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  • Directors’ Liability

    CONTENTS Directors’ liability for payroll withholding taxes Due diligence: An evolving standard To what risks of liability or being found guilty are directors exposed? Environmental liability of directors and officers Directors’ liability for payroll withholding taxes Luc Pariseau and Audrey Gibeault Directors of a corporation may be held personally liable in cases where the corporation fails to withhold and remit federal or provincial payroll taxes on salary, wages and certain benefits. Directors may also be liable for amounts which ought to have been withheld on payments to a non-resident that are subject to withholdings under Part XIII of the Income Tax Act1 (herein referred to as the «Act»). This article reviews in more detail the potential exposure that directors face, and also briefly describes some of the possible remedies that are available in such cases. With respect to federal income taxes, the failure of a corporation to deduct, withhold or remit source deductions under the Act, the Employment Insurance Act2 or the Canada Pension Plan Act3 subjects its directors to personal liability for the unpaid and unremitted amounts. A similar principle applies in the province of Quebec for an amount that an employer was required to deduct, withhold or remit under the Tax Administration Act4 (hereinafter referred to as the “Administration Act”), the Act respecting the Québec Pension Plan,5 the Act respecting parental insurance,6the Act respecting labour standards,7the Act to promote workforce skills development and recognition,8 and the Act respecting the Régie de l’assurance maladie du Québec.9 The purpose of these rules is to make the directors liable for the payment of the employer’s contributions. Section 24.0.1 of the Administration Act and section 227.1 of the Act apply to directors holding office on the date on which the amounts were to be remitted, the date they were to be deducted, withheld or collected, and the date on which an amount was to be paid. In certain circumstances, a person not officially appointed as a director could be considered to be a “de facto” director and become liable if such person performs some of the functions that a director would normally perform. Before a director becomes liable under these provisions, the tax authorities have to demonstrate that they cannot recover the amounts directly from the particular corporate taxpayer. Additionally, the tax authorities must register a certificate for the amount of the corporation’s liability and establish that the amount remains unsatisfied. The director will need to establish that he exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.10 The case law on this point11 has shown that the issue is generally whether, at the relevant time, the director knew or ought to have known of the problem, and whether he took the action within his power under the circumstances to correct the situation. In addition, the tax authorities cannot assess a director for source deductions owing after the expiry of two years from the date on which the director ceased to be a director of the corporation.12 Directors may require the corporation to purchase insurance on their behalf to protect them and former directors against liabilities incurred due to their status as directors, provided that they have fulfilled their fiduciary duties. Directors may, in particular, seek the advice of tax specialists to ensure that they comply with their obligations relating to payroll withholding taxes. _________________________________________ 1  R.S.C. 1985, c. 1 (5th Supp). 2  SC 1996, c. 23. 3  RSC 1985, c. C-8. 4  R.S.Q. c. A-6.002. 5  R.S.Q., c. R-9. 6  R.S.Q., c. A-29.011. 7  R.S.Q., c. N-1.1. 8  8 R.S.Q., c. D-8.3. 9  R.S.Q., c. R-5. 10  227.1(3) of the Act and 24.0.1 of the Administration Act. 11  Soper v. Canada, [1998] 1 C.F. 124 and Peoples Department Stores Inc. (Trustee of) v. Wise, [2004] C.S.C. 68. 12  227.1(4) of the Act and 24.0.2 of the Administration Act.     Due diligence: An evolving standard Jean-Philippe Latreille and Emmanuel Sala Nobody is held to the impossible. This maxim is reflected in statutes that hold directors of a corporation liable, on a solidary or joint and several basis, for its failure to comply with certain tax obligations. Indeed, directors will generally be relieved from such liability if they can demonstrate that they acted with a degree of care, diligence and skill that is reasonable under the circumstances. This is commonly known as the “due diligence defence.” Naturally, the circumstances are specific to each case, and there are no hard and fast rules for determining whether a director can rely on the due diligence defence. We must therefore turn to the courts’ interpretation of this standard, which has fluctuated somewhat in recent years. For many years, an “objective-subjective” test prevailed. This meant that directors had to show they had exercised the skill that can be expected from a person with the same level of knowledge or experience. The fact that the director’s personal abilities were taken into account made it possible to apply the standard of due diligence with some flexibility. However, following the Supreme Court of Canada’s 2004 decision in Peoples,1courts have determined that the test for the due diligence defence should be objective, but must also include a consideration of the specific circumstances faced by the corporation and its directors. Although all directors have the same duty of diligence, it should be noted that the analysis of a director’s liability must take into account the very different contexts in which “outside” and “inside” directors operate. Inside directors play an active role in the corporation’s management and can influence the conduct of its business affairs. They are in a better position to become aware of a corporation’s financial difficulties soon after they arise, and to take such corrective measures as are possible. The reality for outside directors is very different: most often, they are completely dependent on the information they receive from the corporation’s management and on the opinions expressed by experts (such as the corporation’s auditors) though this does not give them licence to disregard outward signs of financial difficulty. Consequently, the distinction between outside and inside directors is a contextual factor to take into consideration as part of the “objective” analysis associated with the due diligence standard ordained by the Supreme Court. This means that instead of considering the skills, aptitudes or personal characteristics of a given director — an approach that would fit more closely with the “objective-subjective” analysis that used to prevail — one must consider the circumstances associated with the director’s role and position with the corporation. Furthermore, the obligation which tax statutes impose on directors is an obligation of means, not an obligation of result. Thus, a director will not be held liable if he or she implemented measures that a reasonably prudent person would have taken, even if those measures did not yield the desired results. In this sense, directors cannot be regarded as unconditional guarantors of a corporation’s tax liabilities. For example, a director will not be held liable for the failures of an employee of the corporation if that employee had the necessary training and was appropriately supervised. In conclusion, the decision to become a director of a corporation should not be taken lightly. Before accepting such an office, one should ensure that the corporation has sound governance practices in place and that these practices will be followed throughout one’s mandate. Directors should not hesitate to consult with their legal advisors in order to ensure that they act in accordance with their obligations and thereby limit their exposure to liability. _________________________________________ 1  Peoples Department Stores Inc. (Trustee of) v. Wise, [2004] xv3 SCR 461.     