On The Dut of Care and Directors’ Liabilities
While mindlessly on a treadmill and flipping the channels, I came across a 2010 documentary named Inside Job. It was about the 2008 financial crisis and how the “Insiders” of the financial world such as investment bankers, officials (former investment bankers), and ECONOMISTS were the ones who created the crisis. The show was almost halfway done when I came across it, but the part of the film that interested me the most was the part about how the most well-respected and famous economists of the time including Ivy League professors were being paid to write papers that portrayed a false representation of the mortgage investment market that was too good to be true. They praised the subprime mortgage investment products and were either paid or were put in board seats by investment banks.
In Wise, the advice of Vice President of Finance was not considered a report by a professional and the Wise Brothers who relied on his advice, were not deemed to be discharging their duty of care and diligence to their shareholders. His advice was not “professional” as he was not a lawyer, accountant, engineer, or appraiser, nor was his advice a financial statement.
I think giving corporations and directors a leeway in terms of relying on reports created by professionals will expose investors and, in the case of the 2008 financial crisis, society to potentially extremely grave dangers. Obviously, these lawyers and other professionals are individuals who are paid to create reports for corporations and directors. In a situation where directors intentionally attempt to defraud the shareholders and make a profit for themselves, does it even matter that whether the report is written by a professional or a non-professional? I would say that it does not matter. I also feel that it would not be possible for anyone to rely on the reports in good faith. Hence, I think s. 123(4)(a-b) are statutory section that would sometimes prove obsolete and would sometimes protect directors who rely on intentionally forged reports to benefit themselves. As to the question whether the requirement whether reports would have to be done by a “professional” before it can be relied on, I don’t think that the statutory requirements do not go far enough. I think it should add more clarity and restrictions on expert reports and require the opinions to be from a third-party more independent to add to the objectivity requirements of the care and diligence test.
Professionalism Requirements
2 responses to “Professionalism Requirements”
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These are good points. The only counter-point I would make is that 123(4) of the CBCA and 157 of the BCBCA require that directors be relying on these reports in good faith in order for this liability defence to apply. If a director is intentionally relying on a report that he/she knows is false, I think that would fail the good faith requirement. However, it would be very difficult to prove that the director knew the report was false, so I agree that this is still very problematic.
Great application of what we’ve been learning in class to a real world situation Ezra!
I think you make a great point as to providing more clarity and restriction on the professional report. The provision reads “a report of a person whose profession lends credibility to a statement made by the professional person,” however it speaks nothing as to the competence or any other potentially relevant factors of that person (e.g. conflict of interest) that we may want to consider being a bar to the availability of this defence. However, perhaps importing objective language in the provision would be helpful. But then again, since the s. 122(1)(b) duty of care language is imported into the defence provision, the objective appropriateness of relying in good faith of that specific professional might already be considered.