GOWLING LAFLEUR HENDERSON LLP

MEMORANDUM

DIRECTORS AND OFFICERS DUTIES AND LIABILITIES

August, 2010

Gowling Lafleur Henderson LLP Robert E. Milnes & Kathleen M. Ritchie

This paper is designed to provide information of a general nature only and is not intended as a substitute for professional consultation and advice in a particular case.

TABLE OF CONTENTS Page

INTRODUCTION ......................................................................................................................... 1 PART I 1. BRIEF OVERVIEW OF DIRECTORS AND OFFICERS DUTIES AND LIABILITIES......................................................................................................... 2 Duties of Directors and Officers ............................................................................ 2 (a) The Duty to Manage .................................................................................. 2 (b) The Fiduciary Duty of Directors and Officers........................................... 2 (c) The Duty of Care, Diligence and Skill....................................................... 3 (d) The Duty to Comply with the Law ............................................................ 4 (e) Conflicts of Interest.................................................................................... 4 Liabilities of Directors and Officers ...................................................................... 5 (a) Liabilities of Directors Under the Business Corporations Statutes ........... 5 (b) Liability for Wages and Other Employee Related Payments .................... 5 (c) Liability under Environmental Legislation................................................ 6 (d) Oppression Remedy ................................................................................... 6 (e) Liability under Securities Legislation........................................................ 6 (f) Liability under Other Statutes.................................................................... 7 (g) Statutory Relief from Certain Liabilities under the Business Corporations Statutes ................................................................................. 7 (h) Indemnification and Insurance................................................................... 8 Conclusion ............................................................................................................. 9 IN-DEPTH REVIEW OF DIRECTORS AND OFFICERS DUTIES AND LIABILITIES....................................................................................................... 10 Introduction.......................................................................................................... 10 Historical Background ......................................................................................... 10 The Duty to Manage ............................................................................................ 11 The Duty of Care, Diligence and Skill................................................................. 11 The Fiduciary Duties............................................................................................ 13 (a) The Duty to Act in the Best Interests of the Corporation ........................ 13 (b) The Duty of Loyalty and Conflicts of Interest......................................... 16 (c) The Duty to Disclose Interest in Corporate Transactions........................ 17 Other Liability Under the Business Corporations Acts ....................................... 19 Liability Under the Occupational Health and Safety Act .................................... 20 Liability Under Environmental Law.................................................................... 21 Liability Under the QBCA................................................................................... 23 Liability Under Other Statutes ............................................................................. 24 Liability in Tort: The Duty to Act within the Scope of Authority....................... 27 Indemnification of Directors and Officers........................................................... 28 Liability Insurance ............................................................................................... 29 New Legislation in Canada.................................................................................. 29 Conclusion ........................................................................................................... 31 -i-

2.

3. PART II 1. 2. 3. 4. 5.

6. 7. 8. 9. 10. 11. 12. 13. 14. 15.

TABLE OF CONTENTS (continued) Page PART III PRACTICAL SUGGESTIONS FOR COMPLYING WITH DUTIES AND MINIMIZING LIABILITY........................................................................ 32

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INTRODUCTION This paper discusses the duties and liabilities imposed on directors and officers of a corporation organized under the Canada Business Corporations Act (the CBCA) or under the Business Corporations Act (Ontario) (the OBCA) (collectively, the Acts). While directors and officers duties and liabilities are substantially similar under both Acts, there are some technical differences. Part I of this paper provides a brief overview of directors and officers duties and liabilities. Part II is an in-depth review of this area of the law, including the historical background and a summary of relevant case law. Finally, Part III of the paper contains a list of practical suggestions to assist directors and officers in complying with their duties and avoiding liability. This paper is intended to provide information of a general nature only, and is not intended as a substitute for professional consultation and advice in a particular case. This area of law can be quite complex and must be considered in light of the relevant facts of any particular situation. For more information on directors duties and liabilities, please feel free to contact Gowlings and Robert E. Milnes at robert.milnes@gowlings.com or Kathleen Ritchie at kathleen.ritchie@gowlings.com.

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PART I - BRIEF OVERVIEW OF DIRECTORS AND OFFICERS DUTIES AND LIABILITIES 1. Duties of Directors and Officers (a) The Duty to Manage

Under both the CBCA and the OBCA, the basic mandate of the board of directors (the Board) is to manage or supervise the management of the business and affairs of the corporation. The Boards mandate can be accomplished directly by the Board, or indirectly by delegating permissible tasks to committees of the Board and to officers of the corporation. The Board of a public corporation in Canada will have at least one standing committee the Audit Committee, and possibly other committees, including a Compensation Committee and a Corporate Governance and Nominating Committee. The Board of a public corporation will also appoint officers, including a Chief Executive Officer and a Chief Financial Officer. In delegating tasks to Board committees, the directors are not relieved of their duties, but rather must continue to perform their oversight function and question the reports and recommendations of the committees. In so doing, the directors are entitled to rely in good faith on committee members to discharge the mandate of their committee. Similarly, in delegating certain management functions to the officers, the directors must still retain ultimate control and direction over the affairs of the corporation. However, provided the directors appropriately oversee management, and in the absence of grounds for suspicion, the directors are justified in trusting the officers of the corporation to perform their duties honestly. (b) The Fiduciary Duty of Directors and Officers

In addition to the statutory duties of the directors, at common law, officers and directors owe a fiduciary duty to the corporation, which can be described as a duty of loyalty and good faith. As such, officers and directors are obliged not to put themselves in positions of conflict with their duty to the corporation. The courts have rigidly applied this concept by insisting that directors and officers avoid not only actual conflict but also the potential for conflict. Under both Acts, this duty requires every director and officer of a corporation, in exercising his or her powers and discharging his or her duties, to act honestly and in good faith with a view to the best interests of the corporation. The application of these concepts has evolved over time primarily through judicial analysis and they are intended to protect a corporation against self-dealing, self-interest and bad faith at the hands of its directors or officers. In addition, there are provisions in both Acts discussed under Conflicts of Interest below which, if followed, provide procedures for the directors and officers to follow in connection with related party transactions which can protect the validity of the contract or transaction, provided that the contract or transaction is reasonable and fair to the corporation. Finally, the courts have been very clear that a director nominated to the Board by a controlling shareholder or other stakeholder is not entitled to prefer the interests of his or her nominator to the interests of the corporation. Furthermore, the courts have found directors to be -2-

ineligible for indemnification where they have acted in the interests of their nominator, rather than in the best interests of the corporation. The courts have also not been sympathetic to directors who have argued that they were sitting on the Board at someones request and were performing no real function and accordingly, that they should not be held accountable for the actions of the Board. (c) The Duty of Care, Diligence and Skill

At common law, directors and officers are expected to perform their duties in accordance with a certain standard, generally referred to as the duty of care. The duty of care, which has been codified in both Acts, is the standard of performance against which the actions of directors and officers will be measured. Under the Acts, this duty requires every director and officer of a corporation in exercising his or her powers and discharging his or her duties, to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. The qualifications of a particular director or officer, the significance of the action to the director or officer when making the decision, the time available for making the decision, the alternatives open to the corporation and other factors have been considered in interpreting the phrase in comparable circumstances. Specifically, such phrase has been interpreted to apply different standards to different directors and officers and to increase the standard of care required from a sophisticated director or officer. In assessing whether or not the directors or officers have met their obligations, Canadian courts generally approach the subject on the basis of what has become known as the business judgement rule. This rule operates to shield from court intervention business decisions which have been made honestly, prudently, in good faith and on reasonable grounds. Specifically, the court will look to see that the directors or officers have made a reasonable decision, not necessarily a perfect decision. Provided the decision is taken within a range of reasonableness, the court will not substitute its opinion for that of the Board or management even though subsequent events may cast doubt on a particular Board or management decision. Directors and officers are not likely to be held to be in breach of their duty of care if they have acted prudently and on a reasonably informed basis. Directors and officers must be scrupulous in their deliberations and demonstrate diligence. For directors, from a practical perspective, this means that the business judgement rule focuses in part on the procedures implemented and processes followed by the Board in reaching its decision, with the question being whether the procedures and processes were sufficient to ensure that the directors judgment was exercised in good faith, in an impartial, informed and reasonable manner. Where a court is satisfied with the procedures and processes followed, it is less likely to second-guess the Boards decisions. Process alone, however, cannot substitute for an informed and reasonable decision. The Board must be able to demonstrate that it took an active role in the decision-making process and was fully informed. The Board should document its process and the reasons for its decisions through the minutes of its meetings as these records will form the evidence that it discharged its duties.

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(d)

The Duty to Comply with the Law

In addition to the statutory and common law duties noted above, directors and officers are also required to comply with all applicable laws. Under the Acts, every director and officer of a corporation is required to comply with the applicable business corporations statute and the regulations thereunder and the articles and the by-laws of the corporation. Furthermore, no provision in a contract, the articles, the by-laws or a resolution relieves the directors from the duty to act in accordance with the CBCA, the OBCA or the applicable regulations thereunder or relieves them from liability for a breach thereof. (e) Conflicts of Interest

The provisions of the Acts dealing with conflict of interest require the directors and officers to disclose their interest in material contracts and transactions. If the directors or officers fail to make the required disclosure, the Acts provide that the corporation or a shareholder may apply to the court to have the transaction set aside. The Acts set forth procedures which, if followed, can protect the validity of the contract in question and may also protect a director or officer from being required to account for the profits accrued from such contract in certain circumstances. However, in order to avoid being set aside by court action, the contract or transaction in question must also be reasonable and fair to the corporation at the time it was approved. More specifically, under both Acts, a director or officer is required to disclose to the corporation, in writing or by requesting to have it entered in the minutes of meetings of directors or of meetings of committees of directors, the nature and extent of any interest that he or she has in a material contract or material transaction, whether made or proposed, with the corporation, if the director or officer is a party to the contract or transaction, is a director or an officer, or an individual acting in a similar capacity, of a party to the contract or transaction, or has a material interest in a party to the contract or transaction. A director required to make such a disclosure is not permitted to vote on any resolution to approve the contract or transaction unless the contract or transaction: (i) (ii) (iii) relates primarily to her remuneration as a director, officer, employee or agent of the corporation or any affiliate; is for indemnity or insurance permitted under the relevant Act; or is with an affiliate of the corporation.