To what risks of liability or being found guilty are directors exposed? André Laurin Directors are subject to the legal liability regime provided in the incorporating statute of the legal person and possibly to that of its registered office and, in some respects, to the regimes in place in jurisdictions where the legal person carries out its activities. It is therefore important to have a good knowledge of the laws that apply to the legal person and directors. In the context of Quebec law, directors face two major types of potential liability, namely: contractual liability to the legal person of which they are directors or, by way of derivative action, to the persons who may step into the shoes of the legal person in certain circumstances (shareholders or creditors of the legal person); and extracontractual liability (delictual, quasi-delictual and penal) to third parties, but also to the legal person. Contractual Liability Civil contractual liability stems from the nature of the link between the legal person and its directors. Under Quebec law, directors are mandataries of the legal person. They may incur liability to the legal person if they do not discharge their duties (care and loyalty) to the legal person or if they exceed the limits of their mandate. Extracontractual Liability Extracontractual liability may be civil or penal in nature. A person seeking a civil liability judgement is required to prove that the director, in the course of discharging its duties, committed a fault which caused damages to such person. However, the person may in some circumstances rely on legal liability presumptions against the director. The court will assess the elements put before it according to the rule of preponderance of evidence. For instance, a director who would knowingly support the decision of the board to authorize the marketing of a product which he knows is hazardous or non-compliant with the regulatory standards of the industry and may cause damages to third parties may be ordered to pay damages to the victims who suffer such damages. In the same way, a director who votes in favour of a recommendation to the shareholders to approve a merger or accept a takeover bid which he knows or should have known that it is not fair or not in the interest of the legal person and its shareholders may be held liable to the shareholders. Failure by a director to exercise its duty of care or duty of loyalty to the legal person may in certain circumstances be considered by the courts as being a civil fault in the context of proceedings against the director by the legal person itself or third parties. Specific statutes identify certain behaviours as constituting penal or criminal offences. Some statutes also create presumptions of guilt. The evidence will be assessed on the basis of the “beyond a reasonable doubt” criterion. Furthermore, the Criminal Code (Canada)1, mainly in section 21, opens the door to the concept of complicity to or participation in a criminal or penal offence. A director who is found guilty may, according to the case and the nature of the criminal offence, be ordered to pay a fine, be imposed a limitation of his rights and even imprisonment. In most cases, a defence of due diligence may be made, even against a presumption, if the director has been in fact diligent. Furthermore, it is to be noted that the more the determination of the fault is objective, the less accessible becomes the defence of due diligence. For a more detailed analysis of the duties of directors and the nature of their potential liability, please refer to the document entitled “The Corporate Director: Questions and Answers”.2 Other remedies The oppression remedy and the application for an injunction complete the arsenal of means or remedies which may be brought against directors. _________________________________________ 1  Criminal Code (Canada) R.S.C. (1985), c. C-46. 2  “The Corporate Director: Questions and Answers”.     Environmental liability of directors and officers Katia Opalka Several federal and provincial statutes in force in Quebec make corporate directors and officers personally liable for offences of an environmental nature committed by the corporation. Corporations can face site assessment and clean-up orders. Subject to certain conditions, directors and officers of a corporation can be named to such orders. The environment ministry can also refuse to issue or renew environmental authorizations on the grounds that a director or officer of the corporation, of a related corporation, or of a lender of the corporation was found guilty of an offence or convicted on certain types of tax charges in the preceding five years. This article reviews sources of personal liability for directors and officers and then identifies measures that can be taken to manage these risks so that they don’t become an obstacle to recruiting and retaining talented people. Quebec’s Environment Quality Act (EQA or the Act) creates a presumption: when a corporation is convicted of an offence under the Act, its directors and officers are presumed to be guilty of that offence unless they can show that they exercised due diligence and took all necessary precautions to prevent commission of the offence. In the case of a partnership, all the partners, except for special partners, are deemed to be directors of the partnership, unless they can show that one or more of them, or a third person, manages the affairs of the partnership. Where a director or officer commits an offence, the minimum and maximum amounts of the fines prescribed in the Act for individuals (min. $1,000/max. $1,000,000) are doubled. When a corporation defaults on payment of an amount owed to the Minister under the EQA or its regulations, the corporation’s directors and officers are jointly and severally liable with the corporation for the payment of that amount, unless they can show that they exercised due care and diligence to prevent the breach which led to the claim. With respect to site assessment and clean-up orders, directors and officers may be the subject of such an order if they have had custody or control of the site, unless they can show that either: they were unaware of and had no reason to suspect the presence of contaminants in the land, having regard to the circumstances, practices and duty of care; once they became aware of the presence of contaminants in the land, they acted in conformity with the law, as to the custody of the land, in particular as regards the duty of care and diligence; or the presence of contaminants in the land is a result of outside migration from a source attributable to a third person. To guard against the risk of environmental liability, corporate directors and officers should make sure that the corporation has an environmental management system that works. They should also consider whether it would be worthwhile to take out pollution insurance, to address risks that are not normally covered in directors’ and officers’ liability insurance policies.

