The Board of Governors approved this project on February 5, 2009 and work commenced in July 2009. The project considers the advisability of applying the principle of joint and several liability to professional advisors to corporations under the Ontario Business Corporations Act (“OBCA”).[1]


A.   The Ontario Business Corporations Act


In Canada, individuals may incorporate a business under the federal business law statute or one of a number of provincial/territorial statutes. Ontario’s Business Corporations Act contains corporate law rules and duties that govern the relationship between the corporation, directors, officers, its shareholders and its stakeholders. A corporation can be incorporated under the OBCA but its operations may or may not be physically located in  Ontario. Nonetheless, the OBCA will be the governing statute for corporate law matters for those businesses incorporated under it. Some corporate law rules are mandatory while others are default rules that can be opted out of by the parties.


Corporations can be classified as private or public. A private corporation, also known as a closely held corporation or a non-offering corporation, has few shareholders, each with a relatively significant economic interest. The shares of closely held corporations generally have restrictions on their transfer of ownership. In contrast, a public corporation, also known as a widely held corporation or an offering corporation, has many shareholders, each of whom has a relatively small economic stake in the corporation. Shares of public corporations are freely-tradeable and often trade on stock exchanges.[2]


Certain corporate law rules are mandatory for both private and public companies. Directors of both private and public companies must present the company’s financial statements to the auditors before each annual meeting of shareholders.[3]


However, some rules that are mandatory for public companies are simply default rules for private companies and can be opted out of by shareholders. For example, a non-offering OBCA corporation can be exempted from the requirements to appoint an auditor if all of the shareholders consent in writing to such an exemption.[4] The differential treatment of public and private companies recognizes that (i) auditors serve a valuable purpose in verifying a company’s financial statements but that it comes with a significant cost; and that (ii) where the shareholders unanimously decide to forgo an audit because the cost exceeds the benefit, the law should facilitate that outcome. The differing rule also recognizes that it would be extremely difficult, if not impossible, to obtain unanimous consent of shareholders to forgo the appointment of an auditor for most public companies and that benefit of audited financial statements exceeds the costs, particularly in the context of protecting retail investors and maintaining the integrity of the capital markets.


Some rules are mandatory for public corporations but not required at all for private corporations. In addition to presenting financial statements to the shareholders, noted above, public corporations must file financial statements as required under the Ontario Securities Act (“OSA”).[5] An offering corporation must also create an audit committee[6] and appoint an auditor to examine the company’s financial statements.[7] Offering corporations also have a duty to solicit proxies[8] and to distribute management information circulars,[9] require at least three directors[10] and are subject to compulsory acquisition rules.[11] Offering corporations have further disclosure requirements under the OSA, as described in this Report.


Under the OBCA, directors are responsible for managing and supervising the business affairs of the corporation.[12] They owe a statutory duty of care and fiduciary duty to the corporation: they must act honestly and in good faith with the best interests of the corporation in mind.[13] The fiduciary duty has been interpreted by the courts, including the Supreme Court of Canada, to include duties to consider the interests of a range of stakeholders, including creditors, employees and customers.[14]


Directors must also comply with the OBCA, its Regulations, the Articles and bylaws of the corporation and any unanimous shareholder agreements.[15] Directors may also be personally liable under federal or other provincial statutes, such as the Income Tax Act or Employment Standards Act, 2000. While the statutory duties and personal liability of directors are mandatory and cannot be opted out of,[16] a corporation may indemnify a director or officer against costs, charges and expenses in certain circumstances[17] and also purchase insurance for them.[18]


Shareholders of an OBCA corporation also have rights against the corporation. They have the right to elect the directors,[19] approve bylaws,[20] formally appoint the auditor[21] and review the corporation’s financial statements.[22] Shareholders also have the right to approve fundamental changes to the corporation, such as amendments to the Articles of Incorporation, statutory amalgamations and sale of all or substantially all the assets of the firm.[23]  A fundamental concept of Canadian corporate law is shareholder limited liability. While directors and officers are personally liable for a breach of their duties, as noted above, a shareholder is not financially responsible for more than his or her investment in the corporation.[24]


Shareholders can be classified in different ways. Retail shareholders or retail investors can be defined as individuals who buy and sell shares of companies directly, for their own account. Retail shareholders are presumed to be financially unsophisticated, with limited financial savvy, few financial resources and less incentive to perform extensive due diligence on their holdings because the stakes they hold in public companies are relatively small. These limitations mean that retail investors tend to be less engaged with and have less say in corporate affairs of public companies.  Ontario securities law, which governs public companies, contains numerous provisions designed to protect the retail investor.


In contrast to retail investors, institutional investors are large, more sophisticated investors including pension funds, life insurance companies, mutual funds, hedge funds and private equity funds. They may be investing on their own account or for individuals.  Institutional investors tend to have significant and diversified investments, large financial resources, sophistication and financial acumen, and complex ownership and investment strategies. Securities law statutes often contain carve-outs that acknowledge the sophistication of such investors and their ability to better protect themselves.


Aside from shareholders, the corporation may contain a diverse array of stakeholders who have an interest in the affairs and well being of the corporation. These stakeholders include creditors, employees and customers. Depending on the nature of the business or characteristic of the individual stakeholder, they may be more or less sophisticated and have more or fewer resources, with corresponding effects on their bargaining power and ability to negotiate contracts, and hence the need for regulation to protect them.  Creditors such as financial institutions will tend to be more sophisticated, with large amounts of resources and bargaining power, while trade creditors could have less of both. Employees are likely on the lower level of sophistication, though they may potentially be backed by more powerful trade unions. Customers in the context of consumer products would likely tend to be on the lower end of sophistication and bargaining power vis-à-vis the corporation, though a customer in a business-to-business transaction may be quite sophisticated and have a significant amount of bargaining power. Hence the need for regulation to protect vulnerable parties would vary depending on the stakeholder and business in question.


Corporations, their directors and officers rely on professional advisors to assist in carrying on the business and affairs of the corporation and helping to fulfill the corporation’s regulatory requirements. Auditors are engaged to audit financial statements and prepare audit reports, lawyers advise on the array of legal and regulatory issues, and other professionals, such as engineers, actuaries or geologists, may be used as required by the nature of the company.


As a public policy matter, we want to ensure that corporations comp