IN FACT AND IN LAW
Directors’ and Officers’ Liability
By Serge Bourque, Patrick Buchholz and Larry Markowitz
In this era of Enron, the notion of
directors’ and officers’ liability is on
everybody’s mind. Greater accountability
is expected of directors and officers by
shareholders, the media and the general
The theory behind imposing a greater level
of personal liability on directors and officers
is that, if they may be found liable, directors
will be more attentive to their legal
obligations to properly manage a
The Common Law and the Civil Code of
Québec impose a variety of obligations on
corporate directors. In addition, corporate
directors may be held personally liable The various forms of liability imposed on When applying a standard of due care
under provincial and federal statutes, such corporate directors and officers under the to corporate directors, the Courts are
as the Competition Act. Competition Act may generally be avoided concerned about the process that the board
through a due diligence defence. of directors has followed, rather than the
It is also important to study case law with result. If directors make a decision which is
respect to directors’ liability. For instance, in With a due diligence defence, directors debatable from a business perspective or if it
a leading U.S. case, Smith v. Van Gorkom1, or officers may protect themselves by turns out badly, the Courts will not hold the
the Supreme Court of Delaware held demonstrating that they have put in place directors personally liable. This principle is
that the board of directors’ conduct in appropriate controls and systems to referred to as the “Business Judgment Rule”.
considering a merger was grossly negligent monitor and ensure that proper policies are
and therefore found the directors to be being implemented, that periodic reports Directors must discharge their duties with
personally liable. In this case, the directors are produced and reviewed in a proper the same level of diligence as a reasonably
had failed to deliberate adequately about fashion and that appropriate action is taken prudent person in comparable
how the merger price had been determined when a problem is brought to their circumstances.
or about the intrinsic value of the attention.
corporation. Moreover, the directors had
not sought legal advice or a fairness
Smith v. Van Gorkum, 488 A. 2d 858 (Del. Supr. 1985).
Serge Bourque has been a
member of the Quebec Bar
since 1962 and specializes in
Business Law, with a focus on
In UPM-Kymmene Corporation v. UPM- • Section 52.1(8): Deceptive Telemarketing For example:
Kymmene Miramichi Inc.2, the Ontario — Liability of officers and directors who
Superior Court of Justice held that the are in a position to direct or influence the • In 1999, the Competition Bureau
Business Judgment Rule should not apply to policies of a corporation that engages in imposed a fine of $250,000 against an
the decision by the Board of Directors of deceptive telemarketing. executive from F. Hoffman-La Roche Ltd.
Repap Enterprises Inc. to approve an for his part in an international conspiracy
employment agreement with the • Section 53(5): Deceptive Notice — to fix bulk vitamin prices and allocate
Liability of officers and directors who are
corporation’s senior executive that provided sales. Another former executive was fined
for excessive levels of compensation, since in a position to direct or influence the
policies of a corporation that sends a $250,000 for his part in two international
the directors had breached their duty of care cartels to fix prices and allocate markets
by not making the proper inquiries or deceptive notice of winning a prize.
in the bulk vitamin and citric acid
investigations that would have enabled • Section 65(4): Contravention of industries.
them to conduct a proper analysis of the Section 11 Order — Directors and
situation. Thus, the Business Judgment Rule officers of a corporation that contravenes • In Her Majesty v. Cormie3, Donald
only applies to the extent that the directors Cormie, the former president of the
an order for oral examination or the
meet a proper standard of due diligence in production of documents under section Principal Group Ltd., which offered
reaching their decisions. financial products, was charged personally
11 of the Competition Act may be found
liable, where such director or officer and pleaded guilty. He was fined $500,000
under the misleading advertising
Liability under the directed, authorized, assented to,
provisions of the Competition Act.
Competition Act acquiesced in or participated in the
commission of the offence. • In September 1999, a former vice-
There are a number of examples under the • Section 74.10: Deceptive Marketing president of Chinook Group Limited was
Competition Act where the law imposes sentenced to nine months in prison for
Practices — An administrative monetary
personal liability on corporate directors penalty of up to $50,000 for a first his part in an international conspiracy to
and/or officers: fix prices and share markets for choline
offence and up to $100,000 for each
subsequent offence. chloride, an additive used in the animal
feed industry. He was also ordered to
• Section 45(1): Conspiracy — perform 50 hours of community service.
Imprisonment for a term not exceeding
In Canada, beginning in the late 1990s, the This was the first jail term imposed for a
five years or a fine not exceeding
$10 million, or both, for conspiracy to Competition Bureau shifted towards breach of the Conspiracy provisions of the
securing convictions against individual Competition Act.
restrain or injure competition unduly.
executives and not just their corporations.
• Section 47(2): Bid-rigging — A fine In fact, it is the stated intention of the
in the discretion of the court or Competition Bureau to prosecute directors
imprisonment for a term not exceeding and officers personally.
five years, or both.
