An Overview of Directors’ and Officers’ Duties

1. An Overview of Directors’ and Officers’ Duties Presentation by Ava Kanner

2. Directors’ and Officers’ Liability • ScotiaMcLeod Inc. v. Peoples Jewellers Ltd.(1995), 26 O.R. (3d) 481 (C.A.) at 8 (QL) The decided cases in which employees and officers of companies have been found personally liable for actions ostensibly carried out under a corporate name are fact-specific. In the absence of findings of fraud, deceit, dishonesty or want of authority on the part of employees or officers, they are also rare.

3. Directors’ and Officers’ Liability • People's Department Store v. Wise, [2004] 3 SCR 461, 2004 SCC 68 122. (1) Every director and officer of a corporation in exercising their powers and discharging their duties shall (a) act honestly and in good faith with a view to the best interests of the corporation; and (b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

4. Directors’ and Officers’ Liability • Re BCE Inc., [2008] 3 S.C.R. 560 The duties of the directors comprehends a duty to treat individual stakeholders affected by corporate acts equitably and fairly. There are no absolute rules. In each case, the question is whether, in all of the circumstances, the directors acted in the best interests of the corporation, having regard to all of the relevant considerations, including, but not confined to, the need to treat affected stakeholders in a fair manner.

5. Statutory LiabilitiesClaims Related to Employees and Employment • Unpaid wages (and other debts for services performed by employees)Maximum of six months' wages. • Vacation pay Greater of 4% of wages or contractual amount of vacation pay for the last 12 months. OBCA, CBCA, Employment Standards Act

6. Statutory LiabilitiesClaims Related to Employees and Employment • Severance and termination payNo liability except if corporation is a federal work, undertaking, or business subject to the Canada Labour Code where liability is greater of: (i) two days' wages x years of employment; or (ii) five days' wages. OBCA, CBCA, Employment Standards Act

7. Statutory LiabilitiesClaims Related to Employees and Employment • Source deductions for taxes not deducted, withheld and remitted Liability if execution against the corporation has been returned unsatisfied or the corporation has commenced liquidation or dissolution proceedings or if an assignment or a bankruptcy order issued against it and a claim for the corporation's liability has been proved within six months after the date of the assignment or bankruptcy order. Due diligence defence is available. Bankruptcy and Insolvency Law Act

8. Pensions/Health & Safety • Canada Pension Plan Directors’ liability for the amount (plus penalties or interest) that the corporation fails to deduct and remit Failure to comply with the obligations and standards of care under pension benefits legislation. Fines up to $100,000 for the first offence and up to $200,000 for subsequent convictions.

9. Pensions/Health & Safety • Failure to comply with obligations relating to workplace safety Fines up to $25,000 and imprisonment up to 12 months. If proceedings by way of indictment, fines up to $1,000,000 and imprisonment up to two years; by summary conviction, fines up to $100,000.

10. Taxes • Unemployment Insurance Premiums Directors’ liability for the amount (plus any interest or penalties) that the corporation fails to deduct and remit employment insurance premiums. Employment Insurance Act

11. Taxes • Goods and Services Tax Directors’ liability for unremitted amounts plus interest and any penalties. Can also be imprisoned up to six months and fined $1,000 plus 20% of amount of tax (plus interest and penalties) that director willfully failed to pay, collect or remit. • Retail Sales Tax Directors’ liability for unpaid amounts in certain circumstances, including an assignment in bankruptcy or a receiving order. Excise Tax Act

12. Taxes • Withholding tax in respect of non-residents Withholding taxes in respect of non-residents not withheld and remitted; if execution against the corporation has been returned unsatisfied and the corporation has commenced liquidation or dissolution proceedings or has had an assignment or a bankruptcy order issued against it and a claim for the corporation's liability has been proved within six months after the date of the assignment or bankruptcy order.

13. Taxes • Fines up to double the tax payable and imprisoned up to two years if a Director consented to tax evasion. Federal and Ontario • Customs and excise taxes various fines and penalties.

