The recent Ontario Superior Court of Justice decision in Centerra Gold Inc. v. Bolturuk1 [Centerra] reported on August 26, 2022, highlights important duties of "nominee" directors—directors who have been appointed by a specific shareholder or class of shareholders.
The judge found the breaches of fiduciary duties to be the most egregious breaches he had ever seen. The facts are unusual and involve the Kyrgyz Republic's takeover of a gold mine in that country owned by a Canadian public company. The Kyrgyz Republic held a substantial minority ownership stake in the Canadian company and, pursuant to a shareholders agreement, was entitled to nominate two directors. One of their nominee directors led the takeover.
Despite the unusual facts, the nominee director principles in the case are relevant to directors of corporations governed by the Canada Business Corporations Act (CBCA) and similar statutes (such as the business corporations statutes of Ontario and Alberta).
For venture capital-backed companies, it is standard practice for one or more VCs to have the right to nominate one or more directors. It is also common for founders or common shareholders to have similar rights to nominate directors. The nomination rights are frequently set out in the articles of incorporation or shareholders agreement.
Shareholders seek director nomination rights because they want their nominees to represent the nominating shareholders' interests at the board. However, the CBCA does not distinguish between "nominee" directors and other directors—all directors have the same duties and obligations.
As the Centerra case makes clear once again for CBCA directors:
In contrast to directors, shareholders do not have a fiduciary duty or a duty of care, unless those duties are transferred to them pursuant to a unanimous shareholders agreement.2
The ability to circumscribe director duties is limited because the CBCA expressly prohibits a director from contracting out of those duties by means of any contract, articles or bylaws, unless those duties are transferred to shareholders under a unanimous shareholders agreement.3
Nominee director issues can be managed to some degree. Language can be included in shareholders agreements or articles of incorporation to deal with nominee director duties, corporate opportunities, conflicts and confidentiality. For example, shareholders agreements or articles may include the following:
To address conflict issues, it might be desirable for the nominee director to be independent of the nominating shareholder. However, in the venture capital-backed company scenario, this is unlikely to be an attractive alternative as the VC firm's personnel and the founder each want to be present at the boardroom table. An alternative that is commonly used in that scenario is the appointment of one or more skilled independent directors in addition to the nominee directors. Independent directors are individuals who are acceptable to, but independent of, the VC firm and the founder. Independent directors are useful where all other directors are conflicted, such as approving company financings in which the VC firm and founder are participating. They are also useful in resolving deadlock situations where the VC firm and the founder are of opposing views.
It is also possible to address certain nominee director issues by selecting a business corporations statute other than the CBCA to govern the corporation. For example, the Business Corporations Act (Alberta):
Where "nominee" directors are involved, thought should be given at the outset as to whether any special rules should be implemented with respect to whom they owe duties, corporate opportunities, confidentiality or conflicts. If so, legal advice should be sought as to how to obtain the desired result. For precedent language and further details on managing these issues, see our Directors' Duties book.7
If you have any questions concerning this decision and/or nominee director duties, please contact the author, Gary Solway.
2 CBCA s. 146(5)
3 CBCA s. 122(3) and s. 146(5). Because the shareholders assume the directors' duties under a unanimous shareholders agreement to the extent they remove those duties from directors, there are some drawbacks to using unanimous shareholders agreements.
4 Business Corporations Act (Alberta) s. 122(4) provides: "In determining whether a particular transaction or course of action is in the best interests of the corporation, a director, if the director is elected or appointed by the holders of a class or series of shares or by employees or creditors or a class of employees or creditors, may give special, but not exclusive, consideration to the interests of those who elected or appointed the director."
5 While corporate opportunity waivers are permitted in various U.S. jurisdictions, Alberta is the first Canadian jurisdiction to provide such latitude.
6 The example provided by the Alberta government is of a director guaranteeing a loan to the corporation. It is unclear if a director could also receive a benefit for undertaking the guarantee obligation, such as a fee for providing the guarantee. Likewise, it is unclear whether directors participating in a financing of the corporation (in which they undertake to provide money to the corporation) would fall within the scope of this amendment.
7 For a more fulsome discussion of nominee director duties and how to manage them, see Chapter 4 (Nominee Directors and Observers) of Directors' Duties in Canada, 7th Edition, LexisNexis, 2021. For a discussion on director confidentiality and access to information, see Chapter 31 (Information and Confidentiality).