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Corporate Governance Essentials for Corporate Counsel

Presentation to The Association of Corporate Counsel

December 14, 2016

Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and its shareholders. The presence of an effective corporate governance system helps to provide a degree of confidence that is necessary for the proper functioning of a market economy.

In addition to the following materials, Ira and I have prepared a brochure outlining “Corporate Governance Essentials for Directors,” which is a useful tool to provide to your Board of Directors and is available on our website at http://www.mindengross.com/client-services/details/business- law/corporate-governance-and-disclosure.

Corporate governance has been defined as a set of relationships between a corporation’s management, its board, its shareholders and other stakeholders. It provides the structure through which the company’s objectives are set, and the means of attaining those objectives and monitoring performance are determined.

Boards generally look to the corporation’s general counsel as the primary resource for legal analysis and governance advice. The general counsel’s client is the corporation, as represented by the board of directors, not the CEO or any other officer or group of managers. For this reason, many boards and key committees meet regularly in private session with general counsel.1

The purpose of today’s seminar is to offer guidance about various topics that we hope will assist corporate counsel in their day-to-day work. Our intention is to provide practical information based on different situations that we have encountered, and make recommendations for dealing with issues effectively.

1 Corporate Director’s Guidebook – Sixth Edition” (The Business Lawyer; Vol. 66, August 2011)

http://www.mindengross.com/client-services/details/business-law/corporate-governance-and-disclosure

http://www.mindengross.com/client-services/details/business-law/corporate-governance-and-disclosure

Association of Corporate Counsel: Corporate Governance Essentials for Corporate Counsel December 14, 2016

Who is your Client?2

Jillian Reiner

■ General Counsel’s role in helping the board understand the issues before it is crucial. Directors cannot gain the necessary level of insight and knowledge themselves.

■ They must rely on management for this information, and they are entitled to do so.

■ General Counsel can assist the board by bringing a healthy degree of skepticism to the information management presents to the board. Skepticism, and a willingness to probe and challenge both information and management recommendations, plays a significant role in allowing the board to assess the adequacy of internal controls and procedures to identify and manage enterprise and legal risks.

■ Lord Denning compared counsel employed by one company, and counsel in private practice. He stated that “the only difference is that corporate counsel act for one client only, and not for several clients. They must uphold the same standards of honour and etiquette. They are subject to the same duties to their client and the Court. They must respect the same confidences, and their clients have the same privileges.”3

■ On that note, Lord Denning was very clear about who corporate counsel’s client is when he stated that “legal advisers do legal work for their employer, and no one else…they are, no doubt, servants or agents of the employer.”4

■ In-house counsel are equally as vulnerable to conflict of interest situations as solicitors in private practice. Perhaps the best advice that I can provide to an in-house corporate solicitor is - do not act for any party other than the employer corporation.5 Undertaking to represent directors, officers, shareholders or employees of the corporation could conflict with corporate counsel’s duty to the corporation. Furthermore, be careful as any of them allege that they reasonably relied on you (corporate counsel) to protect their interest. If this can be established, you may find yourself liable to these individuals, notwithstanding that there is no solicitor-client relationship. The corporate solicitor should take steps to ensure that all parties are aware of this.

2 This section was adapted from “Professional Liability of Corporate Counsel” by Joseph M. Steiner from Canadian Corporate Counsel: A Practical Reference for Corporate, Municipal and Crown Counsel, July/August 1993, Vol. 2, No. 8; and “Counsel to the Company: A Framework for Corporate Governance” by Michael H. Friedman and Valerie Demont, July 10, 2014, extracted from the fourth edition of The International Comparative Legal Guide to Cartels & Leniency, published by Global Legal Group Ltd., London.

3 Alfred Crompton Amusement Machines Ltd. v Commissioners of Customs and Excise (No. 2) [1972] 2 All ER 353 at 376 (CA).

4 Ibid.

5 Mercier and Trecroce in “Juggling Professional Duty and Client Loyalty: The Art of Corporate Counsel”.


■ Where an affiliate is not a wholly owned subsidiary, it necessarily has interests of its own that

may differ from and conflict with those of the controlling corporation; yet, management of the controlling corporation may consider the provision of legal advice to the affiliate to be part of the provision of management services generally.

■ The corporation’s management may not easily understand that there are circumstances in which independent advice to the affiliate is not just a nicety or a legal technicality, but a necessity.

■ Similar considerations apply to joint venturers, whether carried on through a corporate entity or a partnership of corporations. Although there may be no difficulty most of the time in having legal services provided to the joint venture by the law department of one of the joint venturers, counsel must always be alert to situations in which available approaches to the resolution of legal issues favour his or her corporate employer at the expense of the other joint venturer.

■ Corporate counsel cannot simply respond to requests from directors and officers for advice about personal liability. Nonetheless, corporate counsel will frequently be the first person from whom these individuals seek advice, and counsel may have difficulty explaining to them why they should go through the trouble and expense of obtaining advice from their own lawyers.

Nominee Directors

Jason Van Dam

■ The increased level of shareholder activism in Canada over the past several years has affected corporate governance in a number of ways. One consequence is that it is more common for directors to be nominated by a particular stakeholder. Nominee directors can be found in the context of a wholly-owned subsidiary, where the board is nominated and elected by the sole shareholder, or where a particular director is nominated and elected by a particular shareholder. It may also come about that a director of a non-profit is appointed to represent the interests of another for-profit or non-profit organization. In each of these instances, the presence of nominee directors on a board raises questions about the confidentiality of board deliberations and the dual, potentially conflicting, obligations that nominee directors have to the corporation and the nominating stakeholder.

■ Under Canadian corporate statutes, directors and officers have a fiduciary duty to “act honestly and in good faith with a view to the best interests of the corporation.”6 Their duty is owed to the corporation, not to individual stakeholders. Inherent in the fiduciary duty is an obligation to maintain and protect corporate information that is confidential or proprietary.

6 Canada Business Corporations Act, R.S.C. 1985, c. C-44 [“CBCA”], subsection 122(1)(a) and Ontario’s Business Corporations Act, R.S.O. 1990, Chapter B.16 [“OBCA”], subsection 47(1)(a).


