Nominee Directors—Need To Exercise Caution
By: Hartley R. Nathan, Q.C. Mr. Nathan is a senior partner of Minden Gross LLP and is Editor-in-Chief of the Directors Manual. The writer wishes to thank Eleonore Morris, student-at-law at Minden Gross LLP for her assistance in connection with the preparation of this article. This article first appeared in the January issue of the Director's Briefing. © CCH Canadian Limited.
This principle of corporate altruism becomes questionable when a director is a nominee of a specific shareholder. The nominee director must balance his overarching duty to the corporation and his subtler yet underlying obligation to his appointing shareholder. Whether this balance can be achieved depends, realistically, on the degree of involvement of the appointing shareholder. As noted by Farley J. in Ballard, "the life of a nominee director who votes against the interests of his appointing shareholder is neither happy nor long".
Despite this seemingly obvious conflict of interest, corporation nominee directors still seem to need to appease important shareholders. A nominee director can act as a liaison between the shareholder and the corporation, by ensuring that the shareholder is kept apprised of the corporate decisionmaking, while simultaneously ensuring that the corporation is aware of the issues which the shareholder deems important. The duty of the nominee director is to cast his vote towards the course of action best suited for the corporation, regardless of how such a course may impact the interests of his appointing shareholder.
As Farley J. implies, this can have the effect of biting the hand that feeds you. From a legal standpoint, issues with nominee directors generally only arise where the interests of the corporation are subordinated to that of the appointing shareholder. If a nominee director, or the shareholder behind him, conducts or attempts to sway the affairs of the corporation in a manner oppressive to other shareholders, the courts will intervene.
In this context, it is vital to understand that concerns about exposure to director's liability should not be confined only to those persons who are properly appointed directors. The courts have demonstrated that where there is wrongful conduct which is oppressive to the shareholders of a corporation, the court will look for additional and alternative defendants. In the case of a nominee director, the search will likely begin with an evaluation and assessment of the conduct of the appointing shareholder, and its relationship with the nominee director.
With this in mind, it is important for corporations that have existing nominee directors or have an obligation to appoint such directors to be aware of the likely consequences of a breach of fiduciary duties, and the potential risks to which the corporation is being exposed.
Personal Liability and the Oppression Remedy
This idea that one can act in his capacity as agent and be automatically held liable for such actions does not correspond with commercial reality. The legislation should take certain steps towards acknowledging the unique qualities which characterize the role of a nominee director.
In Canada, Alberta has made an attempt at acknowledging that nominee directors will give special consideration to the interests of their appointing shareholders. When discussing duties of care of directors and officers, subsection 122(4) of the Alberta Business Corporations ActS.A. 1981, c. B-15. states:
The use of the words "special, but not exclusive, consideration" was adopted so that the purpose of a nominee director would not be stultified by virtue of their obligations to advance the corporation's interest. Despite its admitted vagueness, the provision was adopted to give a degree of guidance in evaluating the conduct of a nominee director in situations where it was alleged the director was acting as agent to the appointing shareholder, and therefore in breach of his fiduciary duties. The task of determining the boundaries between "special" and "exclusive" consideration falls ultimately to the judiciary.
The danger, of course, in adopting such a provision in the Canada Business Corporations Act ("CBCA"), or the Ontario Business Corporations Act ("OBCA"), or other provincial legislation is to dilute the established fiduciary duties owed to a corporation by a director, namely to act in the best interests of the corporation.
Taking the Alberta provision a step further by stating that special, but not exclusive, consideration could be given to the interests of the appointing shareholder, so long as such consideration was not against the best interests of the corporation at large, would also not remedy the situation in its entirety. Unfortunately, such provisions would hardly be groundbreaking, as it is generally accepted commercial practice for current nominee directors to give special consideration to their appointing shareholders, so long as it is done with a view to "bettering" the corporation.
Perhaps the best solution would be to ensure that every director has sufficient directors' and officers' liability insurance coverage, in the event a cause of action is brought, or, in the alternative, that the appointing shareholder agree to indemnify the nominee director against any action relating to a breach of fiduciary duties.
In practice, this may only prove to be a partial solution. In those cases where an oppression action is brought against a nominee director, the appointing body will likely be named as a defendant as well, on the basis that the appointing body is a de facto director of the corporation. In the event that either the nominee director, or the appointing body as either a de facto director or indemnitor are found liable, the capital of the corporation may still suffer at either of the management or shareholder levels, even with both insurance and indemnification.
Ensuring that appointing bodies are aware of their potential exposure in the event of an oppression action is crucial in the corporate governance process. Such knowledge may help to alleviate certain pressures exerted on the nominee directors by the appointing body, with the effect of avoiding such actions entirely. At the very least, open communication as to the likelihood of liability may discourage certain persons from accepting nominee director roles, without proper indemnification from their nominator, or insurance.
Statutory Qualifications of the Board of Directors
Where a corporation is a subsidiary of a U.S. or other foreign parent and cannot find a resident Canadian nominee director willing to act as such, a possible solution to this problem would be to incorporate in a jurisdiction which does not require a minimum resident Canadian requirement, such as New Brunswick or Nova Scotia. The caveat to this approach, however, is to be watchful of the limitations on rights of action within the jurisdiction. In Jaber v. Hughes et al., an action was commenced against a company incorporated in Nova Scotia but carrying on business in Ontario. The plaintiff sought relief through the oppression remedy under the OBCA in the Ontario Superior Court of Justice. The Court declined to accept jurisdiction.
Accordingly, the nominee director needs to exercise caution.