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  • The corporate director: Questions and answers

    This 52-page bulletin answers in a practical and simple manner respecting the legal framweork forty-three (43) questions administrators ask or should  ask themselves. It is a very useful tool to promote good governance generating value. Click here to view the complete publication

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  • What precautions should a proposed director take prior to accepting to act as a corporate director? / What are the duties of a member of a board of directors?

    This Need to Know Express is part of a series of newsletters which each answers one or several questions in a practical and concrete way. These bulletins have been or will be published over the next few weeks. In addition, a consolidated version of all the Need to Know Express newsletters published on this topic will be available upon request.These various newsletters, as well as others published on the subject of governance, are or will be available on our website ( – André Laurin). 3. WHAT PRECAUTIONS SHOULD A PROPOSED DIRECTOR TAKE PRIOR TO ACCEPTING TO ACT AS A CORPORATE DIRECTOR? A person who is invited or wishes to become a director should clearly make some prior verifications, including: his interest for the organization and its objectives; the requirements of the position as to time and efforts and his availability in that respect; the actual possibility to make a significant contribution, therefore resulting in added value for the legal person; the quality of incumbent directors, who will be his colleagues if he accepts to act as a director; the receptivity of management respecting sound governance and the help provided by management to directors to enable them to discharge their duties and play their full role; the quality of the existing corporate governance; the financial health of the legal person; the existence of actual or threatened significant proceedings against the legal person; the compliance by the organization with laws and contracts; the existence of adequate directors’ and officers’ liability insurance coverage; the availability of an indemnification undertaking by the legal person in favour of the director; the existence of recent director resignations and the reason thereof; the proportionality of compensation relative to the liability risks (mainly in the case of reporting issuers).Preliminary discussions with the chief executive officer, the chairman of the board and some current and former directors may be helpful in obtaining adequate confirmations in respect of many of these items. However, these discussions should be completed by reviewing documents such as the financial statements, court records, minutes...).A person who is an officer, director or employee of a corporation must also ensure that the new office as director is acceptable to the first corporation. The new office may in fact contravene a policy of the corporation, the contract between the individual and the corporation or the interest of the corporation.The risks to reputation related to accepting to act as director with some legal persons are not to be neglected either. We have recently seen that the reputation of high quality persons who had accepted on a pro bono basis to act as directors of not-for-profit organizations suffered as a result. The media, politicians and even auditors general sometimes draw quick, ill-founded conclusions as to the proper discharge of their duties by directors.4. WHAT ARE THE DUTIES OF A MEMBER OF A BOARD OF DIRECTORS?Incorporating statutes, particularly the Canada Business Corporations Act1 and the Business Corporations Act2 (Quebec), as well as the Civil Code of Québec3 all stipulate two general duties which directors are subject to, that is, the duty of care and the duty of loyalty. The Canada Business Corporations Act stipulates these duties as follows:“122. (1) [Duty of care of directors and officers] Every director and officer of a corporation in exercising their powers and discharging their duties shall (a) act honestly and in good faith with a view to the best interests of the corporation; and (b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.”In addition to these general duties, a director is also subject to many statutory obligations or presumptions of liability or guilt under various statutes, particularly for unpaid salaries and remittance of deductions at source and GST/QST. It is important for directors to be aware of all the statutory obligations and presumptions and know how to recognize them, ensure that the legal person takes appropriate measures in this respect and that the board supervises such measures. _________________________________________1 Canada Business Corporations Act, R.S.C. 1985, c. C-44.2 Business Corporations Act, C.Q.L.R., c. S-31.1 art. 119.3 Civil Code of Québec, L.R.Q., c. C-1991, articles 321 and following.

