an overview of directors’ and officers’ duties presentation by ava kanner

An Overview of An Overview of Directors’ and Directors’ and Officers’ DutiesOfficers’ Duties

Presentation byPresentation byAva KannerAva 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


• 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


• 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 pay

No 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 remitFailure 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.

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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.

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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

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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 TaxDirectors’ liability for unpaid amounts in certain circumstances, including an assignment in bankruptcy or a receiving order.

Excise Tax Act

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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 memorandumDirectors in office at the time of filing of the document may be personally liable to investors for damages.

Securities Act (Ontario)

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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)

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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.


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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.


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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)

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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.


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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.]


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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

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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.


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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].


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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

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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

An Guided Tour An Guided Tour Through a Directors’ Through a Directors’

and Officers’ and Officers’ Insurance PolicyInsurance Policy

Presentation byPresentation byDavid David

CherepachaCherepacha

3333

DECLARATIONS

• Policy limits – usually includes defence costs

• Single Loss and Aggregate Limits for Policy Period (usually one year)

• Claims made and reported basis

3434

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

3535

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:

3636

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;

37

Side A Coverage

Insurer Company

DirectorsDirect D&O Coverage (Excess, Dropdown, Difference in Conditions)

3838

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

3939

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.

40

Side B Coverage

Insurer Company

Directors

Indemnity

Reimbursement Insurance

(aboveretention)

4141

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

4242

INSURING AGREEMENT

Side C – Entity Coverage

1.3 on behalf of the insured organization, for

a Securities Claim;

43

Side C Coverage

Insurer Company

“Securities Claims”

Coverage

4444

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

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Nil Retention Retention ($)

Coverage APersonal Asset Protection for

Directors & Officers

Insurance for covered

Non-Indemnifiable

Claims

• Statute• Bankruptcy

Coverage BCorporate

AssetProtection

Insurance Reimbursement

forcovered

IndemnifiableClaims

Single Aggregate Limit

46

Nil Retention Retention ($) Retention ($)




Non-Indemnifiable

Claims

• Statute• Bankruptcy• Company’s

refusal

Coverage BCorporate

AssetProtection

Insurance Reimbursement

forcovered

IndemnifiableClaims

Coverage CCorporate Asset

Protection

Insurance for Corporate

Liability when Company is a defendant in

covered Securities

Claims


47

Excess Limits:• Underlying limits are eroded/exhaustedDifference 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

Nil Retention Retention ($) Retention ($)




Non-IndemnifiableClaims

• Bankruptcy• Company’s refusal

Coverage BCorporate Asset

Protection

Insurance Reimbursement for

covered Indemnifiable

Claims

Coverage CCorporate Asset

Protection

Insurance for Corporate Liability when Company is a

defendant in covered Securities

Claims

Coverage A Excess / DICAdditional

Personal Asset Protection for



4848

INSURING AGREEMENT

• Triggering event is claim for loss arising from a wrongful act by an officer or director

4949

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.

5050

DEFINITION OF “WRONGFUL ACT”

Ensure:

Not restricted to negligence claims only

Avoid “sole capacity” wording

5151

DEFINITION OF “LOSS”

• Fines and penalties are not usually covered

• Defence costs for such claims covered – may have to be repaid if defence fails

• Punitive and exemplary damages sometimes are covered

• Statutory claims for taxes and wages

• Where silent, policies usually cover statutory claims

5252

DEFINITION OF “CLAIM”

“Claim” means any verbal or written claim or allegation made anywhere in the world against or in respect of a director / officer which may reasonably result in a loss.”

5353

DEFINITION OF “CLAIM”

“Claim” means:

(i) A written demand for monetary damages or non-monetary relief:

(ii) A civil proceeding commenced by the issuance of a notice of action, statement of claim, writ of summons, complaint or similar pleading;

(iii) A criminal proceeding commenced by the laying of an information or the return of an indictment or similar legal document; or

(iv) A formal administrative or regulatory proceeding commenced by the filing of a notice of charges, formal investigative order or similar legal document;

5454

EXCLUSIONS

• Bodily injury, sickness, disease, death

• Emotional distress, mental anguish

• Loss of reputation, libel, slander, defamation, invasion of privacy

• Pollution

• Pension fund claims

• Breach of contract

• Prior to Retroactive Date

5555

EXCLUSIONS

Fraud

“Fraud or dishonesty of the director / officer determined by a final judgment or adjudication and which was material to the outcome of the judgment or adjudication ...”

5656

EXCLUSIONS

Fraud

“This exclusion does not apply to:

Claim Expenses incurred in defending Claims alleging the foregoing conduct [i.e., dishonest and fraud] until there is a judgment, final adjudication, adverse admission or finding of fact against the Insured as to such conduct at which time the Insured shall reimburse the Insurer for Claim Expenses incurred up to that date;”

5757

EXCLUSIONS

Fraud

• Clear severability provision so that only affects insured who actually committed the fraud

“This exclusion does not apply to any Insured who was neither the author of, nor an accomplice to, the foregoing conduct.”

