Preventing Breach Fiduciary Duty with Due Diligence

Directors and officers of a corporation have important responsibilities, including overseeing the company and acting in its best interests, which is known as their fiduciary duty. When directors carry out their duties, they must be careful and act honestly. This means prioritizing the company’s needs over personal or other interests and making decisions that benefit the corporation.

These responsibilities include avoiding conflicts of interest and making wise business choices. However, being a director comes with accountability. Directors can be held personally responsible for things like unpaid employee wages or the corporation’s failure to comply with regulations.

This article highlights ways directors and officers can protect themselves and the corporation from breaching their fiduciary duty through diligent actions.

Breach of Fiduciary Duty and Due Diligence

When it is alleged that a director or officer is personally responsible for the corporation’s failure to follow a statutory or regulatory requirement, the director or officer can raise the defence of due diligence. In a nutshell, a director can claim they took steps to ensure the corporation complied with any statutory or regulatory requirements that were alleged to be violated by the corporation, and that the director should not be personally liable as a result.

Directors who are able to show they took steps to prevent an issue from occurring, may also demonstrate they upheld their fiduciary duty to act honestly and in good faith.

The consequences of being found personally liable can include paying fines and even receiving jail time, particularly if the offence in question is of a criminal nature. Because of this, it is essential for corporations, directors, and officers to take steps to prevent offences from happening in the first place.

Employer Takeaways

Although due diligence might have a universal meaning, it is important to note that different offences may be regulated by different statutes, and each statute may have its own interpretation of due diligence.

For example, a tax-related offence could fall under the Income Tax Act, RSC 1985, while a failure to pay wages could fall under the Employment Standards Act, 2000. Each statute can cover a different area of law and should be treated differently, even if due diligence might have one meaning.

Each statute may also have specific exceptions to due diligence that exist. For this reason, it makes sense to seek legal advice should any of the above issues come up.

Establishing practices and internal processes allows for accountability through a checks-and-balance approach, and may foster a working environment that reduces the likelihood of a breach of fiduciary duties. Some of the ways that employers can achieve this is by:

• Implementing a policy for fiduciary employees to act honestly and in good faith;
• Including a fiduciary duty clause into the agreement to ensure directors and officers have a clear understanding of what is expected;
• Conducting internal or external third-party audits at different periods of the year to ensure compliance;
• Implementing checks and balances where there is oversight by other key players in the organization, so fiduciary employees are aware that decisions and actions may be reviewed by a peer.

If you are a director or officer of a company, you should speak to a lawyer concerning the duties you have and the liabilities you may face, so you are prepared for any issues that arise.

If you are an employer, ensuring that your organization has the correct internal processes to reduce the likelihood of a breach of fiduciary duties may go a long way to demonstrate due diligence.

Contact Us

If you are an employer seeking to improve your internal processes, or a employee seeking legal advice concerning your fiduciary obligations, our team of experienced corporate lawyers at Achkar Law can help.

Contact us by phone toll-free at 1 (800) 771-7882 or email us at [email protected] and we would be happy to assist.

Related Topics

• When A Corporate Director Misappropriates Company Assets
• How To Defend Against Allegations Of Corporate Fraud
• Corporate Dispute Resolution – Negotiation, Arbitration, Mediation, Or Litigation