■ For nominee directors, these legal principles can conflict with commercial realities as they often

have competing duties or loyalties to the corporation and their nominating stakeholders.

■ Corporate counsel should ensure that nominee directors are aware that when faced with such a conflict, the director’s duty to the corporation prevails.

■ Although nominee directors have dual loyalties, being a nominee of a majority shareholder, for example, does not in and of itself create a conflict or disentitle the director from voting on a contract in which the nominating shareholder has an interest.7 Nominee directors are generally presumed to act in accordance with their fiduciary duty to the corporation, despite competing allegiances.

■ The following are some common circumstances in which Canadian courts have found nominee directors in breach of their fiduciary duties to the corporation:

• Where they failed to maintain an even hand; and/or • Failed to analyze a course of action from the corporation’s perspective; and/or • Failed to disclose information affecting the corporation’s “vital interests.”

■ Moreover, where the interests of a nominating stakeholder and those of the corporation diverge,

the disclosure of confidential information by the nominee may constitute a breach of his or her fiduciary duty. Nominee directors must protect a board’s confidential information where the interests of the board and corporation so require.8 A director must not compromise or surrender his or her integrity and independence by favouring one group’s distinct interests.9 In other words, corporate counsel should ensure that nominee directors are not acting as mere channels of communication or “listening posts” on behalf of the groups or individuals that nominated them.

■ The prospect of a nominee director passing confidential corporate information on to a nominating shareholder could be grounds for a corporation to withhold information from that director.

■ That said, there is Canadian case law that suggests that boards cannot bar access to documents if there is mere speculation that the director intends to improperly communicate the information to shareholders. The British Columbia Supreme Court cautioned that, “should it ultimately be shown that the director’s purpose is harmful or damaging, the respondent at that time perhaps might have a remedy.”10 Thus, while the director’s purpose may be irrelevant to

7 Keating v Bragg [1997] NSJ No. 248 (NSCA) at 27.

8 Bennetts v. Board of Fire Commissioners of New South Wales (1967) 87 WN (Part 1) NSW 307.

9 Ibid.

10 Tyler v Envacon Inc., 2012 ABQB 631 at pars. 25 and 63.


whether they are statutorily entitled to the information, the corporation may be able to prevent access if it can be proven that the director intends to harm the corporation.

■ Counsel should warn nominee directors that the use of corporate information to profit on a personal level is considered even more severe a breach than communicating confidential information to nominating parties.11

■ Corporate counsel can assist nominee directors with minimizing the risk of liability arising from their dual loyalties by sharing with them some of these suggested guidelines and practices:

• Refrain from actively favouring (or being perceived as actively favouring) the interests of nominating stakeholders where those interests conflict with those of the corporation;

• Disclose any real or potential conflict of interest immediately, abstain from voting on the matter which presents the conflict and avoid taking cognizance of documents or information relating to the matter;

• Conduct a reasonable analysis from the corporation’s perspective prior to advocating courses of action and maintain records of the analysis conducted and steps taken;

• Disclose information to the board affecting the vital interests of the corporation; • Inform nominating shareholders that directors owe an overriding duty to the corporation.

It might be advisable to obtain a written acknowledgment by the stakeholder who arranged for the director’s appointment, of the parameters of his or her independence; and

• Nominee should obtain a clear and broad indemnification commitment from the stakeholder who arranged for his or her appointment.

■ These precautions, although not exhaustive, are a good way to guard against problems.

■ To conclude, while the increased presence of nominee directors on the boards of Canadian corporations does create complexity and risk when it comes to the dual, and potentially conflicting, obligations that nominee directors have to the corporation and the nominating shareholder, a well-informed board can take appropriate actions to address this complexity and effectively mitigate these risks.

Advisory Boards

Ira Stuchberry

■ One of the tools that is at a board’s disposal in order to ensure that: (a) it obtains all of the information it means to use to arrive at the right business judgment and (b) can provide the strategic direction a corporation needs, is the use of an advisory board.

11 Levy-Russell Ltd. v Tecmotiv Inc. [1994] OJ No. 650 (Ont. Ct. of Justice).


• For example, if a corporation feels business persons or professionals with certain expertise might be helpful in providing advice to its board, it might consider appointing such persons to serve on an advisory board.

■ The important distinction between advisory board members and directors is that an advisor would not face the same liabilities, but it is important that this distinction is made clear so that no advisor risks being considered a de facto director. Further, as the same fiduciary duties and confidentiality rules do not apply to advisors, it is important to ensure that confidentiality agreements are entered into.

• In Re Hydrodam, the UK High Court defined a de facto director as “a person who assumes to act as a director. He is held out as a director by the company, and claims and purports to be a director, although is never actually or validly appointed as such”.

• The person must have assumed the status and functions of a director and exercised real influence in the corporate governance of the company.

• As it is possible to be deemed a de facto director without any pretense of legal qualification, and as there is no single test for determining who may qualify as a de facto director, we would recommend that should an advisory board be created, that a mandate be prepared to clearly set out and separate the role of the advisory board versus the board of directors.

■ Previously, the Courts have considered the following factors in determining whether an individual is a de facto director:

a. Whether outsiders would assume the individual was a director; b. Whether the individual held himself/herself out as a director; c. Whether the corporation held the individual out as a director; d. Whether the individual used the title of director; e. Whether the individual participated in directorial acts (i.e. signing documents); f. Whether the individual was part of the corporate governing structure; g. Whether the individual acted on equal footing with one or more “true directors” in

directing the affairs of the corporation

■ If an individual is found to be a de facto director, he or she will be jointly and severally liable with the other directors for any liability that arose while he or she acted in such role.

■ By creating a charter or mandate for an advisory board setting out clear parameters for the expectations, duties and responsibilities of the advisory board, the board and the advisory board members themselves may hopefully avoid potential liability.

• For example, the mandate may consider the composition, term and compensation of the advisory board members. There may be a section regarding matters to be considered


and the policy regarding which meetings of the board of directors the advisory board may attend.