The Acts also outline requirements with respect to the timing of the initial disclosure, which differ depending on whether the person making the disclosure is a director or an officer, and with respect to continuing disclosure. The Acts also address the effect of the disclosure and implications of shareholder approval. It is important to note that compliance with the conflict of interest provisions of the Acts will not protect a director or officer who has misappropriated a corporate opportunity. The courts do not tolerate the misappropriation of corporate opportunities and the Acts do not provide -4-

any mechanism for the directors or officers to follow that would allow them to take advantage of a corporate opportunity with impunity. Directors and officers will be found in breach of their fiduciary duty if they appropriate for their benefit or for the benefit of any other entity of which they are a director or officer or in which they have an interest, a business opportunity which has been presented to the corporation and discussed at the Board level. A further concern in this area is the appropriation of confidential information. A director or officer who becomes privy to confidential information pertaining to a transaction that the corporation is contemplating could face personal liability if it is established that such confidential information which was imparted to such director or officer in the course of his or her duties for the corporation was disclosed to another entity in which he or she is interested, for the benefit of that other entity and to the detriment of the corporation. 2. Liabilities of Directors and Officers (a) Liabilities of Directors Under the Business Corporations Statutes

The Acts generally provide that directors of a corporation who vote for or consent to a resolution authorizing the issue of a share for consideration other than money are jointly and severally, or solidarily in the case of the CBCA, liable to the corporation to make good any amount by which the consideration received is less than the fair equivalent of the money that the corporation would have received if the share had been issued for money on the date of the resolution. A director who proves that he or she did not know and could not reasonably have known that the share was issued for consideration less than the fair equivalent of the money that the corporation would have received if the share had been issued for money will not be held liable under these provisions. The Acts also generally provide that directors of a corporation who vote for or consent to a resolution authorizing: (i) a purchase, redemption or other acquisition of shares; (ii) a commission; (iii) payment of a dividend; (iv) payment of an indemnity; or (v) payment to a shareholder, in each case in a manner or in circumstances prohibited by the applicable Act, are jointly and severally, or solidarily under the CBCA, liable to restore to the corporation any amounts so distributed or paid and not otherwise recovered by the corporation. (b) Liability for Wages and Other Employee Related Payments

One of the more frequent areas of exposure for directors is in respect of amounts owing to employees and for source deductions owing to government authorities in respect of employees. Under the Acts, directors are generally jointly and severally, or solidarily in the case of the CBCA, liable to employees of the corporation for all debts not exceeding six months wages payable to each such employee for services performed for the corporation while they are directors respectively. Under the OBCA, directors are also liable for vacation pay accrued while they are directors, for not more than twelve months under the provincial Employment Standards Act and the regulations thereunder, or under any collective agreement made by the corporation. There are

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certain conditions precedent to a director being held liable under these provisions as well as certain limitations on directors liability for amounts owed by the corporation to employees. In addition, provincial employment standards legislation and other federal legislation in Canada impose liability on directors for employee wages and for employee source deductions for income tax, employment insurance premiums and Canada Pension Plan contributions. Employees have the option of pursuing directors under either the applicable business corporations statute or such other legislation. (c) Liability under Environmental Legislation

An area which can give rise to significant liability for directors and officers is under environmental legislation. Under applicable environmental legislation, officials can issue remediation orders directly against directors or officers of a corporation to rectify environmental contamination. Such orders can be issued against a corporation and its directors and officers even without fault and without proof of causation, on the basis of a corporations ownership, management or control of a property. Defences to such orders by directors and officers have included a demonstration of having acted with due diligence and prudence and without having created or aggravated the contamination problem. (d) Oppression Remedy

It should be noted that the Acts establish a procedure for a complainant to apply to a court for an order to rectify certain matters. These provisions may be invoked to impose personal liability on directors or officers. A court may issue any order it thinks fit, if it is satisfied that the powers of the directors of the corporation have been exercised, or the business or affairs of the corporation have been carried on or conducted, in a manner that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer. Generally, the courts have held that the specific actions or inaction of a director or officer must be directly linked to the conduct said to constitute the oppression and the circumstances of the case must make it appropriate for the director or officer to be required to personally compensate the aggrieved parties. (e) Liability under Securities Legislation

For public corporations, under the Securities Act (Ontario), every person or company that makes a misrepresentation in a document filed pursuant to Ontario securities laws or otherwise contravenes Ontario securities laws is guilty of an offence and on conviction is liable to a fine of not more than $5 million or to imprisonment for a term of not more than five years less a day, or to both. Where a public corporation is guilty of an offence, every director or officer of the public corporation who authorized, permitted or acquiesced in the offence is also guilty of an offence. The Ontario Securities Commission (the OSC) also has powers to impose administrative penalties of up to $1 million and may order the disgorgement of amounts obtained as a result of non-compliance with the Securities Act. The OSC may also issue cease trading orders against a public corporation and its directors and officers and can prohibit an individual from acting as a director or officer of any public corporation. As of December 31, 2005, a new offence was added to the Securities Act relating to fraud and market manipulation. No person or company

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may, directly or indirectly, engage or participate in any act, practice or course of conduct relating to securities or derivatives of securities that the person or company knows or reasonably ought to know: (i) results in or contributes to a misleading appearance of trading activity in, or an artificial price for, a security or a derivative of a security; or (ii) perpetrates a fraud on any person or company. In addition, under applicable insider trading laws, it is illegal for persons in a special relationship (such as a director or officer) to trade in securities using inside information that is not generally available to the public, or to inform others of such information (tipping) other than in the necessary course of business. Under the Securities Act, a person found guilty of illegal trading or tipping is liable to a fine of not more than the greater of $5 million or triple the profit made and/or imprisonment for a term not exceeding five years less a day. Under the Criminal Code (Canada), the maximum term for imprisonment is ten years. With respect to civil liability, under the Securities Act, investors have the right to sue a public corporation, its directors and others for a misrepresentation found in a prospectus, takeover bid circular, directors circular or offering memorandum. As of December 31, 2005, the Securities Act was amended to give investors in the secondary market the right to sue a public corporation, its directors and others for a misrepresentation in certain documents (such as financial statements, MD&A, the annual information form and information circulars) and public oral statements and for failing to make timely disclosure. Investors have the right to sue whether or not the investor actually relied on the misrepresentation or disclosure non-compliance. Varying defences (including, in some instances, a due diligence defence) are available based on ones responsibility for the disclosure. (f) Liability under Other Statutes

In addition to liability under the Acts, employment related legislation, environmental legislation and securities legislation (in the case of a public corporation), it should be noted that other federal and provincial legislation can impose liability on directors in a variety of areas (for example, consumer legislation). (g) Statutory Relief from Certain Liabilities under the Business Corporations Statutes

Both Acts specifically provide that if the directors relied in good faith on certain things, they will not be liable for certain offences under the applicable business corporations statute. However, these provisions operate to relieve directors of liability only for certain specific statutory liabilities, not for just any matter for which the directors may be liable. The CBCA provides safe havens for directors in certain circumstances if the directors acted in good faith. Specifically, under the CBCA, a director is not liable under the enumerated liability provisions or wage liability provisions noted above, and has complied with his or her duty to comply with the CBCA, if the director exercised the care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances, including reliance in good faith on financial statements of the corporation represented to the director by an officer of the corporation or in a written report of the auditor of the corporation to fairly reflect

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the financial condition of the corporation in accordance with generally accepted accounting principles, or a report of a lawyer, accountant, engineer, appraiser or other person whose profession lends credibility to a statement made by any such person. Under the OBCA, the safe haven provision is somewhat different. Importantly, there is no relief from statutory liability with respect to unpaid wages. In addition to the good faith reliance on financial statements and auditors reports and reports of professionals mentioned above, a director of an Ontario corporation is entitled to rely in good faith on interim or other financial reports represented to him or her by an officer of the corporation to fairly present the financial position of the corporation in accordance with generally accepted accounting principles. The OBCA also allows directors to rely in good faith on a report or advice of an officer or employee of the corporation, where it is reasonable in the circumstances to rely on the report or advice. It is important to note that the safe haven provisions noted above apply only to directors, and do not operate to relieve officers of the same statutory liabilities. It should be noted that directors may also be relieved of liability if they dissent from a particular action. Under both Acts, a director who is present at a meeting of directors or committee of directors is deemed to have consented to any resolution passed or action taken at the meeting unless the director requests a dissent to be entered in the minutes of the meeting, or the dissent has been entered in the minutes, the director sends a written dissent to the secretary of the meeting before the meeting is adjourned, or the director sends a dissent by registered mail or delivers it to the registered office of the corporation immediately after the meeting is adjourned. Furthermore, a director who votes for or consents to a resolution is not entitled to dissent. A director who was not present at a meeting at which a resolution was passed or action taken is deemed to have consented thereto unless within seven days after becoming aware of the resolution, the director causes a dissent to be placed with the minutes of the meeting, or sends a dissent by registered mail or delivers it to the registered office of the corporation. (h) Indemnification and Insurance

The Acts provide for the indemnification of directors and officers in relatively narrow circumstances. Generally, the Acts provide that a corporation is permitted to indemnify a director or officer, a former director or officer or another individual who acts or acted at the corporations request as a director or officer, or an individual acting in a similar capacity, of certain other entities, against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by the individual in respect of any civil, criminal, administrative, investigative or other proceeding in which the individual is involved because of that association with the corporation or other entity. However, a corporation may not indemnify such an individual unless she acted honestly and in good faith with a view to the best interests of the corporation or other entity, as the case may be, and in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, the individual had reasonable grounds for believing that the individuals conduct was lawful.

