There is not a day that goes by without a newspaper article on corporate board governance: the Investor Protection Association and the Canadian Coalition for Good Governance, when it is not the Autorité des marchés financiers or the Toronto Stock Exchange, take turns to give their point of view.
One of the least talked about governance rules is the purchase of Directors' Liability insurance. This insurance should be the first condition set by an individual before agreeing to serve on the board of a company or non-profit organization.
A Director's Personal Liability Should not be Confused with the Company's Liability for its Products, Services or Work
Some directors may believe that they are protected from personal lawsuits if their company is incorporated: however, there are several reasons why the "corporate veil" can be lifted to accuse a director personally of the fault of his company. Indeed, the Civil Code of Quebec prohibits the use of the fact that one is incorporated against a person acting in good faith in order to hide fraud, breach of trust or an offence against public order. Thus, a director or directors can be personally sued for a public order offence committed by the corporation. This should once and for all put an end to the belief of some directors that they do not incur personal liability.
It is not only the Civil Code that deals with the liability of directors: the laws of companies, whether incorporated in Quebec or in Canada, set out important rules regarding the personal liability of corporate directors. These laws impose a duty to act in good faith, with the care, skill and diligence that a reasonably prudent person would exercise in the same circumstances. It is recognized, however, that in the course of their duties, directors take business risks and are often encouraged to do so in order to enhance the corporation's wealth. In assessing their liability, the courts will not substitute their judgment for that of the director being sued: rather, they will consider whether he made his decision in full knowledge of the facts, acting in good faith and in the belief that he was acting in the best interests of the company. These last words are important: directors must act in the best interests of the company; they must therefore avoid conflicts of interest where they would prefer their personal advantage to the good of the company.
There are Countless Instances Where a Director Makes a Personal Commitment
In the event of bankruptcy, a director will be liable for failure to pay wages, vacation or severance pay or to remit payroll deductions, sales tax or goods and services tax to the Ministries of Revenue, for the payment of dividends or the granting of a loan resulting in the insolvency of the company, for a violation of environmental laws, for discrimination, for unlawful dismissal, for errors or omissions in employment practices, etc.
Once you know that employees, shareholders, suppliers, customers, competitors, creditors, franchisees, the parent company and governments can bring proceedings, you have no choice but to seek protection. The first step is to ensure that adequate directors' liability insurance is in place, but also that it is supplemented by a favourable directors' indemnity by-law and a unanimous shareholder agreement. And, to avoid being held liable, one should take the time to verify the accuracy of the information given, particularly the financial results, to denounce one's conflicts of interest and to take cognizance of the decisions made in one's absence.
Directors' Liability Insurance Responds to Liability Claims Against Directors and Officers of Corporations, Either Alone or Jointly with the Corporation
It is also intended to reimburse the Company if, by law, agreement or regulation, it has a duty or right to indemnify its directors and officers for costs and expenses incurred in connection with legal proceedings.
Commonly referred to as D&O, for Directors and Officers, a D&O policy provides compensation in the event of a so-called wrongful act, i.e. a fault, error or omission, of a director or officer in the performance of his or her duties.
Most directors' insurance policies include, in addition to the costs of defending civil actions and damages in the event of conviction, the costs of defending against criminal charges against directors and officers arising out of the performance of their duties, or even the costs of defending before administrative tribunals or commissions of inquiry.
It would be appropriate to place the purchase of directors' liability insurance on the agenda for the next board meeting.