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  • Is a director required to be a shareholder or member of the legal person? / Who is eligible to become a director?

    This Need to Know Express is part of a series of newsletters which each answers one or several questions in a practical and concrete way. These bulletins have been or will be published over the next few weeks. In addition, a consolidated version of all the Need to Know Express newsletters published on this topic will be available upon request.These various newsletters, as well as others published on the subject of governance, are or will be available on our website ( – André Laurin).1. IS A DIRECTOR REQUIRED TO BE A SHAREHOLDER OR MEMBER OF THE LEGAL PERSON?Subject to the following, the answer to this question is no.However, the governing statute, articles of incorporation, internal or administrative by-law or unanimous shareholder agreement may stipulate specific eligibility conditions.For example, as a non-exhaustive list of examples: the incorporating statute or the by-law of a not-for-profit organization (NFPO), professional corporation or some other legal persons may stipulate requirements as to membership, residence, citizenship, etc.; the articles of incorporation of a corporation or a unanimous shareholder agreement may confer on a shareholder the authority to appoint one or several directors or provide that a director must also be a shareholder.2. WHO IS ELIGIBLE TO BECOME A DIRECTOR?The eligibility conditions are mainly found either in the Civil Code of Québec1 for legal persons governed by it or in the incorporating statute of the legal person, as completed in both cases by the internal or administrative by-law duly adopted by the legal person or a unanimous shareholder agreement.Under all relevant statutes, a director must be a natural person. A legal person cannot be a member of the board of directors of another legal person.Article 327 of the Civil Code of Québec2 stipulates that “Minors, persons of full age under tutorship or curatorship, bankrupts and persons prohibited by the court from holding such office” are disqualified for office as directors. Exclusions which are similar in whole or in part are to be found in most incorporating statutes of legal persons.Most incorporating statutes do not require directors to be shareholders or, in the case of a NFPO, a member of the legal person.Moreover, some incorporating statutes prescribe eligibility conditions, such as citizenship or residence.Some statutes other than the incorporating statutes or some regulations or decisions of regulatory authorities establish prohibitions from acting as a director generally or, in other circumstances, from acting as a director of specific legal persons.In another publication entitled “May a director be removed by the board of directors during his term of office?”3 we discussed some additional eligibility conditions which may be prescribed by the internal or administrative by-law. Some legal person may, for example, wish to impose as an eligibility condition the absence of criminal record to avoid having to file an application with the court under article 329 of the Civil Code of Québec4 to obtain the removal of a director who has been found guilty of an offence pursuant to the Criminal Code.Failure to meet the conditions of eligibility and the loss of eligibility should, in our opinion, result in most cases and for most purposes, in the automatic disqualification of a natural person as a director.Any person who is invited to become a director of a legal person and the legal person itself must therefore verify that the applicable eligibility conditions are met. _________________________________________1 Civil Code of Québec, CQLR, c. C-1991.2 Civil Code of Québec, CQLR, c. C-1991.3 Lavery website - Publications - André Laurin - “The Corporate Director’s Q & A”, “20. May a director be removed by the board during his term of office?”.4 Civil Code of Québec, CQLR, c. C-1991.

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  • The External Directors of a SME

