Part 10 Directors and Officers (clauses 49-51)

There are a number of important amendments included in this Part. First, is the proposed general reduction of the residency requirement for directors of corporations from a majority to 25 percent (s. 105). This amendment would not apply to sectors or corporations that are subject to ownership restrictions as specified in the regulations. Similarly, CBCA corporations that individually are subject to ownership restrictions (e.g., Air Canada and Petro- Canada ) would continue to be required to have a majority of Canadian residents on their boards.

An obligation on directors to provide notice of a change of address within fifteen days of the event has been introduced. Once this notice is received, the corporation would then be obliged to notify the CBCA Director of this change within fifteen days of receiving notice from a director (s. 113).

Second, the Act would be amended to eliminate the director's residency requirement for committees of boards of directors (s. 115(2)).

Third, the good faith reliance defence would be replaced by a due diligence defence whereby a director is not liable if that director exercises the same degree of care, diligence and skill that a reasonably prudent person would have exercised, in comparable circumstances (s. 123).

Fourth, the statutory indemnification rules would be broadened to, among other things, expressly allow the corporation to advance defence costs, provide for indemnification in respect of investigative proceedings, and allow the corporation to indemnify a director or officer (or person acting in a similar capacity) of a body corporate, a partnership, a trust, a joint venture, or other entity (s. 124).

Fifth, the provisions governing the appointment and removal of directors (s. 106 to 115) and the conflict of interest provisions (s. 120) would be updated and clarified.

A number of minor technical amendments to both the English and French versions are also included, as well some amendments which are designed to facilitate the efficient operation and administration of the statute.

Briefing Book
An Act to amend the Canada Business Corporations Act and the Canada Cooperatives Act

Bill Clause No. 49
CBCA Section No. 121(a)
Topic : Directors and Officers (Technical Amendments)

Sources of Proposed Law 

Changes From Present Law 
The word "affaires" in the French version is replaced with "activités".

Purpose of Change 
Clarification of the French wording.

Similar Provincial Laws 

Current Wording 
121. Subject to the articles, the by-laws or any unanimous shareholder agreement,

a) pour les administrateurs, de créer des postes de dirigeants, d'y nommer des personnes pleinement capables, de préciser leurs fonctions et de leur déléguer le pouvoir de gérer les affaires tant commerciales qu'internes de la société, sauf les exceptions prévues au paragraphe 115(3);

Proposed Wording 
121. a) pour les administrateurs, de créer des postes de dirigeants, d'y nommer des personnes pleinement capables, de préciser leurs fonctions et de leur déléguer le pouvoir de gérer les activités commerciales affaires internes de la société, sauf les exceptions prévues au paragraphe 115(3);

Bill Clause No. 50
CBCA Section No. 123(4) and new (5)
Topic : Directors and Officers (Directors' Liability)

Sources of Proposed Law 

Changes From Present Law 
The good faith reliance defense is replaced with a due diligence defense.

Purpose of Change 
The due diligence defense provides more fairness to directors than does the good faith reliance defense. The due diligence defense recognizes that the nature and extent of the expected precaution will vary under each circumstance. These precautions can include such things as relying on financial statements presented to directors by an officer, putting in place appropriate controls and systems to monitor and ensure that policies are being implemented, requiring a proper review or periodic reports, and taking appropriate action when a problem is brought to the directors' attention.

The elements of the good faith reliance defense are kept to make it clear that these elements continue to be part of what constitutes acting with due diligence.

Similar Provincial Laws 

Current Wording
123. (4) A director is not liable under section 118, 119 or 122 if he relies in good faith on

(a) financial statements of the corporation represented to the director by an officer of the corporation or in a written report of the auditor of the corporation fairly to reflect the financial condition of the corporation; or

(b) a report of a lawyer, accountant, engineer, appraiser or other person whose profession lends credibility to a statement made by him.

Proposed Wording 
123. (4) A director is not liable under section 118 or 119, and has complied with his or her duties under subsection 122(2), if the director exercised the care, diligence and skill that reasonably prudent person would have exercised in comparable circumstances, including reliance in good faith on

(a) financial statement of the corporation represented to the director by an officer of the corporation or in a written report of the auditor of the corporation fairly to reflect the financial condition of the corporation; or

(b) a report of a person whose profession lends credibility to a statement made by the professional person.

(5) A director has complied with his or her duties under subsection 122(1) if the director relied in good faith on

(a) financial statements of the corporation represented to the director by an officer of the corporation or in a written report of the auditor of the corporation fairly to reflect the financial condition of the corporation; or

(b) a report of a person whose profession lends credibility to a statement made by the professional person.

