Posts Tagged ‘director liability’

Shafik Bhalloo
Friday, September 16th, 2011    Posted by Shafik Bhalloo (posts)
Shafik Bhalloo
Shafik Bhalloo has been a partner of Kornfeld LLP since 2000. His practice is focused on labour and employment law, and on commercial and civil litigation. He is also an Adjudicator on the Employment Standards Tribunal and an Adjunct Professor in the Faculty of Business Administration at Simon Fraser University.

Businesses engaged in a single undertaking may, in the interest of minimizing their legal risk or tax planning, conduct their business using separate legal entities. For example, a business may hold its assets in one corporate entity but hire and pay employees using a separate corporate entity that does not hold any assets or has only very limited assets. Rarely, if ever, will the employee have any say in how the business organizes itself or what corporate entity it will hold its assets in. While this may leave the employee vulnerable if she is employed by the corporate entity that does not hold assets if she needs to pursue the latter for outstanding wages or termination pay, common law and employment standards statute offer some protection to the employee in such case.

At common law, the common employer doctrine allows the court to treat separate legal entities, in appropriate cases, as a single employer for the purposes of attaching liability for such things as outstanding wages or termination or severance pay. In Sinclair v. Dover[1], the BC Supreme Court delineated the following justification for common employer determination:

As long as there exists a sufficient degree of relationship between the different legal entities who apparently compete for the role of employer, there is no reason in law or in equity why they ought not all to be regarded as one for the purpose of determining liability for obligations owed to those employees who, in effect, have served all without regard for any precise notion of to whom they were bound in contract. What will constitute a sufficient degree of relationship will depend, in each case, on the details of such relationship, including such factors as individual shareholdings, corporate shareholdings and interlocking directorships. The essence of that relationship will be the element of common control.

In British Columbia, the common employer doctrine has been codified in section 95 of the Employment Standards Act (“ESA”):

 

Associated employers

95 If the director considers that businesses, trades or undertakings are carried on by or through more than one corporation, individual, firm, syndicate or association, or any combination of them under common control or direction,

(a) the director may treat the corporations, individuals, firms, syndicates or associations, or any combination of them, as one employer for the purposes of this Act, and

(b) if so, they are jointly and separately liable for payment of the amount stated in a determination, a settlement agreement or an order of the tribunal, and this Act applies to the recovery of that amount from any or all of them.

 

The legislative objective underlying section 95 is the same as the justification of the common employer doctrine at common law; namely, to protect the employees and ensure their “wage claims are not defeated by niceties of legal form”.

In a recent decision, the Employment Standards Tribunal, after comprehensively reviewing both court and Tribunal decisions, delineated the following, non-exclusive criteria or considerations when determining if two or more entities are common or associated employers under section 95 of the ESA:

  • There must be at least two separate entities that are being “associated”;
  • The nominal employer is not particularly relevant and there is no need that a formal contract of employment subsist as between the employee and the entities that are being “associated”;
  • The entities must be jointly carrying out some business, trade or other activity although the business, trade or activity in question need not necessarily be the only one that each entity is carrying on;
  • “common control or direction” may be determined based on financial contributions from one entity to another (although this factor, standing alone, is not determinative); the fact that one entity is economically dependent on another entity, interlocking shareholdings and directorships; common management principals (e.g., corporate officers and other key employees): sharing of resources (including human resources) among the various entities; asset transfers at non-market transfer prices; operational control by one entity over the affairs of another entity; joint ownership of key assets and operational integration.[2]

 

If you are or contemplating to operate a business through two or more separate legal entities, particularly with a view to curtailing or minimizing the exposure of one or another of your legal entities from legal liability, it is important that you understand what will constitute indicia of associated or common employer so that you do not inadvertently expose yourself to a common or associated employer determination under the ESA or at common law. Conversely, if you are an employee of an impecunious company and owed wages or termination pay that you cannot collect from the company, you may want to investigate if there is any basis at law to properly associate the company with another related company with a view to obtaining a common employer or associated employer determination to successfully collect on your claim. You may also want to consider lodging a claim under section 96 of the ESA, which makes directors, and officers of a corporate employer personally liable for up to two months unpaid wages. Section 96 is the subject of a separate article in our Business Blog.

