Interest of the decision and key findings
In a recent decision of interest in corporate and contract law, Ponce v. Société d'investissements Rhéaume ltée, 2023 SCC 25, the Supreme Court of Canada considers the scope of the duties of loyalty, information and good faith that can be imposed upon the presidents of business corporations, under both the Civil Code of Quebec and the Canada Business Corporations Act, as well as the common law, in the particular context of a contractual relationship between the presidents and the shareholders of the corporation.
The Court first emphasized that there is a fundamental distinction between :
- the obligation of fiduciary or "maximalist" loyalty of presidents (, which is specific to the relationship between them and the corporation (as a legal entity distinct from its shareholders) and generally requires presidents to subordinate their decisions to the interest of the company; and
- the obligation of "contractual" loyalty", which in Quebec civil law – notably through the Civil Code of Québec – may implicitly require the presidents to "take into consideration" the interest of their direct co-contractors, including the corporation's shareholders, if applicable, even in the absence of any explicit contractual obligation to do so.
In this case, on the basis of this distinction and the evidence adduced at trial, the Court concludes that the presidents of three Quebec corporations incorporated under the Canada Business Corporations Act have no obligation of fiduciary or "maximalist" loyalty towards the shareholders. They do, however, have implied obligations of "contractual" loyalty, information and good faith, requiring them both (i) to maximize the value of the shareholders' shares with a view to their eventual sale, and (ii) to inform the shareholders of the interest shown by a third party in purchasing these shares. Having failed to meet these obligations, the presidents are ordered to pay over $11 million to the shareholders for the profits lost as a result of the sale of their shares.
More generally, the Court notes that, in the context of Quebec civil law, the obligations of presidents, like those of any co-contractor, may extend not only to what is specifically stipulated in the contract providing for their roles and responsibilities, but also to everything that is incident to the nature of the contract and in conformity with usage, equity or law (art. 1434 C.C.Q.), as well as by virtue of their general obligation of good faith (art. 1375 C.C.Q.).
In this respect, the Ponce case is particularly relevant to the drafting of agreements setting out the roles and responsibilities of presidents, in this case an "incentive pay agreement" (hereinafter referred to as the "Agreement").
The Court also rules on the remedies available when a contracting party, including presidents, breaches its obligations of loyalty, information and good faith. The Court confirms that the injured party may sometimes seek "restitution of profits" generated by the offending party in lieu of compensatory damages.
Factual background
In this case, the majority shareholders (hereinafter "Shareholders") of three Quebec corporations within Groupe Excellence (hereinafter "Group"), incorporated under the Canada Business Corporations Act and operating in the insurance sector, are suing the two directors and presidents of the Group (hereinafter "Presidents") for breach of their duties of loyalty, information and good faith in connection with the sale of their shares.
The events at the root of the dispute begin in 2002, when the Presidents enter directly into the Agreement with the Shareholders. Essentially, the Agreement, which comprises only eight clauses and has an initial term of five years, establishes certain forms of incentive pay for the Presidents in the event of a sale of the Shareholders' shares, which will be in addition to the compensation the Presidents receive as directors of the Group corporations.
Significantly for the purposes of the Court's decision, the Agreement does not include any explicit contractual obligations incumbent on the Presidents vis-à-vis the Shareholders prior to the sale of their shares. On the face of it, the Presidents' explicit contractual obligations are to the Group corporations only.
In 2005, a third party, Industrial Alliance Insurance and Financial Services Inc (hereinafter "IA"), informs the Presidents of its interest in acquiring the Group. Rather than informing the Shareholders, the Presidents hold, in accordance with the explicit wording of the Agreement, certain discussions with IA, and to this end enter into a undertaking of confidentiality, which prevents IA from discussing a potential acquisition of the Group directly with the Shareholders.
In the months that follow, unaware of IA's interest in acquiring the Group, the Shareholders sell their shares to the Presidents, who receive their incentive pay under the Agreement. Shortly afterwards, however, the Presidents sell these shares back to IA at a price some $24 million higher than that paid to the Shareholders. It is through a press release that the Shareholders learn of this transaction. At that point, the Shareholders decide to take legal action against the Presidents to recover the profit, totaling $24 million, of which they had been deprived by the Presidents' failure to notify them in good time of IA's interest in acquiring the Group.
Detailed analysis of the Supreme Court of Canada decision
The Supreme Court is faced with two central legal issues. First, does the Presidents' failure to inform the Shareholders of IA's interest in acquiring the Group constitute a breach of their duties of loyalty, information and/or good faith, even in the absence of any explicit contractual obligation to do so in the Agreement?
Secondly, should the Presidents be held liable for such a breach, what is the applicable remedy to adequately compensate the Shareholders?
Duties of Presidents in their relations with Shareholders
With regard to the first question, the Court divides its analysis into four (4) distinct legal bases that could potentially give rise in Quebec civil law to the duties of loyalty and information of a president of a corporation.