5858

EXCLUSIONS

Insured vs. Insured

• Claims by present and past directors and officers• Claims by the corporation • Claims by shareholders, creditors or others brought in

the name of the corporation (derivative claims)

Exceptions

• Claims by receiver or trustee in bankruptcy• Arms-length derivative action

5959

DEFENCE COSTS

• Right to appoint and instruct counsel

• Pre-determined allocation formula to split legal costs between covered and non-covered claims

• Payment of costs on a current basis rather than retroactive basis

Corporate Counsel Corporate Counsel Issues for D & O Issues for D & O

InsuranceInsurance

Presentation byPresentation byJordan S. Jordan S. SolwaySolway

General Counsel and General Counsel and Vice President, Vice President,

Claims, Munich REClaims, Munich RE

61

Why do Corporations Buy D&O Insurance?

“The answer to this question, it seems has two parts. First, corporations buy side A coverage in order to attract risk averse individuals to their boardrooms and executive suites. The second part of the answer is more complex and, perhaps, more sinister. Corporations buy entity-level coverage under Side B and C of the D&O policy because they are run by selfish managers who are willing to invest corporate assets in negative net present value projects in order to protect their own compensation packages.”

Professor Sean J. Griffith: Unleashing a Gatekeeper: Why the SEC Should Mandate Disclosure of Details Concerning Directors’ and Officers’ Liability Insurance Policies

62

The Governance Issue

“You ever heard of D&O Coverage? Directors’ and Officers’ Coverage? They are not drafted very well, these policies and they cover both directors and officers. Guess who commits the fraud? A lot of them are officers. Guess what cases go forth, first? The criminal cases. They cost a lot of money. The directors are looking at whether they can even defend themselves – if there’s anything going to be left in the policy.”

Leo Strine, Vice Chancellor, Delaware Court of Chancery at the 2005 Symposium On Director Liability, Harvard Law School Program on Corporate Governance “Symposium on Director Liability," 31 Delaware Journal of Corporate Law

1011-1045 (2006).

63

STARTING POINT

63

Risk Management for Property & Casualty Companies

Risk Management Process

Risk Management Process

Knowledge Management Process

Knowledge Management Process

Identify Risks

Identify Risks

Measure Risks

Measure Risks

Manage Risks

Manage Risks

• Past experience• Market information• Information on potential risk (legal/financial)

• Past experience• Market information• Information on potential risk (legal/financial)

• Data analysis• Simulations and sensitivity analysis• Identifying priorities

• Data analysis• Simulations and sensitivity analysis• Identifying priorities

• Risk management techniques• Strategic choices• Tradeoffs

• Risk management techniques• Strategic choices• Tradeoffs

64

• Company’s Basic Characteristics Corporate structure Type of business and operations

• Financial Picture & Accounting Practices• Corporate History & Geography• Shareholding Structure• Retrospective Risk - Claims History• Going Forward Risk – Vulnerabilities• Stock Price Volatility• Management & Executive Compensation• Disclosure practices• Corporate Governance

RISK ASSESSMENT

65

D&O INSURANCE – STRUCTURE & PROCESS

• Who are the key stakeholders?1. the purchaser (management, board and independent

directors)2. the advisors (outside legal counsel, general counsel, risk

manager, broker) 3. underwriters, managing general agents and reinsurers 4. Shareholders

• What are the real risks facing the corporation and by implication, its directors and officers?

• What are the key issues?

• Whose interests are paramount, who is the decision-maker and what is the level of accountability?

•Balance sheet protection vs. personal asset protection

•Dynamics of the marketplace versus establishing long-term relationships

•Who is being covered, for what and on what basis?

66


• Broker will be responsible for assembling documentation and information required for submission to D&O Insurer:

– outstanding shares and shareholdings– financial statements (audited if applicable)– history of claims and litigation – names and backgrounds of directors and

officers– warranty (knowledge of matters which might

reasonably give rise to a claim within the scope of the D&O insurance being procured)

67


• Factors impacting amount of D&O Insurance:– Size of corporation (asset value)– For profit or not-for profit – Public listing

» Canada» U.S.

– Market capitalization – Countries in which corporation operates– Activities of corporation (M&A etc.) – History of operations of corporation– Structure of D&O coverage – Nature of underlying business

68


• Who is your client?• Are their conflicting interests?• Arranging the right insurance and limit • Internal Communication

- the Directors- Management - In-house legal teams- managing expectations

• Claims Management • External Communication

- brokers & insurers- Lawyers

69

RISK REDUCTION STRATEGIES

• Document Retention & Destruction• Formalize Indemnities & how they work

- Main Board & Subsidiary Board- Contractual Indemnities / Employment Contracts- Provisions for Defence Costs and advancement

70

RISK REDUCTION STRATEGIES

• Incident Escalation- dealing with incidents - dealing with claims- internal reporting mandates

• Claims Reporting- reporting requirements- Flow Charts

• Legal Panels- which firms should you use?- dealing with conflicts- managing defence costs

71

OBSERVATIONS

• The risks directors face and their exposure to personal liability is real

• Recognise the variety of D&O insurance/indemnification solutions available – one size doesn’t fit all

• Understand the principles of a D&O Policy• Risk management ownership within the organization • Risk reduction strategies

72

• Complex, technical area• Importance of input from

- Corporate risk managers- Insurance advisers- Legal advisers

• Solutions tailored to circumstances• Regular review

CONCLUSIONS

73

?

QUESTIONS

Thank YouThank You

Davies Howe PartnersDavies Howe Partners

(416) 977-7088(416) 977-7088www.davieshowe.comwww.davieshowe.com

an overview of directors’ and officers’ duties presentation by ava kanner

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employment unpaid wages

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