• It should also stress it is an advisory board only and its “decisions” are only “recommendations” to the board.

■ Structured properly, an advisory board can provide important guidance, especially for board

members who may not have the industry or professional experience and knowledge specific to the needs of the corporation. It is equally important to put in place the confidentiality and other protective measures in place to protect the corporation, the board and the advisory board members.

Directors’ Codes of Conduct

Jillian Reiner

There is a considerable amount of literature on this subject. I have chosen to use the Chartered Accountants of Canada’s 20 Questions Directors Should Ask about Codes of Conduct.

1. What are the objectives of a Code of Conduct?

A Code of Conduct is a key vehicle for: • Reducing the risk and associated costs of fraud, conflicts of interest and other ethical

lapses; • Setting the boundaries of acceptable behavior; • Providing the basis for sanctions against those that deviate from the Code; and • Fulfilling the regulatory obligations of public companies (Appendix 1).

2. The Role of the board of directors.

• Directors are responsible for ensuring that their own actions and those of the CEO

(whether or not a member of the board) are consistent with the Code. As such, the board sets the tone at the top of the organization, from which all other behavior follows.

3. Who develops, administers and maintains the Code?

• Although the CEO and the board of directors champion the Code, its development, periodic revision, administration and maintenance is usually delegated to another individual.

In large organizations, the individual assigned these responsibilities may be termed a “chief ethics officer” or the role may be assigned to an existing chief compliance officer.


4. How is compliance with the Code measured and monitored?

• As part of the board’s responsibility for overseeing the implementation of the Code,

directors should receive information from management that satisfies them that compliance is being appropriately measured and monitored.

5. How does the Code relate to the rewards system and how are violations handled?

• There should be clear procedures in place to investigate alleged Code violations in order to make a determination as to the veracity of the allegation and the appropriate sanctions, should a breach of the Code be determined to have occurred.

• I will talk about sanctions next. Sanctions

As noted at the outset, one of the objectives of a Code of Conduct is to “provide a basis for sanctions against those that deviate from the Code.”

In case of Codes of Conduct for NFP’s it is not unusual to provide for suspension of membership or even termination of membership as long as natural justice is observed. It is not the case with directors.

Let us assume a director of Rogers (Heaven forbid!) or a nominee director of a subsidiary or NFP organization breaches the Code of Conduct.

1. What can be done?

What cannot be done is have the directors remove the offending director.

2. Removal of the offending director by shareholders.

For a business corporation, the power of shareholders to remove directors exists under the Canada Business Corporations Act12 (CBCA) and the Ontario Business Corporations Act13 (OBCA) regardless of anything in the corporation’s articles or any agreement between the director and the corporation. Section 109(1) of the CBCA and section 122(1) of the OBCA provide that a director of a corporation may be removed by an ordinary resolution of the shareholders passed at a special meeting of shareholders called for that purpose. By the way, we note Rogers is a B.C. Corporation.

12 RSC, 1985, c C-44.

13 RSO 1990, c B16.


The B.C. Company Act provisions are the same in substance to the CBCA. I will refer to a B.C. Case shortly.

For not for profit corporations, the provisions of the Ontario Corporations Act14 (OCA) in sections 66 and 67 and the Canada Not-for-profit Corporations Act15 (CNCA) in section 130 apply with regard to the removal of directors. The provisions of the CNCA are essentially identical to the provisions of the business corporations acts identified above.

It is important to note that under Canadian corporate legislation, unlike some American legislation, this power can only be exercised at a meeting of shareholders. In other words, a director cannot be removed by a resolution in writing. For example, even if a single shareholder owns 100% of the shares, he or she must still call a meeting of shareholders to remove a director. Section 139(4) of the CBCA and section 101(4) of the OBCA read as follows:

If a corporation has only one shareholder, or only one holder of any class or series of shares, the shareholder present in person or by proxy constitutes a meeting.

It is important to remember that only the shareholders of a corporation can remove a director. The board of directors does not have the authority to remove a director. This concept has been discussed and upheld by the courts in several cases.16.

The answers to the questions from a practical point of view and one which we advise our clients to do is call a meeting of shareholders to remove the director. That director has the right to address the meeting as to why he or she should not be removed.

3. Condo Act

Interestingly, the situation is different under the Condominium Act.

Section 56(1) of the Act it reads:

The board may, by resolution, make, amend or repeal by-laws under this section, to govern the number, qualification, nomination, election, resignation, removal, term of office and remuneration of the directors….

14 SC 2009, c 23.

15 RSO 1990, c C38.

16 Re Lajoie Holdings Ltd, (1991), 24 ACWS (3d) 1332 (BCSC), where the British Columbia Supreme Court held that a board of directors did not have the authority to remove a director under the British Columbia Company Act whose provisions are similar to the CBCA and the OBCA.


The Ontario Court of Appeal in Gordon v YRCC, No. 818 214 ONCA 549, decided that the condo board had the power to remove a director who had acted unethically under its Code of Conduct. The removal was pursuant to a provision in its by-laws. The only caveat was that the board had to follow the process in the by-law.

4. Wang v. B.C. Medical Association (2014 BCCA 162)

Here was a case where breach of a confidentiality clause in a Code of Conduct by a director was a costly one for that director.

The Plaintiff, a Board member of the BCMA, distributed private information from Board meetings to non-Board members. At a subsequent Board meeting, allegations were made against the plaintiff regarding her alleged breach of confidentiality provisions in the Code of Conduct and the matter was passed onto a Code of Conduct committee for investigation. The president of the BCMA then sent a letter out to all members notifying them of the investigation into the alleged breach of the Code. The plaintiff sued the BCMA for defamation on the basis of this letter and other communications. The trial judge and Court of Appeal agreed that the letter was defamatory, but that it was made on an occasion of qualified privilege. The board had a duty to inform the membership of such an issue.

I guess notoriety is some sort of sanction. One could add the costs of an unsuccessful lawsuit.

