Litigation – Directors' & Officers' Liability

Directors’ and Officers’ Liability practice comprises providing advice and representation on D&O liability, indemnity and insurance options, corporate governance obligations and risk management strategies. Risk management presents the greatest exposure to personal liability that Canadian directors face, particularly in very large corporations. The difficulty is that directors are not compensated for and not expected to spend enough time to do a good job of advising on risk management. Yet, they are constantly flooded with information. The current focus on independent directors, some argue, is not necessarily a good thing because it puts a premium on independence rather than effectiveness.

However that may be, directors are easy targets for plaintiffs’ counsel who sue corporations not uncommonly under the guise that, not only the company, but the intermediaries through which it acts are liable. Compounding the difficulty is the general tenor of summary judgment case law in Canada, which makes it difficult for defendants who rightfully believe they should not have been sued to put a quick end to the proceedings.

But a recent decision of the Québec Superior Court in Girard v. Productions BBR sheds a little light at the end of that tunnel. In BBR, the plaintiff sued both the corporation and some of its directors and officers. Some of the individual defendants applied for summary dismissal on the basis that the action was bound to fail. While acknowledging that care should be taken not to dismiss a proceeding prematurely, the court also noted that concerns for avoiding injustice must also apply to defendants who believe they have been sued without foundation and rightfully want the proceedings against them ended as quickly as possible.

Under Québec law, only contracting parties are liable for their contractual obligations. Intermediaries or agents are only liable if the fault alleged flows not only from the corporation’s duties, but from the breach of an individual obligation that was independent of the plaintiff’s contractual relationship with the company. Here, the court noted, even if the facts — including allegations of bad faith and intent to cause harm — were accepted as proven, no such breach of an individual legal obligation had occurred. “All the alleged actions derive from and are a consequence of a contractual agreement,” the court wrote. 

In Ontario, a recent  Superior Court decision, Rahimi v. South Gobi, denying leave for plaintiffs to proceed against individual directors and officers of a mining company in a statutory securities class actions, adds to mounting evidence that Ontario judges and court aren’t pushovers when it comes to granting leave allowing these types of cases to proceed.

The Ontario case involved allegations that SouthGobi Resources’ financial statements contained misrepresentations related to revenue recognition. The corporate and individual defendants filed a restatement but maintained that the earlier statements were true when made and were therefore not misrepresentations. They attributed the corrections, Justice Edward Belobaba noted, to “a change of judgment on the part of the company’s auditors that management and the board of directors were forced to accept because of other corporate and financial pressures.”

The defendants also argued that they had conducted a reasonable investigation at the relevant time and were therefore not liable.

Despite expressing doubts that the plaintiffs could succeed at trial, Belobaba allowed the case against the company to proceed.

“These are serious pronouncements that may be explained and rebutted on a balance of probabilities by the defendants at trial but on a leave motion they remain significant,” Belobaba wrote. 

Belobaba, however, refused to grant leave against the individual defendants “on the basis of the reasonable investigation defence.”

Defendants asserting that defence must show that they conducted a reasonable investigation before the misrepresentation was made public, and that they had no reasonable grounds to believe, at the time of a document’s release, that it contained the misrepresentation. While the reasonable investigation defence is usually raised at trial, the Ontario Court of Appeal has in Green v. Canadian Imperial Bank of Commerce approved its use on a leave application. But the test established by Green is not easily overcome.

“It is not enough for the defendants to show reasonable investigation on a balance of probabilities as suggested by the defendants,” Belobaba wrote. “This is not the test on a leave motion. Rather, if there is a reasonable possibility that the defendants will not be able to establish both elements of this defence at trial, the motion for leave must be granted.”

In this case, however, the individual defendants to the motion had met the burden and the case could not continue against them. Justice Belobaba thoroughly reviewed the education, knowledge, credentials and experience of each individual defendant, their reputations in the community, their analysis of the issue, and their reliance on the judgment of colleagues, management, and internal and external auditors. The court also noted that the original financials had been approved by the audit committee and the Board as well as the separate management teams and boards of both the parent and the subsidiaries involved. Finally, the court commented favourably on the quality of the internal controls and of the minutes of important meetings.