Directors' and Officers' Liability

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					                                              IN FACT AND IN LAW
                        Competition
                                                                                                          January 2003



Competition 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
public.

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
corporation.

General Principles

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
opinion.




                                                                                                   1
                                                                                                       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

                           Competition Law




    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
     imprisonment.




                                                                                                           2
                                                                                                               Ont. S.C. No. 99-CL-3536, June 20, 2002.

                                                                                                           3
                                                                                                               Her Majesty v. Cormie, Alta. Q.B., January 22, 1992
                                                                                                               (unreported).




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
                                                                                                       Patrick Bourbeau
    Bourque at (514) 877-2997, Patrick
                                                                                                       Serge Bourque
    Buchholz at (514) 877-2931 or Larry
    Markowitz at (514) 877-3048.                                                                       Patrick Buchholz
                                                                                                       Marc Cigana
                                                                                                       David Eramian
    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
                                                                                                       Larry Markowitz
    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
    you.

    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).




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4       Lavery, de Billy                                                                                                                  January 2003

				
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