5. Rogers’ Code of Conduct for Directors?

What is noteworthy is Point 7: Confidentiality:

7 - In carrying out the Company’s business, directors may learn confidential or proprietary information about the Company, its customers, suppliers, or joint venture parties. Directors must maintain the confidentiality of all information so entrusted to them, except when disclosure is authorized or legally mandated. Confidential or proprietary information of the Company, and other companies, includes any non- public information that would be harmful to the relevant company or useful or helpful to competitors if disclosed. Confidential information shall not be used for personal gain.

Unlike the Code of Conduct in the Wang case, Rogers would have a remedy for breach if the person used confidential information and profited from it. Rogers could sue for ill-gotten gains.


A review of other codes disclose the following items which Rogers might consider using in its Code of Conduct:

a) Harassment and Discrimination - CIBC

“All individuals should be treated fairly, equitably, with decency and with the utmost of respect. Harassment or discrimination of any sort is strictly prohibited.”

b) Fair Dealing and Competition – Shaw

“Team members should endeavour not take unfair advantage of anyone through manipulation, concealment, misrepresentation or any other unfair dealings or practices Team members should avoid disparaging the competition, customers and partners, whether on social media or otherwise and should always identify themselves as being affiliated with Shaw when communicating with the public about Shaw and its products and services.”

c) Entertainment and Favours Via Rail

“Directors and members of their immediate family should not accept entertainment, gifts or favours that create or appear to create a favoured position for doing business with VIA Rail. Any firm offering such inducement shall be asked to cease; a sustained business relationship will be conditional on compliance with this Code.”

d) Dealing with Governments - Telus

“Team members should be aware of laws and regulations restricting or prohibiting government officials from accepting gifts or entertainment or from placing those officials in an actual or perceived conflict of interest with regard to their employer.”

e) Sanctions

See the Wang case. Consequences for non-compliance with this Code of Conduct will be determined by the Board and may include any one or more of the following: • Censure • Exclusion from debate on any matter related to the non-compliance • Letter to the director • Request for resignation • Recommendation of a special resolution to remove the director.


Policies RE: Minutes of Meetings and Retention of Notes17

Hartley R. Nathan, QC Minutes of Meetings

■ Whether or not the general counsel is a director or corporate secretary or other officer, he or she is usually involved in the process of preparing the corporate minutes. Opinions differ regarding the various methods of preparing the minutes.

■ The process of preparing the minutes require substantial involvement of and vetting with the general counsel. Whatever form is ultimately implemented, those involved in preparing and reviewing the minutes must bear in mind that the minutes may be obtainable by court order as a corporate record. It has been said that the minutes must be written as if for an audience of public stockholders (and their lawyers).18

■ Corporate counsel should ensure that their employer corporation abides by the requirement to prepare and maintain records containing minutes of meetings and resolutions of directors. This often defaults to corporate counsel who often act as secretary.

■ Minute books are admissible in court as proof of all the facts contained within, in the absence of any evidence to the contrary. Under the CBCA, any shareholder or member may review minutes of meetings where a director has declared a conflict of interest.19

■ Normally, the minutes of directors’ meetings are signed by both the Chair and secretary of a meeting. This may surprise some of you. There does not appear to be any legal requirement to approve minutes of a meeting at a subsequent one. As Lord Kenyon stated in Mawley v. Barbet, “there is no necessity for the confirmation of the second vesting of what was done at the first.” Nor does there appear to be any obligation to have minutes signed to be valid.20 It is considered good practice to do both.

■ In one case, the court stated that the signatures of the Chair and the secretary would strengthen the evidence, in the sense that at least two persons who attended the meeting would be concurring on what took place. If minutes are signed, the person signing may not afterwards be able to claim an error was made.

17 This section was adapted from the November 3, 2010 ACC Presentation on “The Preparation For and Conduct of Board Meetings” presented by Hartley R. Nathan, Ryan Gelbart and Carol McNamara.

18 E.N. Veasey and Christine T. Di Guglielmo: “The Tensions, Stresses, and Professional Responsibilities of the Lawyer for the Corporation.”

19 CBCA at s. 120(6.1), CNCA, s.141(7).

20 Shakleton at 8-05 citing Mawley v Barbet, (1790) 2 E.S.P. 687, 170 E.R. 496 (N.P.)


■ A ruling in the James Hardie Industries Limited ("James Hardie") appeals handed down by the

High Court of Australia has brought to the forefront the importance of maintaining accurate minutes of meetings of the board of directors.21

• In this case, the board approved a separation proposal which included the creation of a fund to compensate claimants in respect of asbestos-related liabilities. This proposal was announced to the Australian Stock Exchange in a form that was later found to be misleading.

• The draft announcement was distributed to the directors present at the board meeting prior to its release. There were significant errors in the minutes of the meeting, not only in relation to the order in which certain events took place, but also in the recording of certain recommendations made to the board. The directors argued that the minutes were drafted before the meeting actually took place.

• Although the directors claimed that the minutes of the meetings were not accurate, the High Court concluded that the directors had approved the release of the announcement to the public, and had therefore breached their duties.

■ It is cases like these that exemplify the importance of maintaining accurate minutes of meetings, as it may not be possible to claim that an event occurred or a resolution was actually approved at a meeting if the minutes are inaccurately drafted.

■ Some considerations that corporate counsel can share with directors, and encourage them to keep in mind at all times, are the following:

• Prior to their approval, minutes should be critically and carefully reviewed by directors; • The bases of directors’ decisions at board meetings on crucial matters should be

understood and noted in the minutes; • Management should be clear as to whether it is providing documents for information

only, where no immediate action is required, or seeking the directors’ approval on a particular matter; and

• The materials provided to the directors before and at the meeting should be carefully reviewed and included as attachments to the minutes.

■ Special care must be taken when discussion at a board meeting involves legal advice by the general counsel or an external lawyer. The minutes should indicate that the board participated in a privileged discussion with counsel, with only a general reference to the subject matter. Privileged discussions must be redacted from minutes prior to their review by authorized parties, such as auditors and regulators.

