Under corporate law, directors have a duty to act honestly and in good faith in the best interests of the corporation for which they are directors. As such, directors of a subsidiary corporation must exercise their duties in the best interests of that corporation as distinct from its parent.
Directors are required to exercise a certain standard of care when performing their board functions. Within these general standards, several discrete duties have been identified:
- Duty of knowledge, requiring directors to be familiar with the corporation's governing legislation, constating documents and bylaws so they can ensure the corporation operates in compliance with its governing legislation and documents;
- Duty of care, requiring directors to act honestly and in good faith;
- Duty of skill, requiring directors to exercise a requisite degree of skill in carrying out board duties;
- Duty of diligence, requiring directors to maintain familiarity with ongoing operations; and
- Duty to avoid conflicts of interest.
With regards to this last duty, conflicts can arise not only where a director gains personally from a transaction involving the corporation, but also where a director is on the board of two corporations involved in the same transaction thereby exposing the director to a situation where he or she may owe competing fiduciary duties.
If the corporation is registered as a charity, the directors usually owe a higher fiduciary duty to safeguard its charitable property and to use that property in furthering the corporation's charitable purposes.
Canadian law is clear that directors owe their fiduciary duty to the corporation and not to any stakeholder of the corporation. The Supreme Court of Canada removed any doubt about this issue in its decisions in Peoples Department Stores v. Wise and in BCE Inc. v. 1976 Debentureholders. The courts are clear that a director who had been nominated or elected by a shareholder (often referred to as a "nominee director") nevertheless owes his or her duty to the corporation.
Therefore, although directors of a subsidiary are, at times, officers, directors and/or employees of the parent corporation, when making decisions around the subsidiary's board table they must remember to make decisions in the best interest of that subsidiary.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