14. Corporate Finance • Issuing shares in return for property or past services Directors’ liability for amounts by which the consideration received is less than the fair equivalent of the money that the corporation would have received had the shares been issued for money.

15. Corporate Finance • Payment of dividends in violation of the solvency or impairment of capital tests within 12 months preceding bankruptcy if the dividend was paid when the company was insolvent or if the payment made the company insolvent Directors’ liability for amount of the dividend not recovered by the corporation.

16. Corporate Finance • Share purchases, acquisitions or redemptions in violation of the solvency or impairment of capital tests within 12 months preceding bankruptcy if the redemption or repurchase was done when the company was insolvent or if the payment made the company insolvent Directors’ liability for the amount paid and not recovered by the corporation.

17. Corporate Finance • Prohibited financial assistance to any person in violation of requirements for management proxy circulars as per the prescribed form Directors may be subject to a fine of $5,000 and imprisonment up to six months.

18. Corporate Finance • Payment of an unreasonable commission to a purchaser (or someone who procures purchasers) on the purchase of the corporation's shares Directors’ liability for the amount paid and not recovered by the corporation. • Payment of indemnities to directors and officers who have failed to act in the best interests of the corporation or did not believe their conduct was legal Directors’ liability for the amount paid and not recovered by the corporation.

19. Corporate Finance • Payment of amounts to security holders under statutory dissent rights or to complainants in an oppression remedy action in violation of the solvency or impairment of capital tests Directors’ liability for the amount paid and not recovered by the corporation.

20. Securities • Contravention by the corporation of Ontario securities law Directors who authorize, permit or acquiesce to a contravention by the corporation can be fined up to $5,000,000 and imprisoned for up to five years. • Misrepresentation in a prospectus, take-over bid circular or an offering memorandum Directors in office at the time of filing of the document may be personally liable to investors for damages. Securities Act (Ontario)

21. Securities • Insider trading Fines are a minimum of the profit made or loss avoided and a maximum of the greater of $5,000,000 and three times the profit made or loss avoided, in addition to any imprisonment imposed. Securities Act (Ontario)

22. Bankruptcy • Directors who direct, authorize, assent to or acquiesce or participate in the commission of a bankruptcy offence may be liable (on summary conviction) for up to $5,000 and/or imprisonment up to 12 months; or may be liable (upon conviction on indictment) for up to $10,000 and/or imprisonment up to three years. Bankruptcy and Insolvency Law Act

23. Bankruptcy • Reviewable Transactions Directors, officers and others may be liable for the difference between the actual consideration given or received by the bankrupt and the fair market value of the property or services concerned. • Failure to Keep Proper Books of Account Directors and officers may be liable for up to $5,000 and/or imprisonment up to one year. • Unlawful Transactions Directors and officers may be liable for up to $5,000 and/or imprisonment up to one year. Bankruptcy and Insolvency Law Act

24. Environmental Protection 280.1 (1) Every director and officer of a corporation shall take all reasonable care to ensure that the corporation complies with (a) this Act and the regulations, other than Division 3 of Part 7 and regulations made under that Division; and (b) orders and directions of, and prohibitions and requirements imposed by, the Minister, enforcement officers and review officers, other than those issued or imposed in connection with obligations or prohibitions under that Division or regulations made under that Division. Environmental Protection Act (Ontario)

25. Environmental Protection Duties of directors and officers -- Division 3 of Part 7 (2) Every director and officer of a corporation who is in a position to direct or influence the corporation's policies or activities in respect of its obligation to comply with Division 3 of Part 7, regulations made under that Division, and orders and directions of, and prohibitions and requirements imposed by, the Minister, enforcement officers and review officers in connection with obligations or prohibitions under that Division or those regulations, shall take all reasonable care to ensure that the corporation so complies. Environmental Protection Act (Ontario)