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Under the Acts, a corporation may also purchase and maintain insurance for the benefit of such an individual against any liability incurred by the individual in the individuals capacity as a director or officer of the corporation or in her capacity as a director or officer, or in a similar capacity, of another entity, if the individual acts or acted in that capacity at the corporations request, subject of course to the limitations on indemnification noted above. 3. Conclusion

Directors and officers of corporations should be aware of common law and statutory duties applicable to them and understand how to comply with such duties. Directors and officers of corporations should also be aware of the liabilities which they may face and understand how to mitigate those liabilities. For some practical tips on complying with these duties and avoiding liability, see Part III of this paper, below.

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PART II - IN-DEPTH REVIEW OF DIRECTORS AND OFFICERS DUTIES AND LIABILITIES 1. Introduction

Historically the duties and liabilities of directors under Canadian law have evolved from the duties of trustees of commercial organizations up until the evolution of the modern business corporation commencing in the mid-19th century. As stand-alone principles the duties of directors under modern Canadian corporate legislation appear quite simple. The directors have the duty to manage or supervise the management of the business and affairs of the corporation. The directors must act honestly, in good faith and with a view to the best interests of the corporation. Finally, directors have a duty to avoid conflicts of interest unless such conflict is disclosed and approved by a disinterested quorum of shareholders. Given the complexity of modern corporate life, particularly in large corporations, the courts are struggling to fit these simple straight-forward principles into the context of a modern corporation. For example, does the best interests of the corporation involve only considering the economic interests of shareholders, or are the interests of other stakeholders such as employees and bondholders to be considered as well? In assessing their performance, are directors to be judged by an objective standard, or are the qualifications of each director to be considered in assessing whether or not the particular director met the required standard of care? This potion of the paper examines the basic principles and discusses how the courts are currently interpreting these principles in actual situations. 2. Historical Background

Until the early part of the century directors were considered as trustees, and their duties and powers developed out of this concept. The historic development of the concept of a director as trustee is easy to explain in that prior to 1844, the enactment of first modern companies legislation in England, most commercial enterprises were unincorporated and depended for their validity on a deed of settlement vesting the property of the corporation in trustees. To impose on directors the fiduciary duty of trustees made sense, since the directors were usually also the trustees and they held the property in trust for the shareholders or members. The analogy began to break down at the end of the 19th century when it was realized that directors of a commercial enterprise are charged with different responsibilities from trustees, the latter being only expected to adopt a conservative management policy to preserve the assets for the beneficiaries of the trust and the former being charged with the responsibility of managing the assets in such a way so as to gain a profit. Before considering the modern statutory provisions relating to these duties, it should be noted that the statutory provisions in question now subject officers of a corporation to the same duties as directors. At common law officers were not subject to any higher duty than those of full-time employees, which is the duty to devote their whole time and attention (during usual office hours) to the business of the corporation and to act honestly in the best interests of their employer. The evolution of a class of professional corporate managers is one of the most - 10 -

distinctive features in the development of a modern corporation but the courts are not prepared yet to recognize that it has obtained professional status and standards and should perhaps be subject to its own standard of skill and diligence. However, the argument has been made academic by recent Canadian companies legislation, which holds officers to the same standard of skill and fiduciary duties as directors. 3. The Duty to Manage

Under subsection 115(1) of the OBCA and subsection 102(1) of the CBCA, the directors of a corporation are required to manage or supervise the management of the business and affairs of the corporation. According to both Acts, this power which is vested in directors can only be restricted, in whole or in part, by a unanimous shareholders agreement (USA). When a USA is adopted, the shareholders assume those rights, powers, duties and liabilities which have been removed from the directors. In the absence of a USA, the management of a corporations business and affairs is the prerogative of the directors, not of the shareholders. 4. The Duty of Care, Diligence and Skill

The principle formulated in English cases by the end of the 19th century that a director must exercise such degree of skill and diligence as would amount to the reasonable care which an ordinary man might be expected to take in the circumstances, has been embodied in both the OBCA and the CBCA. Both Section 134 of the OBCA and Section 122 of the CBCA state that directors and officers in exercising their powers and discharging their duties shall exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. It has been suggested that the phrase in comparable circumstances is intended to make relevant all of the circumstances in which a decision is made including the qualifications of the particular director, the significance of the action to the director when making the decision, the time available for making the decision, the alternatives open to the corporation, and other factors. It might also be used to apply different standards to different directors depending on whether the director is an outside or an inside director, a representative of a special interest group such as workers or minority shareholders, or a professional advisor to the corporation, such as a lawyer or an accountant. In Standard Trustco Ltd., Re (1993), 6 B.L.R. (2d) 241 (O.S.C.) the phrase in comparable circumstances was held to increase the standard of care required from a sophisticated director. This action was based on the release of financial statements that did not disclose the concerns of the Office of the Superintendent of Financial Institutions (OSFI). The OSC noted that the directors failed to exercise the requisite amount of care and placed great emphasis on the sophistication of the Board. This decision discusses at length what the directors should have done as a result of concerns expressed by OSFI. The OSC determined that it should have been obvious to the directors that they could not rely on management, when they had a reason to be concerned about the integrity or ability of management, and in these circumstances, the directors themselves should have consulted independent outside advisors and made more independent inquiries to OSFI.

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The Standard Trustco decision also addressed the issue of the standard of care of a director who sits on a committee of the Board, such as the audit committee. The OSC offered the following commentary: In our opinion the members of the audit committee should bear somewhat more responsibility than the other directors for what occurred at the board meetings not because there was a greater standard of care imposed on them, but rather because their circumstances were different. As members of the audit committee, they had a greater opportunity to obtain knowledge about and to examine the affairs of the company than non-members had. Although it is still not clear that the attempts to codify the common law standard of care for directors in Canada have been successful in raising the standard of skill required for directors, such codification has had two significant results. First of all, it is no longer possible for directors of Ontario or federal corporations to contract out of their duties or to exclude liability for breach thereof under corporate by-laws. Furthermore, indemnification by the corporation for breach of this duty is either not permitted or is very limited. Secondly, there is clearly a trend in modern companies law towards a due diligence test. For example, both the CBCA and the OBCA provide that, unless a director expressly dissents within seven days, he is deemed to have consented to any resolution or action of which he becomes aware. Both the CBCA and the OBCA permit Boards to appoint an executive committee from among its directors, and to delegate powers and duties of the Board to such committee. Also, both Acts require public corporations to have audit committees of directors to review financial statements. The question arises, as it did in Standard Trustco, whether directors serving on these committees are subject to a higher standard of care than the other directors. In the case of audit committees, it is submitted that under both the OBCA and CBCA the audit committee is only an additional protection for shareholders and is not intended to reduce the duty of diligence and the liabilities of all of the directors in approving financial statements. Under both Acts the directors, and not a committee thereof, are responsible for approving the financial statements before they are submitted to the shareholders. In UPM-Kymmene Corp v. UPM-Kymmene Miramichi et al. (2004), 183 O.A.C. 310 (Repap), an Ontario Court of Appeal decision, the Court of Appeal affirmed an Ontario Superior Court decision ((2002), 214 DLR (4th) 310) that a director generally cannot rely on the recommendations of a Board committee to shield him from an independent obligation to make informed decisions. In Repap, the Chairman of the company was provided with an overly generous compensation package that was not commensurate with his experience and abilities and the precarious financial state of Repap. The Board relied upon the recommendation of the compensation committee but that committee did not have the time or expertise to review the contract, and its members did not understand its key components. The trial judge held that it was not unreasonable for the Board to assume that the committee had done a careful job, but this assumption did not relieve the duty of the directors to make an informed and reasonable decision. Accordingly, the Court of Appeal held that the process by which the Board members came to

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their decision was flawed, and fell short of the exercise of prudent judgment in the interests of shareholders that is expected of directors. 5. The Fiduciary Duties

The fiduciary duties expected of directors and officers under the Acts are, simply stated, that the directors and officers must act honestly, in good faith and with a view to the best interests of the corporation. As in the case of the duty of care owed by directors, the provisions of the OBCA and CBCA dealing with directors fiduciary duties attempt to codify the case law. Despite this codification, the standard to which directors and officers must comply to avoid breaching their fiduciary duties is unclear. Nonetheless, directors and officers who take a cautious approach to possible conflicts of interest are unlikely to become subject to an action claiming damages or other loss. The fiduciary duties of directors and officers can be divided into three categories: the duty to act in the best interests of the corporation, the duty of loyalty and to avoid conflicts of interest, and the duty to disclose any interests in corporate transactions. (a) The Duty to Act in the Best Interests of the Corporation