 


[1] 1987 CanLii 2692,

[2] Re: 0708964 B.C. Ltd., BC EST #D015/11

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Posted by Shafik Bhalloo (posts) | Filed under Labour & Employment | ....
Shafik Bhalloo
Tuesday, August 23rd, 2011    Posted by Shafik Bhalloo (posts)
Shafik Bhalloo
Shafik Bhalloo has been a partner of Kornfeld LLP since 2000. His practice is focused on labour and employment law, and on commercial and civil litigation. He is also an Adjudicator on the Employment Standards Tribunal and an Adjunct Professor in the Faculty of Business Administration at Simon Fraser University.

The Employment Standards Act (“the Act”) delineates the minimum standards that apply in most workplaces in British Columbia. It governs the employment of all employees -casual, probationary or temporary- within provincial jurisdiction, whether employed in a full time or part time capacity.

The Act will not apply where the employee is a person excluded from the provisions of the Act under Employment Standards Regulation (“the Regulation”) such as doctors, lawyers, architects and others whose professions are specifically regulated by provincial legislation. Also other non-professionals, under specific circumstances, are excluded from the application of the Act. These include, but are not limited to, persons engaged in government sponsored work programs, sitters, and newspaper carriers.

The Act also does not apply to employees whose work falls within federal jurisdiction such as banking, defence, interprovincial or international transportation, interprovincial and international shipping, air transport as well as employment with the federal government and crown corporations.

If you are or have been a director or officer of a corporation within provincial jurisdiction, it is important that you understand your potential exposure under section 96 of the Act. Section 96(1) states:

Corporate officer’s liability for unpaid wages

96 (1) A person who was a director or officer of a corporation at the time wages of an employee of the corporation were earned or should have been paid is personally liable for up to 2 months’ unpaid wages for each employee.

Under section 96(1) each director or officer of the corporate employer is liable personally to pay up to a maximum of two months’ wages for each employee, even where more than two months’ wages is owed.

This section only comes into play where the employee successfully lodges a complaint under the Act against her corporate employer for the latter’s failure to pay her wages and the Director of Employment Standards issues a determination against the employer which determination is not satisfied by the employer. In such case, the Director of Employment Standards will employ section 96(1) to issue a determination against one or more directors or officers of the corporate employer to obtain payment of wages owed to the employee by the corporate employer.

The director or officer, to be liable under section 96(1), must have been a director or officer of the corporate employer, at the time the wages were earned or should have been paid by the corporate employer.

It is also important to note that where there is more than one director or officer, nothing in section 96(1) or in any other section of the Act requires the Director of Employment Standards to apportion, pro-rate or divide the liability for wages owed to the employee between the directors or officers[1].

Where the employee is owed more than two months’ wages, the Director of Employment Standards may issue a determination against each director and officer of the corporate employer for two months wages. Just because one of the Director’s or officer’s pays the employee two months’ wages under a section 96 determination does not extinguish or discharge the liability of other directors and officers under their section 96 determinations, since the employee is still owed wages. In such case, since the Director of Employment Standards is not required to collect equally from all directors and officers, he may collect from the other directors or officers only that which is necessary to pay the balance of wages outstanding and no more. For example, if the employee is owed 3 months’ wages, once the director has collected from the first director 2 months’ wages, he may only collect one additional month’s wages from the second director.

What constitutes wages for the purpose of section 96? Wages, under section 96, refers to normal wages including applicable vacation pay. It does not include length of service, termination pay or money payable in relation to individual or group terminations, if the corporation is in receivership.[2]

Directors and officers are also not personally liable for (i) wages of an employee if the corporate employer is subject to action under section 427 of the Bank Act (Canada) or to a proceeding under an insolvency Act[3], (ii) vacation pay that becomes payable to an employee after they cease to hold office[4], or (iii) money that remains in an employee’s time bank after they cease to hold office[5].

Pursuant to section 45 of the Regulation, directors and officers of charities are exempt from the liability created in section 96 of the Act, if they only receive reasonable out-of-pocket expenses and no other remuneration for services performed for the charity. If you are not such a director or officer and section 96 of the Act applies to you, you may want to ask the corporate employer whose Board you are serving on if they have a directors and officers “error and omissions” insurance that sufficiently protects you from such liability.  Such enquiry is advisable in advance of getting on the Board of any corporate employer.


