportunities and risks.

• Directors are responsible for pinpointing primary business risks, establishing systems to manage them.

• Another key duty is succession planning, which encompasses the appointment, training, and oversight of senior management.

• They must adopt a communication strategy for the organization.

• Overseeing the company’s internal controls and management information systems falls under their purview.

• Lastly, directors are tasked with formulating the company’s corporate governance approach, creating guidelines and principles suitable for the organization.

Directors are duty-bound to ensure the organization remains true to its mission. They are responsible for senior staff, offer policy direction, and should stay informed on the company’s business and financial affairs.

Conclusion: Understanding the distinct roles of directors and officers is crucial, as these roles can sometimes overlap or become unclear. This clarity is even more vital in situations like unanimous shareholder agreements, where certain responsibilities initially held by directors might shift to the corporation’s shareholders. It’s always essential for both directors and officers to be fully aware of their specific duties and the limits of their authority within the organization.

Definitely. Directors must be keenly aware of their roles and responsibilities when their company is involved in a merger or acquisition. Let’s delve into key due diligence elements:

1. The Role of Special Committees:

   • Formation and Purpose: During significant transactions, like a merger, it’s common for boards to form special committees comprising independent directors. These committees assess the merger’s particulars and advise the larger board.
   • Advantages:
     • Efficiency: A smaller group can effectively process the extensive information related to major transactions.
     • Objective Decision-making: By having an independent committee, the board can shield decisions from potential biases or conflicts of interest, especially if any board member has a personal connection to the acquiring entity.
   • Independence:
     • It’s not mandatory to have a special committee, but when formed, it must maintain genuine independence. This is to ensure that the interests of minority shareholders are considered without prejudice.
     • The specific standards of this independence can be guided by established regulatory instruments. Courts would intervene if there’s a doubt regarding a committee’s independence.
       
       

2. Seeking Expertise:

   • Need for Experts: The board or its special committee might seek external expert opinions to make an informed decision about the merger.
   • Legal Protection: Relying on expert reports, especially those from professionals like accountants, lawyers, and auditors, can help directors fulfill their statutory obligations of acting in the corporation’s best interest.
   • Fairness Opinions: These are assessments from financial advisors regarding the transaction’s fairness from a market standpoint. Not only do they bolster the board’s objectivity in the process, but sharing these with shareholders can also provide transparency about the board’s motivations and rationale.
     
     

3. Learnings from (Delaware) Case Law:

   • BioClinica, Inc. Shareholder Litigation: This case serves as an illustrative example. Key takeaways are:
     • Courts tend to respect the board’s business judgment, especially when the process involves multiple bidders, relies on fairness opinions, and has adequate oversight from independent directors.
     • Disclosure requirements don’t mandate listing every potential term or clause, but key material terms should be transparent.
     • Even if some directors have personal interests in the transaction, courts will look at whether these members influenced the larger board’s decisions.
       
       

4. Cautionary Measures:

   • It’s essential to critically evaluate the experts or their reports. If there’s any reason to question their accuracy or impartiality, directors might not be shielded from potential liabilities. For instance, relying on a financial advisor who would earn a “success fee” if the merger goes through might pose a conflict of interest. To avoid this, it’s best to either forgo such fees or get a second opinion from a neutral party.

In conclusion, as a director, it’s essential to act diligently, prioritize the company’s and shareholders’ best interests, and ensure transparent and unbiased decision-making during mergers or acquisitions.