The courts have established that directors will be liable as fiduciaries if they fail to act in good faith and in what they honestly believe to be the best interests of the corporation, when carrying out their statutory responsibility for managing the corporation. Historically, the phrase best interests of the corporation has been interpreted to mean the interests of all of the shareholders taken as one group. Any exercise of the shareholders powers by a director for a collateral purpose, not in accordance with the interests of shareholders, may be set aside by the courts. However, difficulties arise, and will continue to arise, in determining what are the best interests of the corporation. Traditionally, the courts have taken a fairly narrow view of what is in the best interest of the corporation. Until recently the courts have taken the position that directors must always be governed by the profit motive, and are prohibited from taking into account the interests of employees, creditors, consumers, or society-at-large unless it can be established that actions taken or payments made for non-business purposes will increase profitability. Furthermore, directors and officers must pursue the profit motive for the benefit of all shareholders equally. Any transactions entered into which depart from this narrow focus may be set aside by the courts even if the transactions could perhaps, under a more modern analysis, lead to greater profits in the long run by creating a better corporate image. A case that challenges the traditional view of profit being the sole justification for a directors decision is the judgment of the Ontario Court of Appeal in Pente Investment Management Ltd. v. Schneider Corp (1998), 42 O.R. (3d) 177. A special committee of outside directors was appointed by Schneiders to review take-over bids. The committee accepted a bid from Smithfield Foods that was higher than market value for the shares of the company, but less than another bid made by Maple Leaf Foods Inc. The main issue was whether the committees actions were not in the best interest of Schneider Corp. and therefore in bad faith. In dismissing the appeal by Maple Leaf, the court emphasized that the committee acted in the best interests of

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the company. In particular, the committee canvassed its options, but was not under any obligation to turn the bidding process into an auction. The committee obtained fair value for the shareholders given the intense time-limit-driven context of the bid process. Recently the Supreme Court of Canada considered whether or not the fiduciary duties owed by directors to a corporation could be extended to creditors, in the case of Peoples Department Stores (Trustee of) v. Wise, 2004 SCC 68, an appeal from a judgement of the Quebec Court of Appeal. In Peoples, the directors of a department store chain implemented a cash management system among affiliated retail entities, which resulted in the insolvency of the entire corporate group. Creditors of the corporate group sued the directors personally, on the basis that the creditors were owed the same fiduciary duties as owed to the corporation, and the directors of Peoples had breached this duty by implementing the cash management system, thereby causing the insolvency of the corporation to the detriment of the creditors. In its decision the Supreme Court of Canada rejected the extension of directors fiduciary duties to creditors, but did hold that the statutory standard of care imposed on directors will enable any outside party injured by a failure to meet this standard of care to sue for damages, including creditors. Therefore creditors can bring an action for breach of the statutory duty of care should directors act recklessly and not with the degree of skill expected of them in the particular circumstances. Although the Supreme Court found that the Peoples directors had acted within the required standard in these particular circumstances, the Supreme Court decision may be an important extension of the liability of directors for breach of their statutory standard of care, because the door appears to be open for injured third parties, whether creditors, employees, or suppliers to name a few, to sue directors personally for damages. In response to the decision in Peoples, s. 134 (1) of the OBCA was amended on August 1, 2007 with the intention of clarifying that directors and officers owe their fiduciary obligations to the corporation alone. The section now reads, [e]very director and officer of a corporation in exercising his or her powers and discharging his or her duties to the corporation shallact honestly and in good faith with a view to the best interests of the corporation [emphasis added]. While the amendments are clearly an attempt to limit the scope of the statutory duty of care owed by officers and directors, and thus prevent the types of legal actions against directors by third parties seen in Peoples, it remains to be seen how the courts will interpret the changes. In 2008, the courts again considered the same issue of best interests, but from a different perspective. In BCE Inc. (Arrangement relative ), 2008 SCC 69, the courts had to decide to what extent directors must consider the interests of bondholders in situations where the company is for sale. In BCE, a group of investors proposed to take one of Canada largest telecommunications companies private in what would be the largest private equity deal in Canadian history. Bell Canada Enterprises Inc. (BCE Inc.) was a prime candidate for a private takeover because its stock price was stagnating due to stringent competition and a failed attempt to transform BCE Inc. into an income trust. Bondholders of Bell Canada Inc., a wholly-owned subsidiary of BCE Inc., believed that the high rating of their bonds would be jeopardized by the highly leverage nature of the going private transaction of its parent, and consequently launched a law suit to stop the privatization on the grounds that BCE Inc.s Board only considered the interests of the shareholders of BCE Inc. and overlooked the interests of other affected constituents, including the Bell Canada bondholders.

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At the trial level, [2008] Q.J. No. 1728, the Quebec Superior Court found against the bondholders. The Court held that in balancing the various interests, the bondholders would continue to be paid their interest and if the bondholders had been concerned about a buy-out of BCE Inc. and the resulting downgrading of their bonds to junk status, the bondholders could have protected themselves with covenants covering this situation. On appeal to the Quebec Court of Appeal, 2008 QCCA 930, the Quebec Court of Appeal overturned the trial decision on the grounds that the directors never discharged their duty to act in the best interest of the corporation by considering the interests of the bondholders. The Court of Appeal held that the directors had a duty to consider the position of the bondholders, and examine potential alternatives that could preserve the high rating of their investment, even if at the end of the day they decided in favour of the shareholders. The Quebec Court of Appeal decision was appealed to the Supreme Court of Canada, and on June 20, 2008 the Supreme Court of Canada agreed with the Quebec Superior Court decision and overruled the Quebec Court of Appeal, with reasons to follow later. In December, 2008 the Supreme Court released its reasons for judgement in the BCE case. First of all, the Supreme Court affirmed its decision in the Peoples case that the fiduciary duty of directors to act in the best interest of a corporation is owed only to a corporation. The Supreme Court described the fiduciary duty as a broad, contextual concept, not confined to short-term profit or share value, but based on the long-term interest of the corporation. The Court held that directors must consider the impact of a Board decision on all affected stakeholders, or run the risk of being found not to have acted in a fair and reasonable manner, leaving the Board open to a successful claim by a qualified claimant under the oppression remedy. The Supreme Court also referred to the fiduciary duty of directors to act in the best interest of the corporation viewed as a good corporate citizen. It is possible that the Supreme Court is now adding a new standard in assessing whether or not a fiduciary duty has been properly performed; whether or not the best interests of the corporation must always be viewed in the context of good corporate citizenship. Finally, the Supreme Court did uphold the business judgment rule, defining it as deference to a business decision, as long as it lies within the range of reasonable alternatives. In summary, the BCE decision has provided some refinement of the correct interpretation under Canadian law relating to the fiduciary duties of directors of Canadian companies to act in the best interest of a corporation. On the one hand, directors may take into account the interest of all affected stakeholders, and in fact must do so in order to fulfill their responsibilities. However, given the development in Canadian cases such as Peoples and BCE, it is clear that the common law duty of directors to act in the best interest of the corporation no longer means to act only in a way that will maximize profit for shareholders, adopting the Revlon duties principle, formulated by the Delaware Supreme Court in Revlon vs. MAC Andrew & Forbes Holdings Inc. 506 A 2d 173 (Del Sup. Ct. 1986). In light of the current public pressure on corporations to take into account environmental and other issues, we will probably see a further expansion of the principle permitting directors to take other interests into account, particularly in light of the Supreme Courts characterization in the BCE decision of the fiduciary duty requiring directors to act in the best interest of the corporation, viewed as a good corporate citizen. Canadian law has never fully endorsed the United States Revlon Duties principle, formulated in Revlon.

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Although it does not appear to have been litigated yet, particular problems will arise in cases of directors appointed by special interest groups which have provided financing, such as financial institutions, minority shareholders, unions or government departments. Under present law, these directors are bound to act only in the best interests of the corporation and cannot consider the special interest of the party which elected them, unless such interest coincides with the best interest of the corporation. Canadian law at the present time does not recognize the concept of nominee directors. (b) The Duty of Loyalty and Conflicts of Interest

As fiduciaries, directors and officers are under a strict duty to avoid any conflict between self-interest and the interest of the corporation. Although recent legislation has developed statutory rules to regulate the directors duty to disclose his interest in a corporate transaction and to regulate his use of confidential information in insider trading, other breaches are generally left to be governed by the common law and each case must be considered on its particular facts. In 1966 the Supreme Court of Canada held in Peso Silver Mines, [1966] S.C.R. 673, that the directors were free to take up independently an opportunity originally offered to their corporation, but which had been rejected by the Board in good faith on the basis that the corporation did not have sufficient funds to take up the opportunity. In finding for the directors, the court held there was insufficient evidence to show that the offer to the corporation was accompanied by confidential information not available to other prospective purchasers, or that the directors had access to such confidential information by reason of their office. In Canadian Aero Services Ltd. v. OMalley, [1974] S.C.R. 592, the Supreme Court of Canada held former senior officers of a corporation liable to the corporation when such officers deliberately set out to take advantage of a contract, the basis of which they had formerly developed as officers of the corporation. Justice Laskin rejected the argument that officers of a corporation are mere employees and held that senior officers are under a fiduciary duty similar to that owed to a corporation by its directors. Although the responsibility of officers in this regard has now been embodied in legislation, the decision is important for several reasons. First, it is clear that each case must be considered on its own facts. Second, the principle from Peso that directors and senior officers are always entitled to take advantage personally of opportunities formerly offered to their corporate employers which were turned down for valid business reasons, was rejected. Finally, Justice Laskin made it clear that the fiduciary duty extends past the time of employment. The defendants in Canadian Aero had tried to argue that because some amendments were made later to the proposal submitted by their personal corporation from the proposal originally submitted by Canadian Aero under their direction, the business opportunity was different. In an Ontario case, Sanford Evans List Brokerage v. Trauzzi (2000), 50 C.C.E.L. (2d) 105 (Ont. S.C.J.), Chapnik J. makes some interesting comments regarding the duty of loyalty, as follows: In these times of fast paced business and increased mobility of personnel, it would be folly to hold employees captive to their employers. Thus not only do the courts not impose the mantle of