21 ASIC v Hellicar & Ors, [2012] HCA 17; Shafron v ASIC, [2012] HCA 18. ["James Hardie Cases"]


■ In case of contention, the Chair could in contentious situations order that proceedings be

recorded. The transcript should be kept in a secure place at the office, only available to a director to ensure that the minutes are accurate. In keeping with the duty of confidentiality, no director should be able to duplicate the transcript and take it away with him or her.

Notes of Meetings

■ A case dealing with the importance of notes is Harris v Leikin Groups Inc.,22 where the solicitor acting for the corporation was questioned about the notes he took at a directors’ meeting. The solicitor deposed that a certain concept was presented at the meeting, but he later acknowledged on cross-examination that there was no specific reference to this concept in his handwritten notes of the meeting. He testified that he did not remember what exactly had happened at the Board meeting.

■ There are two views regarding whether directors should maintain their notes of the meeting after satisfying themselves that the minutes reflect what transpired at the meeting - that is, whether to maintain them or destroy them.

■ Notes can be a double-edged sword. It is often prudent for there to be only one record of the deliberations of the board of directors - the minutes which are approved by the board and inserted with the company’s corporate records. It may create problems if the official record is subsequently challenged by conflicting notes kept by individual directors.

■ On the other hand, a director seeking to show he or she exercised due diligence in coming to a decision at a board meeting may wish to have notes to back this up. Obviously, one should avoid making marginal notes like “why is he not asking the Chair about X?” This will be fodder for anyone cross-examining that director.

■ The company’s corporate secretary will often suggest that directors keep their own notes, if they wish, until the minutes have been approved and then destroy them.

■ Our advice is that it is a good practice to put into place a policy or guideline on managing notes and working files relating to meetings; the policy should be clear on the destruction of notes of meetings.

■ A certain former Premier of Ontario was criticized by the Ontario Securities Commissioner for not keeping his notes of meetings.23

22 (2011), 88 BLR (4th) 1 (Ont. Sup. Ct.), aff’d (2011) ONCA 790, 2011 CarswellOnt 14269 (CA).

23 YPM Magnet Case


In Camera Directors’ Meetings24

Ira Stuchberry

■ Historically, a legal case was said to be heard in camera when the judge either heard it in his private room, or caused the doors of the court to be closed and all persons, except those concerned in the case, were excluded. This was generally done when it was in the public interest to avoid public disclosure of the facts of the case.

■ An in camera meeting in today’s business world usually connotes a meeting where the corporation’s independent directors might have the opportunity to gather together without management present. Often the in camera sessions will consist of a series of meetings between the independent directors and key persons like the CEO, internal and external auditors, the chief risk officer, etcetera.

■ Corporate counsel should advise directors of some of the circumstances under which in camera meetings are commonly held, such as:

• Where independent directors wish to have a candid discussion about the company’s affairs without select parties being present; and/or

• Where there are sensitive issues to be discussed; and/or • Where only a certain number of directors attend.

■ To provide an example, an in camera meeting might be appropriate where a CEO (who is also

one of the company’s directors) is not performing his or her duties and a discussion of how to handle this is required. Likewise, if there is a difficult director who may be a nominee for a larger shareholder and there are confidentiality concerns.

■ The persons most likely to be excused in the non-profit context are particular board members, the executive director or other staff members.

■ Corporate counsel should discuss the merits of in camera practice with directors. While some sources regard the idea as a “standard” board practice, others go as far as to recommend that boards routinely put in camera sessions on their meeting agendas – if not for every meeting, then maybe three or four times per year. Even if directors do not feel it is necessary to hold in camera meetings, fewer suspicions will be raised if this becomes regular practice, rather than if they are suddenly added when a need arises.

■ While there are situations where in camera meetings are appropriate, corporate counsel should expose directors to the risks associated with this practice if not used carefully. For example,

24 This section was adapted from “In Camera Directors’ Meetings,” Hartley R. Nathan, QC, July 9, 2013, and a “In Camera Board Sessions: Careful How You Use Them,” E. Grant MacDonald.


even though technically there may be a majority of directors present at an in camera meeting, it cannot make validly binding decisions as certain directors would not have been given notice. Directors cannot be excluded from meetings of the board (other than in statutory conflict situations).

■ In camera sessions challenge boards to assess whether the motivation for a closed or private deliberation is tied to the need for confidentiality and/or secrecy. While confidentiality is important to good board governance, secrecy can and will undermine it.

■ An important test of any board’s deliberation is whether the board has the information necessary to make the best decision. Corporate counsel should ensure that directors are aware of the consequences that can result from excluding individuals from deliberations – namely, will this compromise the information, expertise or perspectives available to the board? Poor decisions can be made if in camera sessions are used too liberally, and corporate counsel should make this known to directors.

■ Boards and directors need to cultivate a governance culture of robust debate, honest dialogue and respectful listening. This is developed through attention to building the board as a social group.

■ Counsel should urge directors to consider whether a sensitive matter might be better explored in a different forum, such as a committee or task group. A board should always err on the side of openness and transparency; the governance dialogue is one that ought to be visible within the organization and to the community the organization serves. This section

■ The discussion of human resources, or the evaluation of CEOs and executive directors do commonly trigger in camera sessions. However, it is advisable that the majority of this work should take place in the open. The design of the evaluation process itself, the criteria on which performance is to be judged and the kinds of evidence to be mustered, should be developed openly and in collaboration with the executive director. Although it is common practice, there is arguably no good reason to keep the executive director’s salary, and how it compares with that paid by similar organizations, confidential. It may be better off to have a compensation committee deal with such matters and report to the board or an Executive Committee, the power to make binding decisions as to compensation.

In conclusion, in camera sessions do have their merits, but there are strong arguments that they should only be used in extraordinary circumstances. When they are used, and especially where confidentiality is not the sole rationale, the first order of business must be agreement on the rules or board discipline that will apply within the in camera deliberations and the reporting of its results.


Dual Role of Corporate Counsel (When Corporate Counsel Wears Two Hats)

Jason Van Dam

■ Lawsuits by corporate employers against their in-house counsel have been rare to non-existent in Canada. But, this does not mean that corporate counsel cannot be liable to their employer.