• Section 52(5): False or Misleading
Representation — Depending on the
circumstances, a fine either at the
discretion of the court or of an amount
not exceeding $200,000 or imprisonment
for a term not exceeding either one
year or five years, or both a fine and
Ont. S.C. No. 99-CL-3536, June 20, 2002.
Her Majesty v. Cormie, Alta. Q.B., January 22, 1992
2 Lavery, de Billy January 2003
Patrick Buchholz has been a Larry Markowitz has been a
member of the Quebec Bar member of the Quebec Bar
since 1992 and specializes in since 1996 and specializes in
Business Law, with a focus on Business Law, with a focus on
Competition Law Competition Law
• On June 20, 2002, three Toronto The United States • Under section 36 of the Competition Act,
chemical suppliers were charged with bid- any person who has suffered a loss or
rigging and conspiracy with respect to the In the areas of directors’ and officers’ damage as result of anti-competitive
sale and supply of liquid chlorine used by liability and in matters of competition conduct may sue for damages. The
the City of Toronto. In addition to the and antitrust law, generally, the trends in current trend is for class action recourses
corporate charges, two individuals, Canada tend to follow those that are to be taken on the basis of this section.
namely, a former marketing vice- initially established in the United States. It
president and a manager of another
• There is a trend towards co-operation
is therefore useful to consider important among the antitrust agencies in Canada,
accused corporation were also charged American decisions, such as the 1999 case the United States and Europe which has
personally. of Archer Daniels Midland Company, where led to a greater number of prosecutions
• In November 2002, criminal charges were two senior executives of the American and more effective competition law
laid against a number of corporations, as agribusiness giant that had conspired with enforcement (e.g., international cartels
well as some of their executives personally, its rivals to fix prices, were sentenced to two for fixing prices and allocating markets in
for deceptive telemarketing, in which years in jail and fined US $350,000 each. the bulk vitamins industry).
non-profit organizations were contacted
by telemarketers who allegedly Trends under Canadian
misrepresented themselves as their regular Competition Law Conclusion
suppliers of business directories or office
supplies. We foresee an increase in the volume of Under those offences in competition law
where directors and officers can avoid
personal liability litigation against directors
and officers under Canadian competition liability through the establishment of a due
A case where a successful due diligence diligence defence, instituting a corporate
defence was mounted was that of Stroh law for a number of reasons:
compliance program is the best way to avoid
Brewery: such liability. Such a program would be
• A private recourse is now allowed for a tailored to the specific needs of the
• In October 2002, The Stroh Brewery refusal to deal and market restriction and corporation and cover both the criminal
Company (Quebec) Ltd. was fined for thus, it is not only the Competition
and civil provisions of the Competition Act.
engaging in price maintenance, but Bureau that may prosecute cases under For further information regarding the
management was not held personally these provisions. We expect that, in
contents of a competition compliance
liable since the behaviour in question did coming years, private actions will be manual, as well as the issues to be addressed
not represent the general policy of the permitted under other provisions of the
under a competition compliance program,
company, but was merely an isolated Competition Act, with abuse of a we invite you to consult our bulletin
occurrence. The company instituted a dominant position being a distinct
entitled “Competition Law: The Need for
competition law compliance program and possibility. Compliance Programs”, which we published
held information sessions on the in July 2002, available on our firm’s website
Competition Act for its employees. at www.laverydebilly.com.
January 2003 Lavery, de Billy 3
These bulletins are intended solely to
provide general guidance with respect to the You may contact any of the
potential liability of corporate directors and following members of the
officers, in order to avoid such a liability. Competition Law group with
For an analysis of your company’s particular regard to this bulletin.
situation or the formulation of a
competition law compliance program,
including the preparation of an employee
at our Montréal office
compliance manual, please contact Serge
Bourque at (514) 877-2997, Patrick
Buchholz at (514) 877-2931 or Larry
Markowitz at (514) 877-3048. Patrick Buchholz
The Competition Law team at Lavery,
de Billy can also conduct seminars for your Benjamin Gross
employees to inform and guide them with Guy Lemay
respect to competition law compliance. Corinne Lemire
In addition, if a complaint has been filed Jean Saint-Onge
against you or if there is a possibility that Raphaël H. Schachter, Q.C.
one may be filed, Lavery, de Billy’s Criminal
and Penal Law Group, led by Raphaël H.
Schachter, Q.C. and Marc Cigana can assist
Messrs. Bourque, Buchholz and Markowitz
are the co-authors of Loi sur la concurrence
annotée (Les Éditions Yvon Blais inc.,
2000), an annotated version of the
Competition Act (Canada).
Montréal Québec City Laval Ottawa Web Site All rights of reproduction
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Montréal, Quebec Québec City, Quebec Laval, Quebec Ottawa, Ontario
recent legal developments.
H3B 4M4 G1S 1C1 H7T 2R5 K1R 7X7
The text is not a legal
opinion. Readers should
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4 Lavery, de Billy January 2003