"Know your board members and study their backgrounds", says Harper Grey lawyer
Every company has a board of directors, so the concept of director liability is a concern for all organizations – and their in-house counsel.
Attendees at a Canadian Corporate Counsel Association webinar this week heard about the critical role of general counsel in guiding directors and officers through liability concerns, including employment considerations and environmental liability.
“Not only do directors have fiduciary duties to the company and to its stakeholders – including the obligation to act reasonably and in the best interest of the company and its stakeholders – directors also need to comply with the articles and the bylaws of the company,” said Steven Lukas, associate counsel at Harper Grey LLP. This can expose them to liability in multiple areas.
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Jeff Sheremeta, associate counsel at Harper Grey, told in-house counsel attendees that they cannot assume that the board members will know of their presence or feel comfortable reaching out with questions.
“You can’t take for granted what assumptions they make about what you know or don’t know about any particular area of the law,” said Sheremeta, who has spent a total of 14 years serving as in-house counsel at 10 different companies, prior to joining Harper Grey in 2021.
When it comes to protecting the company and its board of directors, Sheremeta advised in-house counsel to start by asking themselves what the directors within that company and that specific industry can get themselves into trouble for. In the mining industry, environmental liability is a major concern, for example, while software companies are likely to be concerned about data privacy.
Knowing the law of differing jurisdictions is also valuable, particularly if your company acquires a foreign subsidiary. Director liability also varies within public and private companies, Sheremeta added.
“Even if you don’t know a lot about public company regulation, being aware of the potential director liability in the public company that you work for becomes a very important thing,” he said. “Where you can add real value – not just to the board – but in your relationship with external counsel – is to know your board members and study their backgrounds.” This will provide an awareness of where each member’s potential liability may come from.
“I’ve come across many directors that weren’t even aware of the concept of director liability, so don’t assume that simply because they are on the board that there’s a level of experience that you can take for granted,” Sheremeta added.
Liaising with the board to tell them about anything that might potentially result in personal liability for them is a great way to add value as in-house counsel, Sheremeta said.
AI can be a significant cause of liability for board members. Lukas told attendees that it is imperative that those who are stewarding the company understand what artificial intelligence is, and its impact on the company and on the business. This includes examining the landscape of AI, and the regulatory consequences of using it in a specific enterprise. Privacy laws and human rights must be considered, as well as the impact on intellectual property.
“You need to implement AI governance,” said Lukas. “The board needs to know how its company, through AI, is managing data models.” Most importantly, he added that you will need to evaluate the risks of not using AI. “Directors can be exposing your company to liability if they failed to exercise their duties and mitigate the potential harm that goes with using and not using artificial intelligence,” he said.
Rose Keith, partner at Harper Grey LLP discussed employment liability, noting that director liability does vary from province to province, as the statutes that lead to personal liability vary.
Under employment standards legislation, directors and officers are made personally liable for unpaid wages, vacation pay, and possibly even severance pay, Keith told attendees. The extent of liability varies from province to province – ranging from two-to-six months.
“Unlike other potential areas of personal liability for directors and officers, there's no defence available that the director was acting diligently and attempting to have the corporation run properly,” said Keith. “Even if a director has been prevented from ensuring that the corporation satisfies the underlying liability, that won’t excuse the director from personal liability.”
Directors and officers in Canada are also subject to environmental liability, with different regulations applicable in the different provinces. Speaking with regard to British Columbia, Richard Bereti, partner and chair of the environmental group at Harper Grey, discussed the significance of liability in contaminated sites, and who will beheld responsible for contamination.
“It turns out all current and all former owners and operators of property are responsible persons,” said Bereti.
The webinar was hosted by the CCCA and the Canadian Bar Association.