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fiduciary lightly, but they carefully scrutinize the actions of the fiduciary in assessing the alleged wrongful conduct. The failure to provide reasonable notice to the employer is not, in itself, viewed as a breach of fiduciary duty. As an overriding proposition, departing employees have an absolute right to go into direct competition with their former employer and make use of the skills and general knowledge they accumulated during their period of employment. Competition per se by a departing fiduciary is not prohibited; only unfair competition is precluded. Thus, a departing fiduciary may advertise to the general public. If the former employers customers are notified during the course of the general advertisement campaign, there is no breach, provided there is no misuse of confidential information such as trade secrets or customer lists. Ivanore v. Bastion Development Corp. (1993) 47 C.C.E.L.74, a British Columbia trial court decision, again illustrates when a senior officer will be regarded as having breached the fiduciary duty the officer owes to his employer by taking a corporate opportunity. In this case, the opportunity arose from a long-standing business and social relationship between the officer and a third party. The court stated that the crux of the matter ... [was] whether, in all circumstances, [the officer] failed to keep [the corporation] ... adequately informed. The court found that the officer did disclose the existence of this opportunity, actual or potential, to [the corporation] and the disclosure was sufficiently detailed. In obiter the court said that in so far as the business and social relationship between the officer and the third party constituted a corporate opportunity, it was an opportunity that belonged to the officer before he became employed at the corporation. In summary, the duty to avoid conflicts of interest and loyalty is difficult to define, and each case must be considered on its facts. However, it is clear that although the directors and officers of a corporation will be entitled to take advantage of business opportunities which have been offered to their corporation but turned down for valid business reasons after full and fair disclosure, directors and officers who deliberately misappropriate corporate opportunities for their own gain will be liable to the corporation, even if the gain materializes after they have ceased to hold office. (c) The Duty to Disclose Interest in Corporate Transactions

In the 19th century, the courts developed a strict rule that contracts of a corporation in which one of its directors had a personal interest, whether pecuniary or non-pecuniary, were voidable at the option of the corporation and that the interested director was liable to account to the corporation for any profits received. The only exception to the rule occurred when an interested director declared his interest and the shareholders of the corporation approved the contract after full disclosure. Problems developed over the application of the rule in two ways. Firstly, dishonest directors were often controlling shareholders, and therefore had the required votes to ratify their own contracts. Secondly, because of the strictness of the common law rule, contracts which were

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fair and in the best interest of the corporation were not protected from voidability under the common law rule. As a result, modern companies legislation sets out disclosure rules with which a director (and an officer) must comply in order to prevent the contract in which he is interested from being voided. Recent amendments to the OBCA have tightened the disclosure requirements for directors and officers. Prior to the amendments, a director or officer was able to sufficiently meet his disclosure obligations by providing a general notice of a material interest in the transaction to the Board. As of August 1, 2007, a director or officer must additionally provide disclosure every time there is a material change in his interest in the transaction or contract. Furthermore, prior to the amendments, directors were not allowed to vote on any resolution to approve a contract or transaction in which they had a material interest, but could attend the meeting in which their potential conflict was discussed. As a result of the amendments, such directors are no longer allowed to attend any part of a meeting of directors during which the contract or transaction is discussed. The CBCA provides that a material contract or material transaction in which a director or officer has an interest is neither void nor voidable by reason only of that relationship. Moreover the contract is not void or voidable if the interested director is present at or is counted to determine a quorum of the Board or committee thereof, provided that (1) the director or officer has properly disclosed his interest to the Board, (2) the contract was approved by a disinterested quorum of the Board or the shareholders, and (3) it was reasonable and fair to the corporation at the time that it was approved. As discussed above, the OBCA adds the additional requirement that the interested director may not attend any part of the Board meeting during which the contract or transaction is discussed. If the director or officer fails to disclose his interest, a court may set aside the contract on such terms as it sees fit, and the director or officer may be liable to account for any profits personally realized on the transaction. The term material interest is not defined in either the CBCA or the OBCA; however, case law suggests that a material interest does not necessarily require the director or officer to have a direct financial interest, as shown in a recent Ontario decision. In Exide Canada Inc. v. Hilts (2005), 11 B.L.R. (4th) 311 (S.C.J), the CEO and director of Exide and his executive assistant co-signed a cheque made out to a joint account in their own names. They later, without the knowledge of the Board, executed a contract between Exide and a corporation controlled by the executive assistant, and transferred $300,000 of the money to this corporation. The court set aside the contract, and ordered the CEO to account for profits, stating: A material interest includes a personal relationship with the person who was a party to a material contract. Even where a director had no monetary interest in a person, but the negotiation involves a close personal friend of one of the directors the transaction ought to be suspect. [at page 316]. In summary, directors and officers have a legal obligation to act honestly and in good faith. This fiduciary duty requires that directors and officers disclose any personal interest they may have in a material contract or transaction involving the corporation. Moreover, directors and officers who permit a corporation to be a party to a material contract or transaction in which the director or officer has an interest, must ensure that the contract is fair and reasonable to the

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corporation. If directors and officers adhere to these obligations, it is unlikely that they can later be called upon to account to the corporation for the profits from a transaction. More importantly, the corporation will be unable to exercise its common law option to void the contract. 6. Other Liability Under the Business Corporations Acts

Both the OBCA and CBCA provide for the personal liability of directors for the following financial misconduct: (a) (b) (c) improper redemption or purchase by the corporation of its own shares; improper declaration and payment of dividends which will render the corporation insolvent; authorizing the issue or allotment of shares for consideration other than money, when such consideration is less than the fair value of the shares.

In the above situations the directors are jointly and severally liable to make restitution to the corporation for the financial harm caused to the corporation and not otherwise recovered by the corporation. This means that an injured party can sue and be entitled to recover damages against each director, although the directors will have the right to force their fellow directors to contribute their proportionate share of damages. A provision common to both Acts creates a large potential liability for directors. The Acts provide that in the case of an insolvent or dissolved corporation, the directors are jointly and severally liable for up to six months unpaid wages (and in Ontario for up to twelve months vacation pay) to employees, provided that the employees have first tried to sue the corporation for such wages, or the corporation has gone into bankruptcy and the execution against the corporation has been unsatisfied in whole or in part. Previously, the OBCA required an action to be commenced while the defendant was a director or within six months after he had ceased to be a director. As of January 1st, 2004 the OBCA no longer includes a six-month limitation period against a director for wages payable, since the Limitations Act, 2002 has substituted a two-year limitation period for the previous six-month rule. The CBCA requires the suit to be commenced within six months of the wages becoming payable, and provides for liability while continuing to be a director or within two years of the director ceasing office. If a director personally pays for employee wages, both Acts subrogate to the director the employees claims and preferences for their unpaid wages. In the Ontario Court of Appeal decision of Proulx v. Sahelian Goldfields Inc. (2001), 55 O.R. (3d) 775, Borins J.A. indicated that in addition to being responsible for employee wages, directors of a corporation can be held liable for employee debts for services performed for the corporation. Former employees of Sahelian Goldfields Inc. sued the directors of the corporation for lost salary, vacation pay and reasonable travel expenses incurred in performing their duties on behalf of the company. The court found that directors were liable for not only unpaid wages but also for debts to employees for other services (such as travel expenses) up to a maximum of six months wages.

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Both Acts provide that a director who dissents to a particular action in accordance with the procedure as set out in each Act is not liable. It is important to note that both Acts deem a director to be liable if the director was present at a meeting at which a particular resolution was considered unless the director records his dissent at the meeting or sends written dissent to the corporation immediately after the meeting is adjourned. However, directors lose their right to dissent afterwards if they vote for or consent to the resolution in the meeting. Finally, Section 248 of the OBCA and Section 241 of the CBCA contain the oppression remedy which, in limited circumstances, may be invoked to impose personal liability on directors. One of the grounds a plaintiff can rely upon is a finding that in respect of a corporationthe powers of the directors of the corporation or of any of its affiliates are, have been or are threatened to be exercised in a manner that unfairly disregards the interests of a shareholder or creditor. If such a finding is made, a court may make any order it sees fit, including an order requiring the director to compensate the plaintiff personally. In Budd v. Gentra Inc. (1998), 43 B.L.R. (2d) 27, the Ontario Court of Appeal set out some factors for a court to consider in determining whether a director should be held personally liable under the oppression section. The court stated that (1) specific actions or inaction on the part of the directors must be directly linked to the conduct said to constitute the oppression; and (2) the circumstances of the case must make it appropriate for the director to personally compensate the aggrieved parties. Sidaplex-Plastic Suppliers Inc. v. Elta Group Inc. (1998), 40 O.R. (3d) 563 is an example of a case in which a court has held a director personally liable under the oppression remedy. The defendant was the sole director, officer and shareholder of the corporation. The plaintiff bank granted a letter of credit (which later lapsed) to the corporation, and in exchange took back a personal guarantee from the defendant as security. In finding that a director of a closely-held corporation should be personally liable for the amount of a lapsed letter of credit, the Court emphasized that the defendant benefited substantially upon the lapse. The case law in this area suggests that where directors of closely-held corporations conduct the affairs of a corporation in such a way as to benefit themselves personally while at the same time harming creditors, there may be grounds for an oppression remedy application. 7. Liability Under the Occupational Health and Safety Act