■ There is a recent case in California, Micro Imaging Technology Inc. v. Brennan 25 where the corporation sued a former director and officer for failing to file reports under s.16(a) of the Securities Exchange Act 1934.

■ The fundamental fact to keep in mind is that corporate counsel are still lawyers, and are therefore subject to the same standards of professional competence and conduct.

■ The questions on which liability turns are the same: did the lawyer owe a duty of care to the party complaining of his/her conduct?; what is the standard of care applicable to the particular task undertaken by the lawyer?; has the lawyer met that standard of care?; and if not, what damages have resulted from his/her failure to do so?

■ The standard of care is the “reasonably competent and diligent lawyer.” Recent decisions make it clear that compliance with prevailing practice is not a defence to a negligence claim when such practice involves known risks that could be avoided. At the very least, counsel has an obligation to warn their clients of such risks.

■ Corporate “in-house” counsel are vulnerable to some of the same types of errors as are “outside” corporate counsel. For example:

a. Corporate counsel should not assume that the client understands the tax implications of a given transaction; clearly define who is responsible for giving tax advice;

b. Likewise, in a purchase or sale transaction, identify who is responsible for resolving any environmental problems;

c. Confirm whether security of personal guarantees are to be obtained as collateral in the transaction and whether this causes any bank covenant concerns;

d. Reduce instructions to writing; and e. Verify any critical information, representations or warranties provided by a third party.

If this is not possible, at least obtain evidence or written assurance that others have conducted the proper investigations.

■ If you represent Rogers make sure that the shareholders and officers of the other party do not believe that you are acting for them; be especially vigilant if these people are unrepresented.

25 C.D. Cal. Case No. 2:14-CV-06560.


26(1995) 25 O.R. (3rd) 804 (C.A.).

Use checklists in a transaction, outlining what your responsibilities are and what will be assumed by others. Do not close your file until you have signed off on your checklist.

■ In-house counsel must be vigilant to protect corporate employers against liability for failing to comply with governmental regulatory requirements. Devising compliance programs is important; an effective compliance program includes written guidelines, educational seminars and document-retention policies. Counsel must help to ensure that all levels of management and operational activity adhere consistently and uniformly to the company’s compliance program.

■ Perhaps the greatest exposure to non-clients on the part of the corporate lawyer arises from negligent opinions. Corporate counsel in acting for the corporation may provide advice to a third party, usually in connection with a transaction to which the corporation is a party.

■ Independent third parties can, and will, rely on the advice provided by lawyers in such areas as legal opinion letters in the context of mergers, acquisitions, financing, commercial deals and security offerings.

■ In a sale transaction, for example, counsel may opine on the corporation’s representation that the assets being sold, after investigating appropriate registers, are free from encumbrance. The opinions in such instances are the same as would normally be requested of outside counsel. Corporate counsel is, therefore, in the same position of liability and responsibility as any outside counsel who renders an opinion on these matters. The same standard of due diligence is required by corporate counsel to enable the opinion to be rendered.

■ As to the role of the Secretary, Kerr v. Law Professional Indemnity Company26 (or LPIC as it was then known) is of importance. Here the applicant brought a declaration that the respondent insurance company was responsible for his legal fees in defending a claim against him in his capacity as secretary of a company. The statement of claim referred to Kerr as “barrister and solicitor who was it all material times the Secretary of NBS…” The act of negligence alleged against the directors and Kerr was that they:

“arranged for and executed various corporate and reporting documents in blank and failed to fulfil the duties and responsibilities associated with their position as directors and as Secretary of NBS.”

The judge pointed out that there was no claim with respect to the giving of legal advice. The applicant argued that his law firm billed NBS for secretarial services rendered and for legal documents prepared by him. He referred to what he called “a common practice for many years”


for partners in law firms to join their client’s board of directors or hold offices such as corporate secretary as part of the solicitor-client relationship.

It was held that the arranging for an execution for corporate documents was the administrative act of a company secretary, not an act arising from the performance of professional services as a solicitor and, as such, was not covered by the policy insurance.

This decision was reversed on appeal after the plaintiff amended the pleadings to allege that the duties owed by the solicitor arose both out of his position as secretary and as a solicitor providing legal advice.

In Gordelli Management Ltd. v. Turk27 Mr. Nathan was corporate secretary of a public company that became financially troubled. Financial statements overstated the value of assets and equity. A subsidiary borrowed money primarily on the strength of the company’s guarantee. The loan went into default and bankruptcy of the parent followed. The lender sued the directors and me as secretary. Mr. Nathan was successful in a motion for judgment. The judge made the following comments as to the role of the corporate secretary.

Another reason why a duty of care should not be imposed on Mr. Nathan is because he never held himself out to Gordelli as possessing special skill, knowledge or competence in the financial sphere. Mr. Nathan was only the secretary of Werner Dahnz with duties limited to general administration associated with meetings, the preparation of minutes and other administrative tasks and it was neither his profession nor his occupation to make financial reports or statements on which other people would rely in the ordinary course of business. In light of Mr. Nathan’s limited role as corporate secretary and his lack of financial expertise, the defendant submits, and I find, that it was not reasonable in the circumstances for Gordelli to have relied on Mr. Nathan in deciding to lend money to Automet. Mr. Nathan was never advised that he would be relied on and he never held himself out as having any particular skill or competence with respect to financial matters. There is no evidence that anyone went to Mr. Nathan and asked him about his role in the financial statements.

Insurance

■ By-Law 6 of the Law Society Act requires that all lawyers who practice law in Ontario pay the insurance premium annually, to ensure they have malpractice coverage in place. However, certain categories of lawyers can apply to exempt themselves from paying this premium. The

27 (1991), 6 O.R. (3d) 521


exemption criteria that apply specifically to in-house corporate counsel are set out in By-Law 6, Part 1, Section 4(1), which stipulates that any licensee who is employed by a single employer and provides professional services only for and on behalf of the employer – and will not provide legal services to anyone other than the employer – may be eligible for an exemption from payment of insurance premium levies.