26. Environmental Protection Liability of directors and officers -- Division 3 of Part 7 (3) If a corporation commits an offence arising out of a contravention of Division 3 of Part 7, a regulation made under that Division or an order or direction of, or prohibition or requirement imposed by, the Minister, an enforcement officer or a review officer in connection with an obligation or prohibition under that Division or a regulation made under that Division, every director and officer of the corporation who is in a position to direct or influence the corporation's policies or activities in respect of conduct that is the subject-matter of the offence is a party to and guilty of the offence, and is liable to the punishment provided for the offence, whether or not the corporation has been prosecuted or convicted. [Emphasis added.] Environmental Protection Act (Ontario)

27. Environmental Protection 280.1 (1) Every director and officer of a corporation shall take all reasonable care to ensure that the corporation complies with: (a) this Act and the regulations, other than Division 3 of Part 7 and regulations made under that Division; and (b) orders and directions of, and prohibitions and requirements imposed by, the Minister, enforcement officers and review officers, other than those issued or imposed in connection with obligations or prohibitions under that Division or regulations made under that Division. Canadian Environmental Act 1999

28. Environmental Protection Duties of directors and officers -- Division 3 of Part 7 (2) Every director and officer of a corporation who is in a position to direct or influence the corporation's policies or activities in respect of its obligation to comply with Division 3 of Part 7, regulations made under that Division, and orders and directions of, and prohibitions and requirements imposed by, the Minister, enforcement officers and review officers in connection with obligations or prohibitions under that Division or those regulations, shall take all reasonable care to ensure that the corporation so complies. Canadian Environmental Act 1999

29. Environmental Protection Liability of directors and officers -- Division 3 of Part 7 (3) If a corporation commits an offence arising out of a contravention of Division 3 of Part 7, a regulation made under that Division or an order or direction of, or prohibition or requirement imposed by, the Minister, an enforcement officer or a review officer in connection with an obligation or prohibition under that Division or a regulation made under that Division, every director and officer of the corporation who is in a position to direct or influence the corporation's policies or activities in respect of conduct that is the subject-matter of the offence is a party to and guilty of the offence, and is liable to the punishment provided for the offence, whether or not the corporation has been prosecuted or convicted.[Emphasis added]. Canadian Environmental Act 1999

30. Environmental Protection 116. (1)Every director or officer of a corporation has a duty to take all reasonable care to prevent the corporation from, (a) discharging or causing or permitting the discharge of any material, in contravention of, (i) this Act or the regulations, or (ii) a licence, permit or approval under this Act; (b) failing to notify the Ministry of a discharge of any material, in contravention of, (i) this Act or the regulations, or (ii) a licence, permit or approval under this Act; (c) contravening section 98; (d) failing to install, maintain, operate, replace or alter any equipment or other thing, in contravention of a licence, permit or approval under this Act; or (e) contravening an order, direction, notice or report under this Act, other than an order under section 84 or 106.1. Ontario Water Resources Act

31. Environmental Protection Offence   (2) Every person who has a duty under subsection (1) and who fails to carry out that duty is guilty of an offence. Onus   (2.1) If a director or officer of a corporation is charged with an offence under subsection (2) in connection with a specific contravention of the corporation, the director or officer has the onus, in the trial of the offence, of proving that he or she carried out the duty under subsection (1) in connection with that contravention. [Emphasis added]. Liability to conviction   (3) A director or officer of a corporation is liable to conviction under this section whether or not the corporation has been prosecuted or convicted. Ontario Water Resources Act

32. An Guided Tour Through a Directors’ and Officers’ Insurance Policy Presentation by David Cherepacha

33. DECLARATIONS Policy limits – usually includes defence costs Single Loss and Aggregate Limits for Policy Period (usually one year) Claims made and reported basis 33

34. WHO IS COVERED? Definition of “Insured” may include: Present, past and future Directors and Officers Outside Directors Members of Committees Employees – but only if a Director or Officer is also named as a Defendant Spouses of Directors and Officers Directors and Officers of subsidiary companies 34

