A number of important changes affecting the liability of directors and officers were introduced in Ontario late last year through amendments to the Ontario Business Corporations Act (Royal Assent on December 20, 2006), which are only now beginning to be recognized and appreciated by corporate boards and executives of OBCA corporations in the Province. The Amendments include: new obligations for conflict of interest transactions; clarification of scope of director’s duties; new defenses to liability; and expansion of permissible identification of directors by the corporation.

New Rules Governing Conflicts of Interest
It has been common practice that when a director with a conflict of interest notified the board of the conflict with respect to a particular transaction in question, that director was not allowed to vote on the resolution to approve the transaction, but could otherwise attend the meeting undisturbed. The recent amendments to the Ontario Business Corporations Act (OBCA) have been an end to that practice. Under the new rules, director with a conflict of interest regarding a transaction is prohibited from attending in that part of the meaning of the board doing with that transaction, as well as continuing to prohibit his or her right to vote on the resolution.

Clarifying the Fiduciary Relationship between Directors and the Corporation
As with most other corporate statutes across Canada, the OBCA contains provisions setting out the statutory duties of loyalty and good faith of directors in the performance of their obligations, as well as their duty and standard of care. In the OBCA, those provisions are found in s. 134(1). Similar provisions are found in the federal CBCA, s. 122(1). (The Nova Scotia Companies Act (NSCA) does not contain these statutory provisions and realize, for the most part, on the common law.)

The explanatory notes accompanying the amending legislation and explain that in the amendments are intended clarify that directors and officers owe their fiduciary obligations exclusively to the corporation. These amendments filed on the heels of the Supreme Court of Canada decision in Peoples Department Stores Inc. v. Wise interpreting the parallel provisions in s. 122(1) of the CBCA. In that case, while the Supreme Court interpreted the language in paragraph 122(1)(a) of the CBCA (virtually identical to the preexisting language in paragraph 134(1)(a) of the OBCA) as creating a statutory fiduciary duty which is owed exclusively to the corporation, stakeholders such as creditors could have a legal right of action based on the statutory duty of care in paragraph 122(1)(b) of the CBCA. The recent amendment to the OBCA is intended to clarify that not only the fiduciary duty, but also the statutory duty of care, of directors is owed exclusively to the corporation.

Expanded Defences for Directors
Prior to the amendments, the OBCA provided directors with a statutory defence to allegations that they had breached their duties based on good faith reliance on financial statements presented by an officer of the corporation or in a written report from an auditor, or based on reliance on the report of a lawyer, accountant or a person whose profession lends credibility to their statements. The amendments added a new statutory defence of due diligence if the director exercised the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

This brings directors’ defences in the OBCA into line with those of the CBCA introduced in 2002. The amendments also expanded the types of documents and reports that a director can rely upon in good faith by adding interim or other financial reports presented by an officer of the corporation, and reports or advice from an officer or employee of the corporation, where it is reasonable to rely on that report or advice. Following the Supreme Court decision in Peoples v Wise, that directors keep accurate and detailed records of their deliberations, the process they followed to consider the particular decisions made, the questions asked and answers given, and their individual positions on those decisions, as well as their votes.