    OVERVIEW: Good governance can and should create value for SMEs Good governance can constitute protection against a director’s potential liability The general duties of the director of a SME are the same as those of the director of a large corporation (care and loyalty) The terms for complying with duties and implementing governance should be simple and practical in the context of a SME An adequate structure and openness by management must be present before agreeing to act as an external director Several measures can and should be taken at the external director’s initiativeINTRODUCTIONMany SMEs have a true Board of Directors and have asked outsiders to sit on it.The contribution individuals with relevant experience and skills can make to a business and the creation of value their advice can bring cannot be denied. The positive effects of good governance should also not be overlooked.However, it is a fact that many entrepreneurs are reticent to create a Board they do not completely control. The creation of a Board is often required by a lender, an investor or the prospect of a public offering. Entrepreneurs often prefer to do without a true board for fear of losing control and wasting time in meetings. In some cases, they set up a formal or informal advisory committee made up of service providers, friends or acquaintances.In this bulletin, we will begin by pointing out the duties of directors of SMEs and the goals or benefits of governance and then suggest certain actions directors may want to take in order to fulfil their duties in the context of a SME and protect themselves against potential liability.REMINDER - DIRECTORS’ DUTIESThe general duties of the directors of a legal person are the same for all directors, whether the legal person is a large or small corporation, a non-profit or for-profit corporation, a Crown corporation or any other type of legal person.These two general duties are known as the duty of care and the duty of loyalty.THE DUTY OF CAREAs it is defined by law1 and interpreted by the courts2, the duty of care involves the following: Nature: act with prudence and diligence Jurisprudential interpretation: perfection not required the decision must constitute a reasonable business decision when it is made (comparison with accepted industry practice) Involves, among other things: preparation, reflection, questioning, intervention, the providing of information and relevant knowledge Presumption of diligence in some cases if the directors base themselves on certain reports provided by management or outside expertsIn assessing whether reasonable diligence was exercised, the courts compare the actions of a corporation or individual who is sued with accepted industry practiceSeveral factors may be taken into account by the courts. The number of such factors will naturally vary depending on the circumstances. The courts will examine, among other things and depending on the circumstances: the nature and seriousness of the harm the investigation and detection systems that have been set up and more generally the risk management system (assessment and treatment) the quality of verifications conducted on a regular and timely basis the corporate culture the relevant policies adopted by the corporation and their follow-up the training and assistance provided to employees regarding prevention of the type of risk that has materialized the foreseeability of the loss, problem or event prior knowledge of the problem or indicators of a potential problem how long it took to react and the steps taken to correct the problem once detected the company’s background or history in such matters the degree of tolerance to risk or to breaches in the past the availability of measures to prevent the harm or reduce its impact the skills of the people in chargeTHE DUTY OF LOYALTYThe duty of loyalty includes the obligation to act in good faith and with integrity, but in this bulletin we will only look at its third component, namely the obligation to act in the best interests of the legal person. This aspect as developed by the law 1 and the jurisprudence 2 can be described as follows: Nature: act in the corporation’s best interests Jurisprudential interpretation: the corporation as a responsible corporate citizen “it may also be appropriate, although not mandatory, to consider the impact of corporate decisions on [...] stakeholders” if the interests of the stakeholders cannot be reconciled with the best interests of the corporation, the corporation’s interests must prevail the Board must act such that the corporation’s legal and contractual obligations are met Involves, among other things: disclosure and avoidance of conflicts of interest confidentiality (including with respect to the person who nominated the director) solidarity with decisions made no use of property and information belonging to the corporation for purposes other than the corporation’s best interests The main breaches of this duty therefore usually involve the pursuit of interests which differ from those of the corporation. The following are a few examples: acting in the interests of the person who nominated the director acting in the interests of the group the director is part of acting in one’s own interest favouring one supplier or another person with whom the director has a privileged relationship or with whom he would like to develop a relationship usurping the corporation’s business opportunity for one’s own benefit or that of a third partyInterests may perfectly coincide. Nonetheless, interests other than those of the corporation must be disclosed even in such cases.Since directors hold office personally, they cannot give a proxy. They are mandataries of the corporation, not the person or group that nominated them or appointed them to the Board. They therefore cannot follow the orders or instructions of such a person or group. They must nonetheless give the Board that person or group’s points of view and positions on an issue, if they are aware of them. In the end, they must conduct their own analysis in the best interests of the corporation and vote according to the outcome of analysis.The notion of “good corporate citizen” or “responsible corporate citizen” adopted by the Supreme Court of Canada in BCE3 will no doubt be clarified further by the courts over the coming years. We suggested possible interpretations in another bulletin available on our website4. This notion clearly implies that SMEs cannot ignore the stakeholders. Directors who ultimately become liable for the management of SMEs under corporate law must therefore incorporate this element into their decision-making process when it is appropriate to do so.STATUTORY LIABILITYOther than these general duties, some laws impose statutory obligations on directors or make them subject to liability or presumptions of liability or guilt in certain circumstances. The following are a few examples among many: directors’ liability for up to six (6) months of unpaid wages5 directors’ liability for unpaid GST and QST6 liability for unremitted deductions at source7 the presumption of guilt of directors where the legal person of which they are the directors is found guilty of an offence under the Environment Quality Act8 the presumption created by the Act respecting occupational health and safety9The nature of the legal person’s activities will determine the potential cases of statutory liability or guilt to which the directors are exposed. The nature of the legal person’s obligations can increase the directors’ burden of statutory obligations and, accordingly, in many cases, their risk of liability or guilt.Note that in most cases, a defence of reasonable diligence may be asserted if the directors were in fact diligent. However, the wording of the presumption provision in certain statutes, such as the Environment Quality Act6, could