■ If, as part of your employment, you are required to also provide professional services to your employer’s customers or clients, or to organizations outside the “employer group,” you are deemed to be providing these services in private practice and are no longer exempt from paying the premium. As well, performing professional services for family, friends or associates, even if on a pro bono basis, could preclude you from qualifying for an exemption.

■ In-house counsel might seek protection in the form of an indemnity which, of course, is only worth having if the corporation is insolvent.

The Business Judgment Rule (BJR)

Hartley R. Nathan, QC

■ Directors of public companies, like Rogers, are granted the complete authority to manage the business and affairs of the corporation28. The judiciary has supplemented the legislature by creating the BJR.

■ The basic premise is that the courts will refrain from intervening in business decisions made by directors so long as those decisions are made after all relevant facts are brought to the board’s attention and all issues are given proper consideration.

■ This premise is based on directors not breaching their duty of care or their loyalty to the corporation.

■ The core of the duty of care may be characterized as the directors’ obligation to act on an informed basis after due consideration of the relevant materials and appropriate deliberation, including the input of experts.

■ The duty of loyalty requires directors to act in the best interests of the corporation; this includes the requirement to act in good faith.29

28 Canada Business Corporations Act, R.S.C., 1985 Chapter 44, s. 102(1); Ontario Business Corporations Act, R.S.O. 1990, Chapter B. 16, s. 115(1)).

29 CW Shareholdings Inc. v. WIC Western International Communications Ltd. et al., 1998), 160 D.R.R. 4th 131 at 150 (Ont. Ct. Jus., General Division) and UPM Kymmene Corp. v. UPM Kyemmene Miramichi Inc., (2002), 214 D.L.R. (4th) 496 (Ont. Sup. Ct.) at paras 152 & 153.


■ Provided the above elements are met, the courts will defer decision-making responsibilities to

the directors because of their expertise and hands-on knowledge of the corporation; they are looking for a reasonable decision, not a perfect one.

The BCE Decision

■ One of the seminal decisions in this area is the decision of BCE Inc.30 In this case, at issue was a plan of arrangement for $52 billon, by way of a leveraged buy-out, between the vendor (“BCE”) and a consortium of purchasers (“Purchaser”).

■ The Purchaser agreed to invest $8 billion of new capital to acquire BCE. Bell Canada, BCE’s wholly-owned subsidiary, proposed to help finance the purchase, in part, by agreeing to guarantee $30 billion of new BCE debt.

■ The arrangement was approved by BCE’s common and preferred shareholders. Conversely, Bell Canada’s debenture holders opposed the proposed assumption of debt arguing that the value of their bonds would be adversely affected.

■ Ruling in favour of Bell Canada’s directors the Supreme Court of Canada (SCC), per curiam, stated:

The trial judge…recognized that the directors had a fiduciary duty to act in the best interests of the corporation…He emphasized that the directors, faced with conflicting interests, might have no choice but to approve transactions that, while in the best interests of the corporation, would benefit some groups at the expense of others. He held that the fact that the shareholders stood to benefit from the transaction and that the debentureholders were prejudiced did not in itself give rise to a conclusion that the directors had breached their fiduciary duty to the corporation. All three competing bids required Bell Canada to assume additional debt, and there was no evidence that bidders were prepared to accept less leveraged debt. Under the business judgment rule, deference should be accorded to business decisions of directors taken in good faith and in the performance of the functions they were elected to perform by the shareholders…We accordingly agree31. (Our Emphasis)

■ Despite the prejudicial effect on the debentureholders the directors did not breach their fiduciary

duty to the corporation when making their decision. The court therefore refrained from interfering with that decision because of the BJR.

30 [2008] 3 S.C.R. 560.

31 Ibid at paras 99 & 100.


32 3716724 Canada Inc v Carleton Condominium Corporation No 375, 2016 ONCA 650 33

BJR in Not-for-Profit Corporations

■ The Ontario Court of Appeal recently held that the Rule be applied to Condo boards.32

■ The Court of Appeal overturned an application judge’s ruling where the judge agreed with the appellant’s argument that the application judge “erred by assessing the Board’s decision on a subjective basis and substituting his judgment for that of the Board, which had been exercised following a fair process an d having regard to reasonable safety concerns.”

■ In reaching this conclusion, the court of appeal had a number of interesting things to say about judicial review of condominium board decisions. It began by noting that “the jurisprudence has occasionally recognized that decisions rendered by boards of condominium corporations should be shown some deference…However, the topic has not been addressed in great detail.”

■ This gap in condominium jurisprudence led the court to consider a concept that is well developed in corporate law: the business judgment rule. While this rule has primarily been considered in connection with for-profit corporations, the court observed that it has been applied to not-for-profit corporations as well, and courts in other jurisdictions have applied the rule when reviewing decisions rendered by condominium boards.33

It is therefore the directors’ responsibility to ensure that the decisions they make are informed decisions. The directors must ensure they obtain the necessary information on a timely basis in order for them to make the decisions and have adequate time to seek clarifications. In this regard, it is often the role of corporate or board counsel to assist the board in determining the appropriate duty of care and loyalty expected in various circumstances when making decisions as a board.

Contentious Issues in the Boardroom (Quorum, Dissent Rights and Abstentions, Removal of Directors and Officers)

Ira Stuchberry

■ It is useful for corporate counsel to be well-versed on proper boardroom conduct so that these practices can be discussed with the corporation’s board to facilitate more effective corporate governance.

■ Difficulties arise for corporations that lack a formal process governing the calling and conduct of board and shareholders’ meetings.


Dissent Votes

■ A director is often faced with a position put forward at a meeting with which he or she does not agree. That person should vote “NO” to the resolution and request that his or her dissent vote be recorded in the minutes. Failure to do so may lead to potential liability since the Corporate Acts deem the director to have consented to the resolution if the dissent is not recorded in the minutes.34

■ A director not present at such meeting is deemed to have consented unless, within seven days after becoming aware of the resolution, the director causes his or her dissent to be placed within the minutes of the meeting.35

■ An unusual situation could arise if a board consisted of 5, with 3 forming a quorum. If two were absent and the vote went 2 to 1 in favour of the resolution at the meeting, the resolution would pass. If the two absent directors requested their dissents be recorded afterwards, the question that arises is whether this could make a difference in the vote.