[1] Rajinder Brad, a Director or Officer of Skynet Travel Inc., BC EST #D056/07

[2] Section 96(2)(a) of the Act

[3] Section 96(2)(b) of the Act. Section 1 of the Act defines insolvency Act” to mean “Bankruptcy and Insolvency Act (Canada), the Companies’ Creditors Arrangement Act (Canada) or the Winding-up and Restructuring Act (Canada)”

[4] Section 96(2)(c) of the Act

[5] Section 96(2)(d) of the Act

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Posted by Shafik Bhalloo (posts) | Filed under Labour & Employment | ....
Dan Parlow
Thursday, April 8th, 2010    Posted by Dan Parlow (posts)
Dan Parlow
Dan is a partner at the firm of Kornfeld LLP. He helps resolve commercial disputes for clients including investors, brokerage houses and financial institutions in the realization of claims by creditors and over disputed investments; entrepreneurs in claims over business assets, shareholder and partnership interests and commercial property; estates, trusts and beneficiaries over disputed wills, trusts and related claims; clients of realtors, lawyers, accountants, brokers and investment advisors; and businesses in the telecom, oil & gas and high-tech industries.

This is the fourth and final post in a series of posts on this subject. The full version of the article was published by the Institute of Corporate Directors in its Journal and and as a web resource.

Bad Faith and Self-Dealing

I would not allow corporations to exonerate directors in the event of bad faith, self-dealing or other instances of non-loyalty.

In the event the directors’ action is challenged, it will be the court’s job to determine whether the board’s decision was in fact taken disloyally.  This may involve review of the substance of a business decision made by an apparently well motivated board for the limited purpose of assessing whether that decision is so far beyond the bound of reasonable judgment that it seems essentially inexplicable on any ground other than bad faith.  Delaware law shows that the courts are capable of making a reasoned distinction.

In the event of a conflict of interest, directors’ approval of a transaction can be set aside even where it had been subsequently approved by the shareholders after the conflicts of interest were disclosed.  Directors in such a case would be obliged to prove that the shareholders were fully informed and that the process was transparent in all respects.

As discussed in the Delaware Disney litigation involving its former president, Michael Ovitz, a “failure to act in good faith may be shown, for instance, where the fiduciary intentionally acts with a purpose other than that of advancing the best interests of the corporation, where the fiduciary acts with the intent to violate applicable positive law, or where the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties.”

A good example of a gross negligence claim without a bad faith component is seen in the proposed sale of the Lear Corporation: Lear Corporate Shareholder Litigation. A deal was struck with a potential suitor under which he would increase his offer by some $90,000,000 on the condition that the company pay him a $25,000,000 termination fee if the shareholders voted “no”. After the deal was rejected and the termination fee was paid, the plaintiffs alleged that the transaction was entered into in bad faith in that it had been a virtual certainty that the offer would be rejected by shareholders.  The Court once against struck the lawsuit because there were no facts indicating that the directors consciously acted in a manner contrary to the interests of Lear and its stockholders.

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Dan Parlow
Thursday, March 11th, 2010    Posted by Dan Parlow (posts)
Dan Parlow
Dan is a partner at the firm of Kornfeld LLP. He helps resolve commercial disputes for clients including investors, brokerage houses and financial institutions in the realization of claims by creditors and over disputed investments; entrepreneurs in claims over business assets, shareholder and partnership interests and commercial property; estates, trusts and beneficiaries over disputed wills, trusts and related claims; clients of realtors, lawyers, accountants, brokers and investment advisors; and businesses in the telecom, oil & gas and high-tech industries.

This is the third in a series of posts on this subject. The full version of the article was published by the Institute of Corporate Directorsin its Journal and and as a web resource.

Encouraging Risk-Taking

The main purpose of the proposed “Charter Option” – empowering corporations to limit director liability –  is to make it easier for corporations to attract directors who would otherwise be deterred by the prospect of personal liability.   As noted earlier, the Charter Option would only exculpate directors who have acted in good faith, loyally and without self-interest.