make this defence difficult.The director of a SME is therefore subject to these general duties and statutory obligations or liability.GOVERNANCE WITHIN A SMEThere are many definitions of corporate governance. Governance is synonymous with the management and operational processes and systems a legal person adopts to comply with laws and contracts and fulfil its mission. These processes and systems include: the definition of duties and their allocation among the legal person’s various decision-makers (management, Board of Directors, etc.), the setting of expectations, a framework for activities and people through policies and mechanisms and supervisory, control and internal audit measures. As Professors Yvan Allaire and Mihaela Firsirotu10 point out, governance or more specifically the duties of directors do not only translate into what the common law calls “fiduciary duties”. Governance and the exercise of a director’s duties must also create value.Allaire and Firsirotu have also suggested that such governance must be based on four pillars:1 - the legitimacy and credibility of board members2 - the strategy process and dialogue3 - the quality of financial and strategic information4 - the compensation and incentive systemThe Institute for Governance of Private and Public Organizations (IGOPP) follows this approach in its courses.Directors should not however ignore the precautions that are available to them to protect themselves against liability. In the Peoples case, the Supreme Court of Canada held as follows:“[64] The establishment of good corporate governance rules should be a shield that protects directors from allegations that they have breached their duty of care.”11 [emphasis added]The measures we suggest in this bulletin emphasize precaution. However, use of precautionary measures should always be based upon and driven by the goal of creating value for the SME.Governance is therefore important not only for the SME itself, but also for the directors.SMEs normally do not have the means (human and material resources) to adopt and apply the same systems and processes as large reporting issuers and Crown corporations. Furthermore, an entrepreneur who runs a SME and who ends up with a Board of Directors has neither the time nor the inclination to become involved in a system that is likely to prevent him from devoting his time to the efficient running of the business.As a result, the principles and guidelines of good governance must be adapted to the specific reality of each SME.An external director should therefore encourage the establishment of good governance within the SME by suggesting the use of simple and practical measures and by taking several initiatives he can control himself.SUGGESTED MEASURESCONTEXTUAL MEASURES1 - Ensure management’s cooperationSetting up governance measures will no doubt be easier where the SME has several shareholders, some of which are not part of management. However, both in such a case and where the SME is controlled by a majority shareholder who is also the principal officer, it could be difficult if not impossible to implement such measures without management’s complete cooperation.The measures suggested below will not have any true impact unless such cooperation exists. The power of persuasion and the personality of the external director will also play an important role, but they will hardly be effective if the external director is not perceived by management as a useful and relevant player in helping the SME achieve its goals and fulfil its mission.It goes without saying that the controlling shareholder and principal officer can quickly call a special meeting of the shareholders he controls and replace the external directors he is not pleased with, unless a unanimous shareholder agreement or an agreement with a lender or investor prevents him from doing so.2- Encourage the presence of other external directorsAn external director has every interest in not being the only external Board member. The presence of other external directors will give a better balance of power, lead to greater cooperation, increase the chances of certain measures being accepted and provide a sounding board for the discussion of concerns between meetings.MINIMUM FORMAL MEASURESCertain more formal measures, most of which are of minor importance, could create an environment more conducive to the fulfilment of the director’s duties. The following is a non-exhaustive list of such measures: election of a Chairman of the Board or a lead director chosen from among the external directors adoption of a description of the Board’s duties and responsibilities (mandate or charter) adoption of a work plan and a schedule to be followed by the Board in performing its duties adoption of a standard agenda including specific items for each meeting appropriate to the Board’s work, such as “Business arising” and “Remittance and review of management certificates” use of a corporate secretary or meeting secretary to help prepare for meetings, take notes and draft minutes (several independent notaries and lawyers offer this service on a contract basis) obtaining management certificates on a regular basis (regarding financial aspects, controls and internal audits, compliance with laws and regulations, the payment of salaries, the payment of GST/QST, deductions at source, the environment, occupational health and safety, lawsuits, threatened lawsuits and other aspects which could lead to the statutory liability or guilt of the directors) implementation of internal control and information management systems preparation and adoption of minutes for each meeting obtaining of “Directors and Officers” liability insurance and contractual undertakings to indemnify the directors from the SME and in certain cases shareholders or even lendersManagement should be prepared to agree to the setting up of most if not all of these measures.MEASURES AT THE INITIATIVE OF THE EXTERNAL DIRECTORSeveral other measures could or should be taken by the external directors. They might include the following:generally become familiar with the SME’s activities and the market in which it carries on business, its competitors and its legal and contractual environment use one’s knowledge and skills to bring added value to the SME (positive and proactive role) devote the time necessary to provide a quality contribution (mere attendance at meetings not enough) have the courage to express one’s views based on the development and realization of the value of the business, even if they might not be welcome (avoid complacency) use skills and psychology to communicate one’s questions, requests and points of view show high ethical standards and integrity, comply with the law and contracts and respect the people involved in one’s reflections, decisions and actions as a director use good common sense and the “smell test” resign if the environment is unsatisfactory or if you can’t make a good contributionand more specifically do not hesitate to have items added to the agenda meet with management between meetings and discuss the corporation’s major files and perspectives talk to the other external directors between meetings and discuss each person’s thoughts and concerns during meetings, repeat one’s understanding of the information provided by management at meetings or in conversations between meetings, ask the other directors to do the same and have management confirm (or correct) one’s understanding and that of the other external directors, and have this recorded in the minutes with respect to any proposed transaction or capital expenditures or with respect to any other major decision, ask for explanations from management, including: a description of the nature and elements of the proposal the main reasons for adopting it the other options that were considered and why they were set aside