Ontario and British Columbia have enacted specific duties owed by directors and officers of a corporation under the relevant provincial health and safety laws. In the remaining provinces and territories, to date directors and officers are held liable only if prosecuted as individuals in breach generally. Since these other jurisdictions do not impose any specific duties on directors and officers under its health and safety law, the odds of prosecution are generally low. Section 32 of Ontarios Occupational Health and Safety Act (the OHSA) requires officers and directors of a corporation to take reasonable care to ensure that a corporation complies with the OHSA, its regulations, and the orders and requirements made pursuant to the OHSA. Section 121 of British Columbias Workers Compensation Act places a similar duty on directors and officers of a corporation. Section 66(1) of the OHSA stipulates that directors and officers may receive a term of imprisonment (of not more than 12 months) or a fine (of not more

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than $25,000), or both, for failing to comply with Section 32 of the OHSA. The exact scope and meaning of the duties under Section 32 remain unclear however since the section has yet to be judicially considered by an Ontario court. In R. v. Bata Industries Ltd. (1992), 9 O.R. (3d) 329 [appeal allowed in part (1993), 14 O.R. (3d) 354] the Ontario Court of Justice set out a list of criteria to be considered in determining whether accused directors and officers had established the due diligence defence to an environmental offence (further elaboration on case in next section). While Bata was an environmental case, it nevertheless provides guidance in determining how the due diligence defence may be used by directors and officers under health and safety law. In future, for a director or officer to prove that they were duly diligent to escape liability under health and safety law, they will have to establish that they: (i) (ii) (iii) (iv) (v) (vi) 8. created a system to ensure compliance with health and safety law; gave instructions for implementing the system; created a system to ensure that the Board of Directors received reports on operation and effectiveness of the system; reviewed compliance reports that were provided to them; were aware of industry standards in dealing with the risks faced by the corporation and met those standards; and reacted immediately to and rectified a system failure.

Liability Under Environmental Law

Under Section 280.1 of the Canada Environmental Protection Act (the CEPA), directors and officers have a duty to take reasonable care to ensure that the corporation complies with the CEPA, its regulations and any orders or directions made pursuant to the CEPA. Further, under Section 280(1), directors and officers are liable for an offence committed by the corporation under the CEPA if they were in a position to direct or influence the corporations activities that led to the violation and regardless of whether the corporation was prosecuted or charged. Directors and officers can escape liability under the CEPA if they are able to establish that they were duly diligent in attempting to prevent the offence (Section 283). Section 194 of Ontarios Environmental Protection Act (EPA) was amended in 2005 to significantly broaden the scope of directors and officers statutory duties. Pursuant to this section, a director or officer has a duty to take all reasonable care to prevent the corporation from committing a number of environmental offences under the Act, such as: (i) (ii) discharge of a contaminant contrary to law; failure to provide notification of the discharge of a contaminant contrary to law;

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(iii) (iv) (v) (vi) (vii)

contravention of the sections of the Act dealing with hauled industrial waste or hazardous waste; failure to act to restore the natural environment when there has been a spill; obstruction, giving false information, or refusing to provide information; failure to install, maintain, operate, replace, or alter equipment as required; and contravening certain orders issued under the Act.

A director or officer of a corporation is liable to conviction for a breach of the statutory duty whether or not the corporation has been prosecuted or convicted. The maximum penalty for non-compliance with the Act by an individual was recently raised substantially to a maximum fine of $4,000,000 per day on a first conviction ($6,000,000 per day on subsequent conviction), or to imprisonment for up to five years less a day; or both. Once charged with one of the offences for failing to carry out one of his statutory duties, the director or officer bears the burden of proving, on a balance of probabilities, that he carried out the duty that is the subject of the charges. It should be noted that the Ontario Water Resources Act was also amended in 2005 to include provisions similar to those in the EPA regarding expanded liability for directors and officers (Section 116(1)), including an onus on the director or officer to prove due diligence (Section 116(2.1), and penalties (Section 109(3)). The Ontario District Court, in the case of Regina v. Shamrock Chemicals and Shirley (1989), 4 C.E.L.R. (N.S.) 315 displayed a willingness to enforce the director liability provisions of the EPA. The Court found that the sole director, shareholder and the corporation itself could all be fined for an environmental offence, dismissing any double jeopardy argument. The court viewed the offence under the Act as one of strict liability. Moreover, the court held that, in the interests of general deterrence, it was necessary to penalize both the sole director and the corporation under the Act. Considering the recent public emphasis on environmental protection, it is anticipated that the courts will increasingly find directors liable for a corporations environmental offences. Bata expanded the scope of directors liability even further. In that case, two officers of Bata Industries Ltd. were convicted for failing to take all reasonable care to prevent a discharge of liquid industrial waste contrary to the Ontario Water Resources Act. In making this finding the court ruled that the Crown is only required to prove the actus reus of the offence; that is, the Crown only has to show that the defendants were engaging in an activity that caused the prohibited discharge. Once the Crown established beyond a reasonable doubt that the officers were engaged in the activity in question, it was open to the officers to argue that they were duly diligent. Essentially, the officers had to show, on the balance of probabilities, that they exercised all reasonable care by establishing a proper system to prevent commission of the offence and by taking reasonable steps to ensure the effective operation of the system. The officers were

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unsuccessful in arguing that they were duly diligent and were each fined $6,000. Bata Industries Ltd. was ordered not to indemnify them. It is instructive to note the standard of care that the court required of the officers in Bata, as it may be applied by analogy to other situations. The court stated that directors are responsible for reviewing the environmental compliance reports provided by corporate officers, but are justified in placing reasonable reliance on these reports (and the reports of consultants, counsel or other informed parties). Furthermore, directors should ensure that officers are promptly addressing environmental concerns brought to their attention by government agencies or other concerned parties, including shareholders. Directors should also be aware of the standards of their industry and other industries which deal with similar environmental pollutants or risks. Finally, the court stated that directors should take immediate remedial action when they have noticed that the system has failed. Ontarios Environmental Enforcement Statute Law Amendment Act sets out specific environmental duties owed by directors and officers. One of the main duties it imposes on directors and officers is to take reasonable care to prevent a corporation from allowing or causing the unlawful discharge of contaminants. Quebecs Environment Quality Act (the Act) states that a director or an officer commits an offence by allowing a corporation to neglect or refuse to comply with an order made under the Act. It is also an offence for a director or an officer to allow the corporation to unlawfully dispose or release contaminants in contravention of the Act. The Act does not however require directors and officers to take positive action in preventing these contraventions and nor does it result in personal prosecution of the directors or officers. In most of the other provinces of Canada, the relevant environmental legislation imposes liability on directors and officers who permit, direct or agree to contraventions of the legislation. 9. Liability Under the QBCA

The Quebec Business Corporations Act (QBCA) came into effect on December 1, 2009. This new piece of legislation was aimed at modernizing the law governing companies under the Quebec Companies Act (the QCA) and creating a legislative framework for Quebec corporations. The drafters of the QBCA have modelled the provisions on officer and director liabilities on the related provisions under the CBCA in an attempt to harmonize the provisions. Under the QBCA, directors are liable for certain acts that the corporation is prohibited from doing. These include acts such as paying an unreasonable commission in connection with the issuance of a corporations securities or accepting property value as consideration for shares where such property value is less than what the amount of money consideration would have been. Directors are relieved from this statutory liability if they can establish that they have acted with a reasonable degree of prudence and diligence (Section 158). The section further elaborates that even if the director cannot prove he/she acted prudently and diligently, a court can excuse the director if it appears to the court that the director acted loyally, honestly, reasonably and ought to be excused. Section 119 of the QBCA states that directors and officers in exercising their duties are directly accountable to the corporation to act diligently and prudently. Section 120 further states that no articles, by-laws, contracts or resolutions can be used to relieve directors and officers

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from the liabilities imposed on them in the event that they do not uphold their obligations under the QBCA. Section 122 clarifies that directors and officers have discharged the duty to act prudently and diligently if in good faith they relied on the report, information or opinion of a) an officer of the corporation, b) legal counsel or an expert, or d) a committee of the Board of Directors of which the director is not a member of. Where an officer or director relied on the report, information or opinion of an officer of the corporation, the Section 122 onus is met only if the director or officer believed the officer of the corporation to be reliable and competent. Where an officer or director relied on the advice of the Board, legal counsel or an expert, the Section 122 onus is met only if the officer or director they believed the Board, counsel or expert to merit confidence. The presumption in favour of the director or officer who relied on the advice from the Board, officer, legal counsel or expert is rebuttable. Section 159 of the QBCA requires a corporation to indemnify directors and officers against all costs and expenses incurred in the exercise of their functions. The language used in this section broadens the group to whom the corporation owes an obligation to indemnify when compared with the related provisions under the QCA. A director or officer may however only receive indemnification if he or she acted with honesty and loyalty in the interest of the corporation. If a court finds that the director or officer does not deserve indemnification, Section 160 states the corporation may not indemnify the director or officer for costs, charges and expenses related to the legal proceeding. The director or officer will also be required to repay any money that was advanced to them with regards to the legal proceeding. If corporation indemnifies the director or officer contrary to Section 160, Section 156(6) of the QBCA states that the directors who approved the indemnification are liable for repaying the money to the corporation. Recognizing the fact that directors and officers are under great risk of facing personal liability, Section 162 of the QBCA has been added in for the benefit of directors and officers by allowing corporations to maintain liability insurance against its directors and officers. 10. Liability Under Other Statutes