The encouragement of corporate risk-taking has traditionally been supported by English law. In one famous case, Re City Equitable Fire Insurance, the court pointed to three reasons for exculpating directors:

(i) a director need not exhibit a greater deal of skill than may reasonably be expected from a person of his knowledge and experience;

(ii) a director is not liable for errors in business judgment, as his primary function is to use his own particular talents in advocating corporate risk-taking; and

(iii) a director is not bound to give continuous attention to the affairs of the corporation.  In the absence of grounds for suspicion, eh is fully justified in trusting corporate officials to be honest.

As noted by former Delaware Chief Justice Veasey, the effect of the Delaware provision is that derivative due care claims seeking personal liability of directors can normally be dismissed at an early stage without the need for a trial.  He notes that the law is “designed … to protect directors and to encourage qualified personals to act as directors” … and that it is “very much in the stockholders’ interest that the law not encourage directors to be risk averse.  Some opportunities offer the prospect of great profit at the risk of very substantial loss, while the alternatives offer less risk of loss but also less potential profit.”

In one takeover case, J.P. Stevens & Co. Stockholders Litigation, the Delaware Court of Chancery noted that “there is great social utility in encouraging the allocation of assets and the evaluation and assumption of economic risk by those with … skill and information.”  Accordingly, “courts have long been reluctant to second-guess such decisions when they appear to have been made in good faith.”

Fostering Economic Activity by Attracting Directors

It is in the interest of Canada’s continued prosperity to attract the best people possible to oversee adn direct management of our corporations.

In her book entitled Corporate Governance, Professor Christine A. Mallin noted that “in general, small and medium-sized firms will have simpler corporate governance structures than large firms…; a small number of non-executive directors (NEDs); a combined chair/CEO; longer contractual terms for directors due to the more difficult labour market for director appointments into small and medium-sized companies.”

The role and importance of NEDs was emphasised in the Cadbury Report (1992) and in the Code of Best Practice in the U.K. that NEDs “should bring an independent judgment to bear on issues of strategy, performance, resources, including key appointments, and standards of conduct” (para. 2.1).  Similarly, the Hampel Report (1998), also from the U.K. stated: “Some smaller companies have claimed that they cannot find a sufficient number of independent non-executive directors of suitable calibre.  This is a real difficulty, but the need for a robust independent voice on the board is as strong in smaller comapnies as in large ones” (para. 3.10).

It is human nature for a prospective director to be averse to serving if he or she will face personal liability for honest decisions made while serving on a board.  On the other hand, directors will understand that they owe a duty to act loyally and without self-interest; they will understand that the law cannot, and will not, protect them should they act otherwise.

In particular, small business, which accounted, as of 2004, for half of all private sector employment in Canada, may consider the Charter Option to be especially helpful both in attracting quality directorial candidates and in reducing or eliminating the need for director and officer insurance which is often disproportionately expensive and difficult to obtain, if available to them at all.

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Dan Parlow
Tuesday, January 19th, 2010    Posted by Dan Parlow (posts)
Dan Parlow
Dan is a partner at the firm of Kornfeld LLP. He helps resolve commercial disputes for clients including investors, brokerage houses and financial institutions in the realization of claims by creditors and over disputed investments; entrepreneurs in claims over business assets, shareholder and partnership interests and commercial property; estates, trusts and beneficiaries over disputed wills, trusts and related claims; clients of realtors, lawyers, accountants, brokers and investment advisors; and businesses in the telecom, oil & gas and high-tech industries.

This is the second in a series of posts on this subject.  The full version of the article was published by the Institute of Corporate Directors in its Journal and and as a web resource.

The mood prevailing upon enactment of Canada’s contemporary corporate law was to make directors more, rather than less, accountable in the exercise of the duty of care.

The Canada Business Corporations Act (CBCA) was based in large part upon the recommendations of a 1971 Dickerson Report which proposed a duty of care that was stricter than that then prevailing duty:
Recent experience has demonstrated how low the prevailing legal standard of care for directors is, and we have sought to raise it significantly.

An enhanced duty of care was ultimately enshrined in the CBCA.

Several objections to the Delaware model have been made by observers. An initial object to limited director liability, as raised in the Dickerson report, was that it gives rise to “a steady supply of marginally competent people” to serve as directors. However, despite over twenty years of legal history in the U.S., I have seen no facts to support this opinion.

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