the scope and nature of the verifications conducted, the methodology followed for such purpose and the confirmations of internal or external experts obtained the expected benefits or return on investment and have the answers noted in the minutes if doing so would be appropriate encourage the establishment of adequate and reliable financial controls and ensure they are effective identify the main risks, check how they are managed and regularly update and monitor these aspects verify the SME’s succession planning and identify the people who could take over as president and CEO and fill the other important executive positions temporarily or for the long term in the same manner, identify potential acquisition or merger targets and other business opportunities to avoid being taken by surprise if management suddenly presents a proposal, so as to be able to offer other suggestions give management any information you may have about the market, useful contacts (financing, underwriting, competitors’ initiatives, business partnerships, etc.), including newspaper or magazine articles or other documents of interest identify the personal interests of the other Board members and management and suggest measures to protect the search for and consideration by everyone of the corporation’s best interests encourage the adoption of policies to support compliance with the law and contracts, including the adoption of a code of conduct ensure that contracts to which the SME is a party do not contain any misrepresentations by asking the management questions in this regard and obtaining a description of what management has done to confirm them in the case of the acquisition of another business, ensure that the people who did the due diligence of the other business had adequate means to do it and find out from them whether the results raised any concerns encourage the establishment of a complaint reporting and whistleblowing system investigate or have an independent investigation conducted and obtain adequate explanations about any serious complaint or mention of an event which could constitute a breach of the law or contracts or which could cause material damage or bodily harm when a problem arises, insist that it be dealt with promptly in order to identify possible solutions and ensure that the chosen solution is implemented quickly and efficiently in the case of the proposed sale of the business or another material transaction to be submitted for shareholder approval, ensure that all shareholders have access to the same information as management and are treated fairly in the case of the sale of the business, a change of control or other transaction resulting in a material change, ensure that the interests of all stakeholders are taken into account if they can be reconciled with those of the corporation conduct a post mortem of Board decisions and a comparison of the actual results achieved compared to the projections submitted by management obtain clear confirmation regarding the financial criteria prescribed by law in the case of the declaration of dividends or other transactions or operations modifying the assets of the legal person or involving significant disbursements by it when necessary or advisable, ask for more time and information before making a decision and, in certain cases, do not hesitate to insist on having the advisability of a major decision validated by outside experts increase the intensity of one’s oversight and the amount of information which must be provided to the directors in the case of a major decision by or financial difficulty of the business if the business is experiencing financial difficulty, also obtain more regular written confirmation from management that certain payments have been made (GST/ QST, wages, deductions at source, etc.) and consider the possibility of resigning or obtaining additional guarantees of indemnification, and obtain advice from the corporation’s legal counsel with respect to other protection that could be provided, where applicable, pursuant to laws governing insolvency and bankruptcy (including an undertaking by shareholders or major lenders) disclose your interests to the Board and, in the case of a conflict of interest in connection with a decision, refrain from participating in the decision in the case of a fundamental disagreement with a major decision, immediately have your dissent entered in the minutes and/or send the Secretary and the Chairman of the Board written notice of your dissentFURTHER THOUGHTSMany Board decisions which turned out in hindsight to be unwise and some of which opened the door to lawsuits stemmed from inaccurate, incomplete or mis-information given to the Board or the failure to adequately check and validate information provided not enough time spent analysing the situation or proposal a lack of resolve by the Board and, more specifically, the external directors faced with a difficult decision the failure to follow common sense and to notice apparent indicators of failings or problems the failure to take required action in a timely mannerThere’s no substitute for common sense. Rational arguments do not always make up for an uncomfortable feeling about a situation. That uncomfortable feeling should be identified, investigated and acted on. In terms of integrity, the following question should be asked: Will I be able to look at myself in the mirror tomorrow and am I sure that I’m not only “doing the right thing” but “doing things right”?12.CONCLUSIONSMEs play a very important role in our economy and are essential to the development and well-being of society. They require the knowledge and skills of various individuals and a certain framework. Holding office as a corporate director is therefore an important social contribution.Acting as the director of a SME and contributing to its development can also be a very interesting and rewarding challenge.Directorship involves certain duties and obligations and the failure to comply with them can lead to liability and even conviction in some cases.The presence of shareholders and executives on the Board of a SME, the more limited resources of a SME and certain conduct can sometimes make the performance of the duties of an external director difficult and precarious.Measures adapted to the reality of SMEs can be taken but they can only be used effectively with management’s cooperation. The presence on the Board of several external directors can help create a conducive environment. However, other measures and precautions, like those suggested in this bulletin, are essential._________________________________________ 1 Civil Code of Québec, R.S.Q., c. C-1991, art. 322, Canada Business Corporations Act, R.S.C. 1985, c. C-44, s. 122(1), Business Corporations Act, R.S.Q., c. S-31.1, s. 119.2 Peoples Department Stores Inc. v. Wise, [2004] 3 S.C.R. 461 at par. 32, BCE Inc. v. 1976 Debentureholders, [2008] 3 S.C.R. 560 at par. 36.3 2008 S.C.C. 269.4 “Directors’ Duties in Light of the Peoples and BCE Decisions ”, September 2009, by André Laurin and André Vautour (Lavery, de Billy website-publications-André Laurin).5 See for example: Canada Business Corporations Act, R.S.C. 1985, c. C-44, s. 119(1), Business Corporations Act, R.S.Q., c. S-31.1, s. 154.6 See for example: Excise Tax Act, R.S.C. (1985), c. E-15, s. 323(1).7 See for example: Income Tax Act, R.S.C. (1985), c. 1 (5th Suppl.), s. 227.1, Tax Administration Act, R.S.Q., c. A-6.002, s. Environment Quality Act, R.S.Q., c. Q-2, s. 115.40.9 Act respecting occupational health and safety, R.S.Q., c. S-2.1, s. 241.10 CD Howe Institute, Changing the Nature of Governance to Create Value (No. 189, November 2003), Allaire and Firsirotu, 2003.11 Peoples Department Stores Inc. v. Wise 2004 S.C.C. 68.12 Ethics and Corporate Social Responsibility: Why Giants Fall, Ronald R. Sims, Prayers, 2003, p. 8.