It is common practice for modern legislation to provide penalties not only for corporations which breach legislation, but also for directors and officers of corporations who consent to or acquiesce in the particular activity which leads to the breach of the legislation in question. Two examples are the federal Consumer Packaging and Labelling Act, and the consumer business practices legislation of various provinces. Legislation of this nature is now so extensive that directors and officers of modern corporations are subject to liabilities under these statutes as onerous as the liability under the companies legislation governing their particular corporation. A number of statutes of general application merit some attention in this regard. The Ontario Securities Act and the securities legislation of other provinces provide strict liabilities for directors in respect of materially false statements and omissions of necessary statements contained in prospectuses or takeover bid circulars. The Ontario Securities Act, for example, provides that a director is personally liable (jointly and severally with the corporation and other liable directors) for materially false statements contained in a prospectus or a takeover bid circular, unless the director proves to the satisfaction of a court one of the following defences as set out in the Act:

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(a)

the prospectus was filed without the directors knowledge or consent and, on becoming aware of the filing, he has given reasonable public notice that it was so filed; he has given reasonable public notice of withdrawal of his consent after becoming aware of any false statement; he had reasonable grounds to believe that the statement was true, or relied on reasonable grounds on the qualifications of an expert who made a statement in the prospectus or whose report or evaluation was produced or fairly summarized in the prospectus; or he reasonably relied on a statement purporting to be a statement by an official or an official document.

(b) (c)

(d)

Directors and officers of publicly-traded corporations are also subject to liability under Canadian securities legislation for insider trading using material information unavailable to the general public. An amendment to the Ontario securities legislation introduced in 2002 has resulted in potentially stringent penalties for contravention of the insider trading rules. A director, by virtue of his position, is defined as an insider of the corporation and on conviction is liable to a penalty not less than the profit made by reason of his trading with insider information and not more than the greater of $5,000,000 or three times the profit made on the illegal trade. The information may be any matter considered to be a material fact or change to the corporation, not publicly disclosed at the time of trading. On June 12th 2003, then Justice Minister Martin Cauchon introduced amendments to the Criminal Code that would create a new insider trading offence. Prior to this announcement, insider trading was covered only by provincial securities laws. The new Section 382.1 of the Criminal Code came into force on September 15, 2004, providing that persons charged with insider trading are guilty of an indictable offence and liable to imprisonment for up to 10 years. In addition, under Section 382.1 a person who knowingly conveys inside information is guilty of an indictable offence and liable for imprisonment of up to 5 years, or guilty of an offence punishable by summary conviction. The current federal Bankruptcy and Insolvency Act provides for general liability for directors and officers of bankrupt corporations in Section 204 as follows: If a corporation commits an offence under this Act, any officer or director or agent or mandatary, of the corporation, or any person who has or has had, directly or indirectly, control in fact of the corporation, who directed, authorized, assented to, acquiesced in or participated in the commission of the offence is a party to and guilty of the offence and is liable on conviction to the punishment provided for the offence, whether or not the corporation has been prosecuted or convicted. This amendment, enacted in 1992, and reworded in 2004, is more generally worded than the previous section regarding director and officer liability under the Act. It was introduced to eradicate the possibility of abuse by fraudulent directors and officers.

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A number of statutes require the corporation to hold funds in trust for the Crown and pay such funds to the Crown, usually at a specified time. If the corporation fails to do so, it commits an offence and is liable to a fine, which can be quite substantial. Such legislation often provides for the personal liability of directors and officers who have authorized this breach of trust in order to provide an incentive for management to pay the amounts owing to the Crown. Examples of these Acts include: the Income Tax Act, the Canada Pension Plan Act, the Employment Insurance Act, the Excise Tax Act, and the Ontario Retail Sales Tax Act. The Income Tax Act provides for the personal joint and several liability of all directors of a corporation under Section 227.1 when the corporation fails to deduct or withhold a required amount or to remit such an amount, including interest and penalties. The Act also has a general liability section (Section 242) whereby, when a corporation has committed an offence under the Act, an officer or director of the corporation who directed, authorized, assented to, acquiesced in, or participated in the commission of the offence is a party to it, whether or not the corporation has been prosecuted or convicted of that specific offence. Legislation designed to protect the public often use personal liability of directors and officers to achieve its ends. For example, the EPA, subsection 186(1), provides that every person who contravenes the Act or regulations is guilty of an offence. This includes acts and omissions by officers, officials, employees or agents of a corporation in the course of employment or in the exercise of their powers in the performance of their duties, and is deemed to be an act of the corporation (Section 192). With the proclamation of Bill C-45 (The Westray Bill) on March 31st, 2004, organizations and individuals face potential criminal liability if they fail to take reasonable steps to protect the health and safety of employees. The amendments to the Criminal Code impose a duty on all persons who have the authority or undertake to direct the work of another person. The duty imposed is similar to that found in the Occupational Health and Safety Act. The definitions of representative and senior officer have been drafted to include directors and officers, thereby making it easier to convict an organization for its acts and omissions. There is also personal criminal liability for directors and officers of organizations that create or condone unsafe workplaces. The primary defence for a director or officer under Ontario legislation such as the OHSA, and the defence that an officer or director has the positive obligation of proving once charged under the EPA or the Ontario Water Resources Act, is the due diligence defence. There are several steps a Board should insist upon, particularly in industries where there exists the potential for the commission of an offence under the EPA. The Board should emphasize a policy of requiring compliance and have officers provide compliance reports on a regular basis, as well as set out a policy on how to deal with any deficiencies. The Board should also monitor and receive reports on corrective actions. Similarly, the Ontario Dangerous Goods Transportation Act can subject corporate officers, directors and agents who are found to have directed, authorized, assented to, acquiesced in or participated in the commission of an offence under the Act to criminal liability, whether or not the corporation has been convicted. Section 4(1) holds that every person found guilty of contravening the prohibition on transporting dangerous good without adhering to the prescribed

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safety requirements is liable on first conviction to a fine of not more than $50,000, on each subsequent conviction to a fine of not more than $100,000, or to imprisonment for up to two years less a day. Section 116(3) of the Consumer Protection Act, 2002 provides for the liability of every director or officer of a corporation who fails to take reasonable care to prevent the corporation from committing an offence under Section 116. Directors and officers are liable on conviction to a fine of not more than $50,000 and/or imprisonment for up to two years less a day. It is clear from the statutory provisions outlined above that directors and officers can unwittingly become personally liable for a large variety of offences committed by the corporation in the course of its operations. As a result, directors and officers are advised to be completely aware of what is occurring in the corporations operations. Resignation after the discovery of illegal behaviour will generally not allow a director or officer to escape liability. 11. Liability in Tort: The Duty to Act within the Scope of Authority

As a general rule, officers and directors will not be personally liable for the indebtedness of their corporations. However, this immunity does not apply where officers and directors fail to act within the scope of their authority. For example, if a director has induced a breach of contract by the corporation, a court may hold the director personally liable where he is found to have acted in bad faith. The case of Butler v. Dimitrieff, [1994] O.J. No. 3518 (QL) provides an example of the Ontario Court of Appeal considering the personal liability of a director who was found to have induced the breach of a settlement agreement with a former employee of the corporation. The Court found that the defendant had almost exclusive control over whether the corporation would honour the settlement agreement. Despite this finding, the Court held that the facts did not fall within a line of cases in which corporate representatives were held liable for inducing companies to breach their contractual obligations. As a result, the defendants conduct was lawful. The line of cases the Court referred to sets out the general rule that directors or employees of a corporation, acting within the scope of their authority, are not liable in tort for procuring a breach in contract by the corporation unless bad faith, fraud or the absence of good faith can be shown. McFadden v. 481782 Ontario Ltd. et al. (1984), 47 O.R. (2d) 134 (H.C.J.) is an example of directors being held personally liable for inducing a breach of an employment contract. The directors, anticipating the collapse of their corporation, withdrew for themselves funds from the company in such quantities that it was described by the court as a hemorrhage of funds which ... bled [the corporation] dry. The court found that in procuring the breach [of the employment contract] the individual defendants were not acting bona fide with a view to the best interests of [the company], but were rather acting to secure the transfer of the greatest possible amount of [the companys] funds to themselves unhindered by any obligations that [the company] might have to the plaintiff. In Adga Systems International Ltd. v. Valcom Ltd. (1999), 43 O.R. (3d) 101 (C.A.) (leave to appeal to the Supreme Court of Canada dismissed), the directors and officers of the defendant

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company were personally involved in a recruitment program designed to hire away valued employees from its competitor, the plaintiff company. The Ontario Divisional Court dismissed the plaintiffs claim that the directors and officers had personally induced breach of contracts, stating that the directors and officers were only acting in the best interests of their company. The Court of Appeal reversed the decision. It stated two principles on which it based its decision: (i) Claims made personally against officers and directors for inducing breach of the plaintiffs contract with the corporate defendant can be defeated by demonstrating that their conduct fell within the course of their duties of employment and advance the interests of their employer. Their personal conduct will only attract liability if it was fraudulent, deceitful or advanced their personal interests. Notwithstanding the foregoing, where a corporation commits a tort against a plaintiff (such as negligence, breach of fiduciary duty, nuisance, trespass, etc.), if the officers and directors participated in, or directed, the wrongdoing of the corporation then personal liability can be imposed, even when they acted within the normal scope of their duties and advanced their corporate employers interests.