Bill Clause No. 51
CBCA Section No. 124
Topic : Directors and Officers (Directors' Liability)

Sources of Proposed Law 
Model Business Corporations Act
General Corporations Law (Delaware)

Changes From Present Law 
Broaden the statutory indemnification rules to:

(A) expressly allow the corporation to advance defense costs,

(B) provide for indemnification and advancement of defense costs in respect of investigative proceedings,

(C) eliminate the reference to a shareholding or other financial interests in the corporation found in the current subs. 124(1),

(D) allow the corporation to indemnify a director or officer, or a person acting in a similar capacity, of a body corporate, a partnership, a trust, a joint venture or other entity,

(E) allow persons to be indemnified if they act in the best interests of such entities,

(F) replace in the current s. 124(3) the words "Notwithstanding anything in this section" with "Notwithstanding subsection (1)", specify that a person is entitled to indemnity from the corporation if he/she was found not to have committed any fault or omitted to have done anything that the person ought to have done,

Permit a corporation to purchase and maintain insurance for the benefit of any person referred to in subs. 124(1) against any liability incurred by reason of the person being or having been a director or officer, or acting in a similar capacity.

Purpose of Change 
(A) The current indemnification provision does not provide for the advancement of defense costs to directors. Several years may pass from the start of proceedings against a director until a final adjudication. In the interim, the director may have the burden of financing his or her defense. Legal expenses in complex proceedings can be staggering. It is appropriate for a court to approve the advance of funds in the case of a derivative action since court approval of indemnification in a derivative action is currently required by par. 124(2).

(B) Subsection 124(1) does not mention investigative proceedings and it is not clear under the present rules whether indemnification is permissible in respect of them. Investigative proceedings are regularly used by, for example, securities commissions, and can involve corporate directors. Such proceedings can be costly and lengthy. This change would allow corporations to ensure that directors are adequately protected against the costs of all types of proceedings.

(C) One condition for indemnification (current subs. 124(1)) is that the corporation has a shareholding or other financial interest in the body corporate. Consequently, a corporation cannot indemnify individuals who sit on the boards of subsidiaries of subsidiary corporations ("grandchildren") or on outside boards at the request of subsidiaries. The elimination of the shareholding or other financial interest in the body corporate would permit indemnification by the parent corporation of a director of a subsidiary corporation or of a director sitting on an outside board at the request of the subsidiary.

(D) The indemnification provision applies not only to officers and directors of the corporation but also to officers and directors of a body corporate who act at the corporation's request. As such, it does not apply where a person acts at the corporation's request as a director or officer (or in a similar capacity) of a partnership, a trust or other unincorporated entity. Broadening the definition would enable directors to obtain the benefits of protection of indemnification while they are or were serving at the corporation's request as a director on these entities.

(E) To be indemnified, subs. 124(1) requires an individual acting as a director of another body corporate at the request of the corporation to act honestly and in good faith with a view to the best interests of the corporation. Consequently, in order to be indemnified by the corporation at whose request he/she acts, this director has to act in the best interest of the corporation. He/she can be put in the position of having to breach his/her duty to the other body corporate. The proposed amendment would allow directors to be indemnified by the corporation where they act honestly and in good faith with a view to the best interests of the body corporate, partnership, trust, joint venture or other entity (providing they serve as directors of that body corporate at the corporation's request).

(F) Subsection 124(3) [Bill s. 124(5)] provides for mandatory indemnification of directors and officers by the corporation in specific situations. It is unclear whether s. 124(3) can be read with s. 124(2) to make indemnification mandatory for a substantially successful defense of a derivative action. This uncertainty comes from the first sentence of s. 124(3), which specifies: "Notwithstanding anything in this section". Subsection 124(2) requires court approval of any indemnification paid by the corporation to a director who has been sued by or on behalf of the corporation. The proposed amendment to s. 124(3) would clarify that the mandatory indemnification does not apply in the case of a derivative action.

(G) Section 124(3)(a) includes a test that requires a director or officer "was substantially successful on the merits in his defense of the action or proceeding" before that person is entitled to indemnification from the corporation. This test of whether a person's defense was successful on the merits is no longer be appropriate for anticipated or investigatory matters that do not reach a conclusion with respect to the merits. This proposed change will ensure that directors will be adequately protected against liability arising from all types of proceedings.

(H) Director and officer (D & O) liability insurance provides protection to directors and officers in addition to the rights of indemnification created by s. 124. Subsection 124(4) [Bill s. 124(6)] specifically authorizes the purchase of insurance for the same category of persons named in subsection (1). However, no insurance is permitted for liabilities relating to the "failure to act honestly and in good faith with a view to the best interests of the corporation."

It is not appropriate that the CBCA disallows a corporation from obtaining insurance to cover its directors even in situations where the corporation cannot otherwise indemnify its directors. It should be left up to the market place, i.e. insurance companies, to determine when and under what circumstances they are prepared to provide directors' insurance.