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  • Francization – Bill No 14 amending the Charter of the French language

    This publication was authored by Luc Thibaudeau, former partner of Lavery and now judge in the Civil Division of the Court of Québec, District of Longueuil. The title of this newsletter gives a good summary of the explanatory notes that serve as an introduction to Bill 14, entitled An Act to amend the Charter of the French language, the Charter of human rights and freedoms and other legislative provisions (the “Bill”). The legislator is concerned that English is being used systematically in certain workplaces. The Bill was tabled on December 5, 2012 and the proposed amendments are designed to reaffirm the primacy of French as the official and common language of Quebec.

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  • SMEs, Governance and Directors

    Since the mid-1990s, the promotion of corporate governance has been the subject of various public and private initiatives in Canada. The first of them were aimed at reporting issuers. State-owned corporations and other public sector organizations were targeted next.As a result of the example provided by these corporations and pressures from funding organizations, donors and sponsors, many not-for-profit organizations (NFPs) followed behind. Similarly, in the case of SMEs not listed on a stock exchange, institutional investors and outside directors also pressured these corporations to adopt minimal governance rules.

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  • Directors and Risk Management

    Risk management has always been a part of an enterprise’s management profile. Historically, boards of directors did manage risk, albeit in a less systematic way.Greater emphasis has been placed on this aspect of management over the last few years. Thus, the practices which were recommended to Canadian reporting issuers with respect to governance emphasized the need to include risk management in the board of directors’ mandate. In the United States, the Securities and Exchange Commission (“SEC”) requires reporting issuers to disclose the risk management actions they have taken.

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  • Directors’ duties in light of the Peoples and BCE decisions

    The Peoples and BCE decisions have shed considerable light upon the parameters and criteria for the exercise of directors’ duties in Canada.The purpose of this bulletin is to provide an update on: the nature and scope of directors’ duties and obligations; the identity of the creditors or beneficiaries of these duties and obligations; the influence of the factual context and nature of the recourses instituted on the first two points; the parameters for the exercise of these duties; some available precautions.

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  • Your Contracts: a Systematic and Disciplined Approach is Called for

    Every day, and several times a day, we enter into contracts without knowing it or without considering and controlling their effects. This bulletin provides a brief and non-exhaustive summary to help you better understand, prepare for and monitor your contractual environment.Do you know that a contract is a meeting of minds that may be expressed and entered into in different ways (written, verbal, e-mail, filling of orders, etc.). Do you know that a contract may be amended or rights abandoned by actions, words or subsequent writings, or by failing to take action in a timely manner.This bulletin provides practical advices before you drafting, negotiating, also advices regarding the performance and monitoring of contracts.In summary, clarity, transparency, a mutual understanding of the goals and expectations of each party, good faith and the use of a systematic and disciplined approach will smooth the way for your contracts. Have good contracts!

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  • The Role of the Chair of the Board of Directors

    The role and duties of a Chair are not defined and circumscribed in incorporating statutes (federal and Quebec) except in the case of Quebec government-owned corporations and then, only in part. Boards of directors have been at the centre of the public debate on corporate governance in recent years. This heightened focus on boards has provoked questioning and reflection on the role and liability of the Chair.This newsletter reviews the legislative, regulatory and jurisprudential framework of the Chair’s role.Every company and every period in its development has specific characteristics and requirements. The context, the identity of the company’s shareholders or members, as the case may be, the composition of the board, and the personalities of the Chair and of the CEO are some of the many factors that will affect the role of the Chair and the specific qualities that the Chair of a particular company should have. However, the fundamental features and requirements should remain constant, regardless of the circumstances. This newsletter has attempted to explain and describe some of them.

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