Corporate Governance: The Internal Affairs of Corporations, Essay Example

The Canadian Business Corporations Act (CBCA) states that every director and officer of a corporation has a duty to act honestly and in good faith, as well as exercise reasonable care, diligence and skill.  This fiduciary duty imposes a high standard of conduct on directors and officers involving loyalty, integrity, and trust.  The CBCA also imposes a general duty on directors and officers to avoid any conflict of interest with their corporation.

In this case, there is a clear conflict of interest.  Forrest, Moss and Pine, the only three shareholders of Forest Park Apartment, Ltd., are the owners of the land that was sold to the corporation.  The fact that the land may have been purchased for a bargain does not eliminate the obvious conflict.

The duty to disclose any interest that a director may have in contracts made with the corporation is perhaps one of the most important fiduciary obligations.  The CBCA mandates that a director who has such a conflict discloses this fact at a meeting of the board of directors.  However, only independent members of the board may vote to carry out the contract.  In this case, all three of the directors have an interest in the contract; in other words, there are no independent members of the board.  Forrest, Moss and Pine should have presented the contract to the other fifteen shareholders at a general meeting and allowed the shareholders to vote on and ratify the contract to purchase the land.  Because this was not done, all three directors are in clear breach of their fiduciary duty to the corporation, and the corporation has the right to rescind the contract.

There are two defenses to a claim of breach of fiduciary duty in the CBCA, and one other common law defense.  The CBCA allows for a defense of reasonable diligence, in which directors have to prove that the required degree of care was taken.  However, this defense is only available against claims of breach of the articles, by-laws, and act, and would not apply in this case.

The second CBCA defense is good faith reliance.  This defense asserts that the directors relied in good faith on audited financial statements or expert reports.  Even though this defense can be used against claims of breach of fiduciary duty, it would not be applicable in this case because there was no mention of reliance on these types of statements.  In fact, when asked, the directors stated that they relied on only their opinions regarding the value of the land and the bargain to the corporation.

The common law defense is the business judgment rule.  Courts will give directors the benefit of the doubt when it comes to business decisions, as long as the directors exercised an appropriate degree of prudence and diligence when making a decision.  In this case, it is unlikely that a court will defer to the decision of the directors when their only expertise was their own opinions about property value.

Directors are personally liable for breaches of fiduciary duty.  Therefore, the corporation could be awarded damages to be paid from the personal assets of Forrest, Moss and Pine, including the land.  Also, the shareholders could request the replacement of the current directors, and perhaps even a return of the investment.