35. INSURING AGREEMENT In respect of a loss resulting from a wrongful act which a director(s) / officer(s) becomes legally obligated to pay on account of any claim first made against him during the policy period and reported to [the Insurer] during the policy period or discovery period, [the Insurer] shall pay: 35

36. INSURING AGREEMENT Side A – Individual Coverage 1.1 on behalf of the director(s) / officer(s), as and to the extent permitted or required by the applicable law, the loss for which the director(s) / officer(s) are not indemnified by the insured organization; 36

37. Insurer Company Side A Coverage Direct D&O Coverage (Excess, Dropdown, Difference in Conditions) Directors

38. INSURING AGREEMENT Side A – Individual Coverage Covers claims for loss for which the corporation cannot provide indemnification to Directors and Officers Financial impairment / bankruptcy of company Prohibited by statute Usually no retention / deductible 38

39. INSURING AGREEMENT Side B – Reimbursement Coverage 1.2 on behalf of the insured organization, the loss for which the insured organization has granted indemnification to such director(s) / officer(s) as and to the extent permitted or required by the applicable law. 39

40. Insurer Company Side B Coverage Directors Indemnity Reimbursement Insurance (aboveretention)

41. INSURING AGREEMENT Side B – Reimbursement Coverage Covers claims for loss for which the corporation can and will provide indemnification to Directors and Officers Deductible applies 41

42. INSURING AGREEMENT Side C – Entity Coverage 1.3 on behalf of the insured organization, for a Securities Claim; 42

43. Insurer Company Side C Coverage “Securities Claims” Coverage

44. INSURING AGREEMENT Side C – Entity Coverage Covers claims for loss for which the corporation itself is liable Deductible applies Usually only covers certain types of claims Securities claims 44

45. Coverage B Corporate Asset Protection Insurance Reimbursement for covered Indemnifiable Claims • Coverage A • Personal Asset • Protection for Directors & Officers • Insurance for covered • Non-Indemnifiable • Claims • Statute • Bankruptcy Single Aggregate Limit Nil Retention Retention ($)

46. Coverage B Corporate Asset Protection Insurance Reimbursement for covered Indemnifiable Claims Coverage C Corporate Asset Protection Insurance for Corporate Liability when Company is a defendant in covered Securities Claims • Coverage A • Personal Asset • Protection for Directors & Officers • Insurance for covered • Non-Indemnifiable • Claims • Statute • Bankruptcy • Company’s refusal Single Aggregate Limit Nil Retention Retention ($) Retention ($)

47. Excess Limits: • Underlying limits are eroded/exhausted • Difference in Conditions (“DIC”) Limits: • Insurer of Underlying: • Wrongfully refuses • Is financially unable • Rescinds • Underlying insurers are not liable • Bankruptcy; proceeds of underlying insurance are stayed Coverage A Excess / DIC Additional Personal Asset Protection for Directors & Officers Coverage B Corporate Asset Protection Insurance Reimbursement for covered Indemnifiable Claims Coverage C Corporate Asset Protection Insurance for Corporate Liability when Company is a defendant in covered Securities Claims • Coverage A • Personal Asset • Protection for Directors & Officers • Insurance for covered • Non-Indemnifiable • Claims • Bankruptcy • Company’s refusal Single Aggregate Limit Retention ($) Nil Retention Retention ($)

48. INSURING AGREEMENT Triggering event is claim for loss arising from a wrongful act by an officer or director 48

49. DEFINITION OF “WRONGFUL ACT” “wrongful act” means any actual, alleged, attempted or allegedly attempted error, misstatement, misleading statement, act, omission, neglect or breach of duty, by any director(s) / officer(s) anywhere in the world, individually or otherwise, but only in the capacity of a director or officer for the insured organization, or any claim against any director(s) / officer(s) solely by reason of his serving in such capacity. 49

50. DEFINITION OF “WRONGFUL ACT” Ensure: Not restricted to negligence claims only Avoid “sole capacity” wording 50