Breach of Fiduciary Duty by Directors: When Can You Sue?

Directors and officers of corporations hold positions of power and trust. They control company assets, make strategic decisions, and have access to confidential information. 

With that power comes a legal obligation to act honestly and in the company’s best interests. When directors betray that trust, shareholders and the company have legal remedies.

A fiduciary duty is a legal obligation to act in another party’s best interests with loyalty, honesty, and care. Directors and officers owe this duty to the corporation itself, not to individual shareholders.

Under Ontario’s Business Corporations Act, directors must:

• Exercise their powers honestly and in good faith
• Act with a view to the corporation’s best interests
• Exercise the care, diligence, and skill that a reasonably prudent person would use

These requirements create two distinct duties: the duty of loyalty (acting in the company’s interests, not your own) and the duty of care (being informed, attentive, and reasonably competent).

Self-Dealing: Directors enter transactions with the corporation that benefit themselves personally. Examples include selling property to the company at inflated prices, awarding contracts to their own businesses without competitive bidding, or approving excessive compensation for themselves.

Usurping Corporate Opportunities: Directors take business opportunities that belong to the company for personal profit. A director who learns of a valuable opportunity through their position, takes it for themselves, and profits while the company loses out has breached their duty.

Conflict of Interest: Directors have competing loyalties that compromise their judgment. This includes serving on boards of competing companies, having undisclosed financial interests in suppliers, or using confidential information for personal investments.

Negligence and Mismanagement: Directors fail to exercise reasonable care. This includes ignoring financial warning signs, failing to implement basic controls, making major decisions without adequate information, or not attending meetings.

Competing with the Corporation: Directors start businesses that compete with the company, solicit its customers or employees, or use confidential information for competitive advantage.

The Corporation Itself: The company can sue directors directly for breaches. However, this requires board authorization.

Shareholders (Derivative Action): When the company won’t sue, shareholders can bring a derivative action on behalf of the corporation. Any recovery goes to the company, not the individual shareholder. Courts must grant permission first, requiring proof you’re acting in good faith and the action benefits the corporation.

Shareholders (Oppression Remedy): When director conduct harms shareholders personally (not just the company), shareholders can bring oppression remedy claims. This differs from derivative actions in who was harmed and who receives damages.

For Duty of Loyalty Breaches:

• The director owed a fiduciary duty
• They acted in their own interest
• The corporation suffered harm
• The breach directly caused that harm

For Duty of Care Breaches: You must show the director’s conduct fell below what a reasonably prudent person would do – not merely that a decision turned out badly. Evidence includes:

• Acting without adequate information
• Ignoring obvious risks
• Failing to consider relevant factors
• Gross negligence (not just poor judgment)

Courts won’t second-guess business decisions made honestly, in good faith, on an informed basis, and in the reasonable belief that they serve the corporation. This rule protects directors from liability for honest mistakes.

The rule does NOT protect:

• Bad faith or conflicted decisions
• Decisions made without gathering relevant facts
• Ignoring warning signs or obvious risks
• Gross negligence in decision-making

The distinction often comes down to the process the director followed, not the outcome achieved.

Informed Consent: If the director disclosed their conflict and disinterested directors approved the transaction after full disclosure, the breach may be excused.

Business Judgment Rule: Decisions made in good faith with reasonable care are likely protected.

Reliance on Experts: Directors who relied in good faith on financial statements, legal opinions, or expert reports may avoid liability if the reports were reasonable.

Concerned about director misconduct or breach of fiduciary duty? Pinto Shekib LLP handles complex corporate and shareholder litigation. Contact us at 416.901.9984 or info@pintoshekib.ca for a consultation.