Similar Provincial Laws 

 Current Wording 
124. (1)Except in respect of an action by or on behalf of the corporation or body corporate to procure a judgment in its favor, a corporation may indemnify a director or officer of the corporation, a former director or officer of the corporation or a person who acts or acted at the corporation's request as a director or officer of a body corporate of which the corporation is or was a shareholder or creditor, and his heirs and legal representatives, against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by him in respect of any civil, criminal or administrative action or proceeding to which he is made a party by reason of being or having been a director or officer of such corporation or body corporate, if

(a) he acted honestly and in good faith with a view to the best interests of the corporation; and

(b) in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, he had reasonable grounds for believing that his conduct was lawful.

(2) A corporation may with the approval of a court indemnify a person referred to in subsection (1) in respect of an action by or on behalf of the corporation or body corporate to procure a judgment in its favor, to which he is made a party by reason of being or having been a director or an officer of the corporation or body corporate, against all costs, charges and expenses reasonably incurred by him in connection with such action if he fulfils the conditions set out in paragraphs (1)(a) and (b).

(3) Notwithstanding anything in this section, a person referred to in subsection (1) is entitled to indemnity from the corporation in respect of all costs, charges and expenses reasonably incurred by him in connection with the defense of any civil, criminal or administrative action or proceeding to which he is made a party by reason of being or having been a director or officer of the corporation or body corporate, if the person seeking indemnity

(a) was substantially successful on the merits in his defense of the action or proceeding; and

(b) fulfils the conditions set out in paragraphs (1)(a) and (b).

(4) A corporation may purchase and maintain insurance for the benefit of any person referred to in subsection (1) against any liability incurred by him

(a) in his capacity as a director or officer of the corporation, except where the liability relates to his failure to act honestly and in good faith with a view to the best interests of the corporation; or

(b) in his capacity as a director or officer of another body corporate where he acts or acted in that capacity at the corporation's request, except where the liability relates to his failure to act honestly and in good faith with a view to the best interests of the body corporate.

(5) A corporation or a person referred to in subsection (1) may apply to a court for an order approving an indemnity under this section and the court may so order and make any further order it thinks fit.

(6) An applicant under subsection (5) shall give the Director notice of the application and the Director is entitled to appear and be heard in person or by counsel.

(7) On an application under subsection (5), the court may order notice to be given to any interested person and such person is entitled to appear and be heard in person or by counsel.

Proposed Wording 
124. (1) A corporation may indemnify a director or officer of the corporation, a former director or officer of the corporation or another individual who acts or acted at the corporation's request as a director or officer, or an individual acting in a similar capacity, of another entity, against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by the individual in respect of any civil, criminal, administrative, investigative or other proceeding in which the individual is involved because of that association with the corporation or other entity.

(2) A corporation may advance moneys to a director, officer or other individual for the costs, charges and expenses of a proceeding referred to in subsection (1). The individual shall repay the moneys if the individual does not fulfil the conditions of subsection (3).

(3) A corporation may not indemnify an individual under subsection (1) unless the individual

(a) acted honestly and in good faith with a view to the best interests of the corporation, or, as the case may be, to the best interests of the other entity for which the individual acted as director or officer or in a similar capacity at the corporation's request; and

(b) in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, the individual had reasonable grounds for believing that the individual's conduct was lawful.

(4) A corporation may with the approval of a court, indemnify an individual referred to in subsection (1), or advance moneys under subsection (2), in respect of an action by or on behalf of the corporation or other entity to procure a judgment in its favor, to which the individual is made a party because of the individual's association with the corporation or other entity as described in subsection (1) against all costs, charges and expenses reasonably incurred by the individual in connection with such action, if the individual fulfils the conditions set out in subsection (3).

(5) Despite subsection (1), an individual referred to in that subsection is entitled to indemnity from the corporation in respect of all costs, charges and expenses reasonably incurred by the individual in connection with the defense of any civil, criminal, administrative, investigative or other proceeding to which the individual is subject because of the individual's association with the corporation or other entity as described in subsection (1), if the individual seeking indemnity

(a) was not judged by the court or other competent authority to have committed any fault or omitted to do anything that the individual ought to have done; and

(b) fulfils the conditions set out in subsection (3).

(6) A corporation may purchase and maintain insurance for the benefit of an individual referred to in subsection (1) against any liability incurred by the individual

(a) in the individual's capacity as a director or officer of the corporation; or

(b) in the individual's capacity as a director or officer, or similar capacity, of another entity, if the individual acts or acted in that capacity at the corporation's request.

(7) A corporation, an individual or an entity referred to in subsection (1) may apply to a court for an order approving an indemnity under this section and the court may so order and make any further order that it sees fit.

(8) An applicant under subsection (7) shall give the Director notice of the application and the Director is entitled to appear and be heard in person or by counsel.

(9) On an application under subsection (7) the court may order notice to be given to any interested person and the person is entitled to appear and be heard in person or by counsel.