Question:
Is requiring that a report come from a “professional” before it can be relied on in good faith by directors without potential liability as set out in People’s Department Stores Inc v Wise going too far? What are the core justifications for such a requirement of “professionalism”?
Very Brief Answer:
Simply speaking, the professionalism requirement prevents situations of “oops missed a zero, sorry ’bout ur luck, lol :P”
Analysis:
Section 123(4)(b) of the CBCA allows the director of a corporation to avoid liability in certain situations if he or she relies in good faith on a report by a professional.
More specifically, if the required conditions are met, s. 123(4) protects a director who is conducting matters involving corporate finances, such as issuing shares for consideration other than money, or paying out dividends or indemnity contracts. Additionally, the provision removes director liability in the scenario where a corporation undergoing bankruptcy has been sued by employees to recover unreceived wages. The common thread of ss. 118 and 119 (provisions for which s. 123(4) provides exculpation), beyond merely involving corporate finances, is that the activities in both of these provisions affect the value of the shareholders’ and creditors’ interest in the corporation.
S. 123(4) also provides protection for directors in violation of s. 122, which requires the director act with a good faith view to the best interests of the corporation, and to exercise the due care, diligence, and skill of a reasonably prudent person in comparable circumstances.
Conclusion:
The justifications for the requirement of professionalism are contained within s. 122, and its interplay with ss. 118 and 119. These justifications can be summed up as follows:
Premise: Directors are not expected to have special skills, and yet they have the capability of making business decisions which can affect corporate finance on a major scale. The professional designations listed in s. 123(4)(b) (lawyers, accountants, engineers, and appraisers) are all groups which are self-regulated, have strict professional standards, and often have specific legislation detailing these standards (e.g., the Legal Profession Act, the Accounting Profession Act, the Professional Engineers Act, etc).
Justification 1: The requirement for professionalism shows the director of a corporation the standard required to save their own ass when making decisions affecting the value of shareholder investment. If avoiding liability for this decision is as simple as asking a lawyer or accountant for a professional report, instead of “guesstimating” or asking Tommy First-Day down in shipping, it is in the director’s best interest to rely on the skills and expertise of the person who meets that requisite standard. Should the director compromise or otherwise fail to seek professional advice, they have clearly not exercised the diligence expected of a prudent person in a comparable circumstance, and would likely be held liable.
Justification 2: The requirement for professional advice or information as a basis for a financial decision also provides peace of mind to shareholders and investors. In the event that a transaction does have a catastrophic result, the shareholders know that either:
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a) the director is liable, because he relied on the advice of his best friend who totally took Intro to Business Math during undergrad, instead of getting an official report by an accredited business valuator; or
b) the author of the official report is liable (potentially along with their firm and overseeing body), because they should have the skills and expertise to reasonably know that a 1/3rd interest in tinyshoesfordogs.com™ does not have the equivalent cash value of 20,000 shares in Facebook.
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I wonder if this still leaves a grey area where liability can be avoided: e.g. Director goes to corporate counsel, clears a questionably legal business plan that counsel can formulate reasonable argument in favour of, so that when everything goes south, director can claim that he relied on professional, and counsel can claim defense that there was legitimate legal argument behind the structure.
Rob, in that case I think litigation would have to turn on the good faith reliance requirement. If both the director and counsel are coming up with creative ways to make a questionable course of action sound legitimate, I think you could argue that’s pushing the bounds of good faith. That said, it would likely be extremely difficult to actually prove the director and counsel were intentionally being shady.
Great summary Kelly. I would come down on the side of the requirement outlined in Peoples as being reasonable and not going to far for the very justifications you set out. It seems that given the lack of qualifications required for Directors, a line has to be drawn somewhere re accountability, and yet there is also the need to avoid unlimited liability for Directors or the incentive to accept such roles would be seriously curbed. Requiring that reports come from professionals before they can be relied on in good faith by directors without potential liability seems a reasonable place to draw this line, especially given there is some assurance that the advice will likely (hopefully) be of a certain quality given the regulation of professional disciplines.
Good morning, Robert.
Thank you for your reply.
In response, I would say, “Totally.” As we’ve seen over the last year and a half, everything is grey and arguable. There’s nothing stopping a director and lawyer from being in cahoots and superficially “relying” on professional advice to circumvent liability. In this situation, it would be up the parties, just as you state, to argue either way, and for the courts to determine the merits of the arguments.
That being said, at least this requirement ensures some kind of standard is being exercised for business decisions which are clearly outside the director’s skills and expertise.
Robert’s scenario definitely has the “taint of fraud” aspect to it, and I think it would strike most people as a very questionable use of the provision. Clearly, this goes outside the reasoning for the provision that Kelly outlined. We’ve seen that the court has very wide powers under the BCBCA and CBCA, and while there is deference, it tends to disappear when there is a whiff of improper motive. The fact that the provision uses the wording “good faith” further supports in my mind that a court would try to tear down the front of legitimacy that the professional record offered, if there was enough evidence presented of ulterior motive. This would be an interesting case!
Thanks Seamus and Emily for the follow-up on my hypothetical! I think it sheds some good light on the scope of the good faith requirement, and also fleshes out my skepticism with the court’s whole approach to this sort of thing: while deference is balanced by the “improper motive” requirement, that sort of turns the game from ensuring one makes decisions in good faith into ensuring that no improper motive can be seen/imputed from any acts/evidence thereof. It’s a very tough line, especially since, looking at the scenario I drew up, similar ones where, e.g., the counsel for the corporation was unaware of any potential fraud and was simply duped might be situations where we would still have a problem with the corporate conduct, but possibly lack the means to deal with it. Then again, if there has been a single truth that has come out of all these cases, it is that the court is quick to forget the strict rules in the face of sufficient facts.