As in the Court's decision, each of its potential bases will be dealt with separately here.
- Obligation of fiduciary or "maximalist" loyalty incumbent on presidents as mandataries or administrators of the property of others
The Supreme Court is quick to dismiss the idea of imposing on Presidents an obligation of fiduciary or "maximalist" loyalty consisting of putting the interest of the Shareholders above their own.
From the outset, the Court draws a fundamental distinction between two types of loyalty that may apply to presidents: "maximalist" loyalty in the exercise of a power, which must be exercised in the exclusive interest of the corporation or for the purpose for which the power was conferred; and "contractual" loyalty, based on good faith and requiring "taking into account" the interest of the other contracting party.
In this case, the Court concludes that the Presidents have no "fiduciary" duty of loyalty to use their powers in the interest of the Shareholders, for whom they are neither mandataries nor administrators of the property of others. Their obligation of fiduciary or "maximalist" loyalty exists solely in respect of the Group corporations as legal entities distinct from their shareholders.
- Extracontractual obligation to inform based on the principles of good faith
To justify their actions, the Presidents claim that their conduct should be judged on an extracontractual basis only, on the grounds that the Agreement would not be applicable to the facts in dispute and that no other contract with the Shareholders had been formed. Although the Presidents recognize that a certain duty to inform should guide them even in an extracontractual context, they submit that this duty did not require them to disclose IA's interest to the Shareholders.
Once again, the Court is quick to dismiss this second potential basis for the obligation to inform of presidents, ruling that arguments based on extracontractual liability are only theoretical in scope. Indeed, according to the Court, the Agreement applies to the Presidents and to the facts at issue, even in the absence of an explicit contractual obligation to inform.
- Implied contractual obligation to inform under the Agreement
This third potential basis for presidents' obligation to inform is at the heart of the Court's decision.
According to the Presidents, since the Agreement contains no explicit contractual obligation to inform the Shareholders of IA's interest, nor any other obligation prior to the sale of their shares, they cannot be held liable for any contractual fault in this respect. Rather, the Presidents describe the Agreement as a simple "remuneration agreement", and claim that it cannot give rise to any contractual obligation on their part.
After analyzing the contractual paradigm in place between the parties in light of the evidence adduced at trial, the Court dismisses the Presidents' argument on the grounds that the Agreement nevertheless contains an implied contractual obligation to inform. The Agreement is defined by the Court as the cornerstone of the relationship between the Presidents and the Shareholders. As the Agreement lays the foundations for a relationship of trust between the parties, it bound them not only for what was specifically expressed in it, but also to all that is incident to it according to its nature and in conformity with usage, equity or law (art. 1434 C.C.Q.).
According to the Court, the Agreement constitutes a long-term agreement formalizing a mutually beneficial business relationship between the Presidents and the Shareholders. It thus commands an implied contractual loyalty to "take into account" the interest of the other contracting party, an obligation which goes beyond the explicit wording of the Agreement.
On the basis of this implied obligation, the Court concludes that the Presidents were obliged both to maximize the value of the Group's shares and to inform the Shareholders of any fact that might enable them to assess the profits likely to be generated following the sale of their shares.
- Obligation to perform the Agreement in accordance with the requirements of good faith
Finally, the Court also concludes that the requirements of good faith in the execution of the Agreement entailed an additional and independent duty for the Presidents, based on the general obligation of good faith (art. 1375 C.C.Q.), to inform the Shareholders of IA's interest.
In this regard, the Court recalls that good faith is an obligation of public order that is included in every contract under Quebec civil law. Moreover, unlike "maximalist" loyalty arising from the exercise of "fiduciary" powers, good faith requires all contracting parties to act loyally, taking into account, within the limits of reasonable conduct, the interest of their co-contractor.
In the present case, the Presidents therefore had, within this same limit, an obligation to take the interest of the Shareholders into account in the execution of the Agreement and to inform them of IA's interest, regardless of the absence in the Agreement of an explicit obligation to inform.
The applicable remedy
With regard to the appropriate remedy, the Court notes at the outset that Quebec civil law case law does not generally allow the restitution of the party at fault's profits in the case of a simple breach of the obligation of good faith. Damages are intended to compensate the aggrieved party for the harm it has suffered directly.
However, the Court points out that breach of the obligation of good faith sometimes prevents the injured party from proving the injury sustained. In such a case, it may be appropriate for the Court to presume that the loss is equivalent to the profits obtained by the party at fault, and therefore to order the latter to compensate the aggrieved party for this amount.
In this case, as the Presidents were unable to rebut this presumption, the Court concludes that the Shareholders are entitled to the profits generated by the Presidents, i.e. the difference between the amount of the sale price received by the Presidents on their resale of the shares to IA and that paid to the Shareholders on their initial sale of the shares in accordance with the Agreement.
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