Some Observations on the Business Judgment Rule
July 17, 2007
The Supreme Court of Canada in Peoples Department Store Inc. (Trustee of) v. Wise revisited the question of the business judgment rule in Canada. (This is the rule whereby courts will defer to the directors’ business judgment so long as they brought an appropriate degree of prudence and diligence in reaching a reasonable business decision at the particular time it was made.)
Major and Deschamps JJ. speaking for the court stated:
Canadian Courts, like their counterparts in the United States, the United Kingdom, Australia and New Zealand, have tended to take an approach with respect to the enforcement of the duty of care that respects the fact that directors and officers often have business expertise that courts do not. Many decisions made in the course of business, although ultimately unsuccessful, are reasonable and defensible at the time they are made. Business decisions must sometimes be made, with high stakes and under considerable time pressure, in circumstances in which detailed information is not available. It might be tempting for some to see unsuccessful business decisions as unreasonable or imprudent in light of information that becomes available ex post facto. Because of this risk of hindsight bias,
Canadian courts have developed a rule of deference to business decisions called the "business judgment rule", adopting the American name for the rule.
In Maple Leaf Foods Inc. v. Schneider Corp., Weiler J.A. stated:
The law as it has evolved in Ontario and Delaware has the common requirements that the court must be satisfied that the directors have acted reasonably and fairly. The court looks to see that the directors made a reasonable decision not a perfect decision. Provided the decision taken is within a range of reasonableness, the court ought not to substitute its opinion for that of the board even though subsequent events may have cast doubt on the board’s determination. As long as the directors have selected one of several reasonable alternatives, deference is accorded to the board’s decision. This formulation of deference to the decision of the board is known as the "business judgment rule". The fact that alternative transactions were rejected by the directors is irrelevant unless it can be shown that a particular alternative was definitely available and clearly more beneficial to the company than the chosen transaction.
One should, however, pause to consider exactly what is encompassed by the business judgment rule in Canada.
Foremost, one should keep in mind that this rule appears to have been adopted from the United States where there has been some suggestion that it ought to be restricted to directors. Query therefore whether it should only apply to directors acting in the capacity of a board and not to officers (including persons who are otherwise directors acting qua officers)?
There seems to be a blurring of this dividing line in some of the cases. An example of this would be Kerr v. Danier Leather Inc. (see the firm’s commentary on this decision), where the Ontario Court of Appeal stated, "In other words, the trial judge failed to give any deference to the ‘business judgment’ of senior management …"
Similarly, the same court in Brant Investments Ltd. v. KeepRite Inc. referred to the question of a trial judge substituting "his own business judgment for that of managers, directors, or a committee such as the one involved in assessing this transaction." See also the loose reference to officers in the Peoples decision.
Secondly, the incantation of the rule does not automatically extend immunity to directors. The board is required to carefully consider the options apparently open to the corporation at the time of the decision being made; the board must then choose one of those options, keeping in mind that that choice will have to stand up to subsequent scrutiny as being a decision that is within the range of reasonableness.
It would seem that this exercise presumes that the board will require that it be provided with what appear to be the possible alternatives (together with the pros and cons of each choice). The board then would apply its expertise and experience to come to a ‘protected’ decision.
This was recognized in UPM-Kymmene Corp. v. UPM-Kymmene Miramichi Inc., where the Ontario Court of Appeal favourably commented on the trial judge’s observation that the rule "recognizes the autonomy and integrity of a corporation and the expertise of its directors" since they are "in the advantageous position of investigating and considering first-hand the circumstances that come before it and are in a far better position than a court to understand the affairs of the corporation and to guide its operation."
Thus a board should ensure that it does conduct a proper investigation and makes certain that it has what appears to be the then-relevant information before it makes a decision, after balancing the various considerations and factors in play.
Lastly, while the business judgment rule provides directors with insulation from liability under their statutory duties of care, one must keep in mind that the oppression remedy (signalled by the Supreme Court in the Peoples decision as being a powerful tool that could have been pursued) is available. Its focus is on result and need not involve any bad faith.
If there is a result that is oppressive to, is unfairly prejudicial to or unfairly disregards the interests of a complainant, a remedy to rectify that result may be granted.
While a remedy might be fashioned against a director or directors arising out of a board decision even though the board decision met the requirements of the business judgment rule, it would appear more likely that the remedy selected would be one aimed at the corporation itself.
Please note that all decisions hyperlinked in this publication are from Canlii (Canada Legal Information Institute: http://www.canlii.org/).
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