■ Reality dictates that since the meeting had concluded, this would not affect the vote. However, their dissent may protect these two directors from liability.

Abstentions

■ Another option for directors would be to abstain. An abstention is defined as “the refusal to vote either for or against a motion.”

■ A director at a meeting may be “sitting on the fence” or just does not want to offend one faction or another so he or she decides not to vote at all on a proposed resolution.

■ A director may well be deemed to have consented unless the abstention is recorded. As such, it would appear to be prudent for the undecided director to at least request that an abstention is recorded, even though that may not act as a liability shield for a director who did not dissent.

Voting

■ There are no provisions in corporate statutes as to how votes are to be conducted at directors’ meetings. Generally, voting is carried out by show of hands and each director has one vote.

■ If the matter is a sensitive one, there is a question of whether there can be a secret ballot at a meeting of directors, so directors would not be aware of how other directors have voted. Only the Chair who counts the ballots would know, assuming directors’ names were on the ballots.

34 OBCA s 135, CBCA s 123, CNCA s 147.

35 OBCA s 135(3).


■ Using foresight and careful drafting, the By-laws could effectively provide for voting by secret

ballot. Quorum Issues

■ Though I am sure corporate counsel is familiar with this topic, it is important that quorum requirements are reinforced, because if a quorum is not maintained throughout a meeting of directors, the business conducted would not be lawfully transacted. Directors should be made very aware of this fact.

■ With regard to shareholder meetings, the number of shareholders that constitute a quorum is determined by the governing statute, the by-laws and by any unanimous shareholder.

■ In relation to shareholder meetings, at common law, absent any other provision in the constating documents, a quorum was a majority of the shareholders.

■ Subsection 139(4) of the CBCA and subsection 101(4) of the OBCA each provide that two persons form a quorum for a shareholders’ meeting (CNCA s.164(2), ONCA s.57(1)). Of course, in some larger corporations, the quorum is often specified to be a stipulated percentage of shareholders’ shares represented at the meeting.

■ Where a shareholder attends only to protest the meeting, such person or such person’s shares should not be counted for quorum purposes.

■ One issue that arises from time to time is that of the “disappearing quorum”. This refers to the situation where a quorum is present at the start of the meeting but the quorum is lost at some point during the meeting itself.

■ The CBCA, OBCA and CNCA all state that, unless the by-laws provide otherwise, if a quorum is present at the opening of the meeting of shareholders, the shareholders present may proceed with the business of the meeting even if a quorum is not present throughout the meeting.36

■ Note that this role does not apply to directors’ meetings. When it comes to meetings of directors, a quorum must be maintained throughout the meeting or the business conducted is deemed invalid.

■ A strategy tip that corporate counsel can pass on is to provide in the By-laws that if a person fails to attend two board meetings without reasonable excuse, he or she will be deemed to have resigned and the vacancy may be filled. Alternatively, if a quorum is not constituted by the absence of a director, a second meeting can be called and can proceed with the balance of the directors constituting a quorum.

36 Section 139(2) of the CBCA, section 101(2) of the OBCA and s.164(3) of the CNCA. The OCA is silent on this point so it would have to be covered in the by-law.


Removal of Directors and Officers by Shareholders

■ In Canada, when a director is considered to be a problem because of misbehaviour, or where a faction of the board refuses to attend meetings and thereby frustrates a quorum, the available remedies are limited.

■ A special meeting of shareholders could be convened to remove the “dissident” directors by an ordinary resolution and to replace them with more compatible ones. The current Ontario Corporations Act requires that the right to remove directors be set out in the Letters Patent or By-laws and requires a 2/3 majority (s.67), otherwise a director cannot be removed during his or her term. All other corporate statutes provide that the removal is by a simple majority vote. The percentage of votes required for this purpose cannot be increased in the articles or by-laws.37

Where appropriate, proceedings might be brought by the corporation, claiming damages occasioned by the director’s absence and any resultant breach of fiduciary duty.38

■ If the director ceases to be qualified, for example if he or she is certified to be mentally incapable, becomes a bankrupt, or if the by-laws of a charity so provide, becomes an “ineligible individual” under the Income Tax Act, the director is automatically removed from the board.

■ A strategy tip that corporate counsel should communicate to the board is that, in dealing with any case of disorder at a meeting, the Chair should always maintain a calm, deliberate tone. If the situation demands it, he or she may become increasingly firm, however under no circumstances should the Chair attempt to drown out a disorderly member or engage in a verbal duel.

Removal by Directors Not Possible

■ Directors do not have the right to remove other directors as this is the role of the body that elected them.39

37CBCA, s.7(4) and 109; OBCA, s.7(5) and 122; CNCA, s.7(5) and 130.

38 Gearing v. Kelly (1962), 182 N.E. 2d 391 (N.Y. Ct. App.) and see Comment on Bearing v. Kelly in (1962) 62 Col. L. Rev. 1518)

39 Fraser and Stewart, Company Law of Canada (5th Edition), 1962 at p.129 citing Van Alstyne v. Rankin and St. Lawrence Corp. Ltd 1952 Que. S.C. 12.


Removal of Officers

■ Officers are normally elected by directors, although a unanimous shareholders agreement could allow the shareholders the right to elect officers. As there are no rights to remove officers dealt with under corporate statutes, it has been assumed that those who appointed the officers have the power to remove them.

Presented by: Hartley R. Nathan, QC Partner, Minden Gross LLP [email protected]

Ira Stuchberry Associate, Minden Gross LLP [email protected]

Jason Van Dam Senior Legal Counsel, Rogers Communications Inc. [email protected]

Jillian Reiner Legal Counsel, Rogers Communications Inc. [email protected]

MINDEN GROSS LLP BARRISTERS AND SOLICITORS

145 King Street West, Suite 2200, Toronto, ON M5H 4G2 P. 416.362.3711 www.mindengross.com

© 2016 Minden Gross LLP - Please note, this article is intended to provide general information only and not legal advice. This information should not be acted upon without prior consultation with legal advisors.

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