(ii)

Before Valcom, it was generally believed that the liability of a director or officer who has induced a breach of a contract will depend on whether the inducement was under the compulsion of a duty to the corporation. The director or officer becomes liable where the inducement is not in good faith or outside the scope of their authority (e.g. where the inducement is with a view to their own best interests rather than those of the corporation). Valcom now stands for the proposition that personal liability may be imposed on directors if they participate in a tort committed by the corporation, even though they are only promoting the corporations interest and not their own self-interest. 12. Indemnification of Directors and Officers

Prior to the enactment of modern companies legislation in North America and the United Kingdom, directors could be, and usually were, fully indemnified by corporations either under the terms of the memorandum of association or corporation by-laws. The trend of modern legislation has been to narrow the scope of indemnification. The OBCA and the CBCA provide for the indemnification of directors and officers in relatively narrow circumstances. Both Acts permit a corporation to indemnify present and former directors and officers, and the present and former directors and officers of subsidiaries or of other corporations of which the corporation is a creditor, against all costs, charges and expenses reasonably incurred by such director or officer in respect of any civil, criminal or administrative action or proceeding, including amounts paid in settlement or to satisfy judgments, provided that such director and officer was acting honestly and in good faith with a view to the best interests of the corporation and, in the case of a criminal or administrative action or proceeding that is enforced by a fine, that the director and officer had reasonable grounds for believing that his conduct was lawful. Consequently, under both Acts it is not a pre-requisite to indemnification that the director or officer shall have been substantially successful in the defence of such action.

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However, when a director or officer has been substantially successful in the defence of any civil, criminal or administrative proceedings brought against him by reason of his position, the corporation must indemnify him. In the case of a derivative suit, where the director or officer is sued in the name of the corporation, indemnity may only be granted by the corporation with the approval of the court. Furthermore, both Acts provide that the director or officer may be indemnified for any costs or settlement with the corporation. 13. Liability Insurance

Both the CBCA and the OBCA permit directors and officers to obtain liability insurance. These Acts state that a corporation may purchase and maintain insurance for the benefit of directors and officers against any liability incurred in their capacity as a director or officer. Before August, 2007, under the OBCA, insurance could not be maintained for directors and officers who failed to act honestly and in the best interests of the corporation. The current OBCA places no restrictions on the terms of such insurance coverage. Many large Canadian corporations obtain indemnification insurance for directors and senior officers. Such policies contain wide exclusionary clauses, and always prohibit a director or officer from claiming coverage when he personally profits from the transaction giving rise to his liability. The typical policy contains a large deductible clause which is ultimately dependent upon the size of the company and the nature of the risk. However, because of the escalating liability claims in Ontario and other jurisdictions over the past few years, the premiums for such policies in many cases have become prohibitive. As a result, corporations have been finding it increasingly difficult to obtain coverage at a reasonable cost, particularly public corporations where directors might be exposed to minority shareholder litigation. In some cases, insurance companies will refuse to issue a policy where risk is particularly acute; for example, where the possibility of large environmental disasters exist. Although the Canada Revenue Agency has yet to issue an Interpretation Bulletin on the point, it appears that premiums paid by a corporation for directors and officers liability insurance are deductible as a business expense under Canadian income tax law. 14. New Legislation in Canada

Reacting to business collapses such as Enron, on July 30, 2002 President Bush signed into law legislation which has come to be known as the Sarbanes-Oxley Act. This legislation aims to strengthen corporate governance in the U.S. by introducing strict reporting requirements for public and private companies, by monitoring a corporations accounting practices more closely and by implementing harsher penalties for violations of corporate and securities legislation. The Sarbanes-Oxley Act also applies to foreign issuers, including Canadian issuers, who distribute securities in the U.S. In response to growing investor uncertainty and the Sarbanes-Oxley Act, the Ontario government passed legislation entitled, Keeping the Promise for a Strong Economy Act (Budget Measures), on December 9th, 2002. Among the measures included in this Act are reforms to the provincial Securities Act designed to increase the penalties for offences and to provide more rulemaking powers to the OSC. Pursuant to Section 129.2 of the Securities Act, a director or officer

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who authorizes, permits or acquiesces in the non-compliance of the Ontario securities law by a corporation shall be deemed to also have not complied with the securities law. The OSC has been given the power to impose penalties of up to $5 million, imprisonment for a term not more than five years less a day, and disgorgement of profits obtained as a result of non-compliance with the Act. Also included in the amendments to the Securities Act are new measures that create statutory civil liability for directors and officers for misrepresentations in documents released publicly, public oral statements regarding public companies, and for failure to provide timely disclosure of a material change. These new statutory liabilities came into force on December 31, 2005 and provide that directors and officers could be personally liable not only for misrepresentations to people who purchase shares through a prospectus, but may also be liable to those who purchase the corporations shares in the secondary market. Given these new powers, the OSC has introduced several new policies that will prescribe specific duties and liabilities of directors and officers in the public company environment. These National Instruments (NI) received Ministerial approval and came into force on March 30, 2004, and include NI 51-102, which makes directors and officers ultimately responsible for the preparation, accuracy and filing of the corporations financial statements, managements discussion and analysis (MD&A), annual information form (AIF), material change reports, business acquisition reports (BAR), proxy solicitation and information circulars; NI 52-107, which identifies acceptable accounting principles, auditing standards and reporting currency; NI 52-109, which requires a chief executive officer and a chief financial officer to certify the accuracy of annual or interim filings required under securities law for public corporations at the time of filing; and finally NI 52-110, mandating the composition of an audit committee of a Board of a public corporation. Furthermore, two new OSC policies dealing with corporate governance issues came into force on June 30, 2005. The first, NI 58-101, requires directors to be independent in the sense that they have no direct or indirect relationship with the corporation. Such a material relationship could be one that in the view of the Board would reasonably interfere with the exercise of a directors independent judgement. This national instrument requires the corporation to file a Code of Business Conduct and Ethics with the Commission. The second, National Policy 58201, is applicable to corporate and non-corporate entities. It provides a series of recommended best practices that provide guidance on ensuring that strong corporate governance practices are in place. These practices have been developed for boards of directors, and they place additional duties upon directors to implement them and ensure that they are being enforced. Since the above new rules and legislation have only recently come into force, it will take some time before the jurisprudence will clarify what in fact are the duties and liabilities of directors and officers are with respect to these requirements. However, these days the duty of a director and officer to a public corporation and its shareholders cannot be taken lightly. Only those who are willing to accept significant responsibility for their actions should accept such a position.

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15.

Conclusion

There is no doubt that the potential liability of directors in Canada is increasing. As the courts adopt the more aggressive position of American jurisprudence, Canadian directors will be increasingly subject to claims for breach of their statutory duties by disgruntled shareholders, creditors and affected third parties. However, although the state of the law is still unclear, particularly in the area of the standard of care expected from directors, there are certain rules that can be followed by directors and officers to minimize their liability. The next section of this paper, Part III, contains a list that is a summary of these common-sense rules.

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PART III -

PRACTICAL SUGGESTIONS FOR COMPLYING WITH DUTIES AND MINIMIZING LIABILITY

To comply with a directors or and officers duties, and to minimize liabilities, the following rules should be followed: 1. Directors and officers should avoid any conflict of interest, which includes self-dealing of any kind, particularly in respect of share transactions that are motivated by knowledge acquired as an insider. Directors and officers should be aware of the terms of the articles and by-laws of the corporation and should be able to verify, in general terms on an on-going basis, that the corporations business and affairs are being managed in accordance with any restrictions contained in such documents. Directors and officers of corporations in regulated industries should be aware of the statutory requirements of such regulation, and in particular should be aware of the specific liabilities for directors and officers imposed by such legislation. Directors and officers should keep informed generally about the activities of the corporation and the industry of which it is a part in order to be capable of assessing managements operating plan, particularly the goals, strategies and the capability of management to achieve their goals. All directors should remember that their role is primarily one of stewardship on behalf of shareholders, including overseeing management. Liability issues can arise for outside directors if such directors try to second-guess management on every issue or become too involved in day-to-day management of the corporation. Directors should be aware of the sensitive areas under the relevant corporate statutes imposing specific liability, such as improper dividends, and should pay attention to any transactions where such concerns might arise. Reasonable and regular attendance at directors meetings is required for directors. If that is not possible, the absent director should justify his absence in writing to be embodied in the minutes or at least should record by letter with the corporate secretary the reasons for his absence. All of the directors should insist on the prompt and regular circulation of minutes, and every director who is absent from a meeting and dissents to a resolution passed at such meeting should record his dissent immediately by letter with the secretary. Directors should be aware of any Board delegation of power to one or more officers of the corporation, and should be satisfied that the officer in question is fully capable of accepting such delegation.

2.

3.

4.

5.

6.

7.

8.

9.

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10.

Directors should be particularly aware of the nature of the industry in which the corporation operates and its environmental risks. Board policies on operational procedures should be implemented and assessed regularly to keep in step with legislation. Directors are defined as insiders under provincial securities statutes, and the penalty for trading with insider information can be extremely serious. Directors would be advised to hold securities in the corporation of which they are a director as long-term investments, or at least minimize trading to avoid any coincidence of trading prior to public knowledge of a material change to the company. Directors of a listed corporation should ensure that the new stringent reporting requirements are met on a regular on-going basis. Directors of a listed corporation who provide a false sense of security with respect to the financial position of the company and its affairs run the risk of significant criminal, civil and regulatory sanctions. Directors of any public corporation should ensure that effective corporate governance procedures are implemented on a regular basis as the law changes, and in fact are being followed by the corporation.

11.

12.

13.

TOR_LAW\ 7431351\4

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