Interpretation of �Borrowed’ Legislation: Director’s Duties
Interpretation of the provisions of �borrowed’ legislation can give rise to unfair and unexpected results. The purposive approach to statutory interpretation mandates that legislation be interpreted in light of the purpose behind the legislation.[249] Conventional legal wisdom suggests that copied legislation be interpreted in the light of precedent from the foreign jurisdiction from which it was copied.[250] Imputing the treatment and interpretations of the foreign statute to the Caribbean model presents a problem because the foreign precedent is based on the corporate culture of that jurisdiction.
This may, however, be cured by what has come to be known as the �local circumstances rule,’ which is an exception to the rule that previous interpretations of the statute are binding where a statute is identical or in pari materia to a statute in the UK, in circumstances where it would produce an irrational result and therefore could not have been the legislative intent.[251]An example of the possible difficulties of interpretation can be found in the provisions relating to the duties of directors and officers. In the main, most Commonwealth Caribbean territories have copied the provision from the Canadian Business Corporations Act 1985 (now revised) which states:
Every director and officer of a company, in exercising his powers and discharging his duties shall-
e. act honestly and in good faith with a view to the best interests of the company and
f. exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.[252]
Here, the Commonwealth Caribbean has an opportunity to either apply the purposive approach to statutory interpretation or some other approach.
A. Duty to Act Honestly and in Good Faith: Primary or Improper Purpose?
The courts in Canada have grappled with whether or not the phrase �act honestly and in good faith with a view to the best interests of the company’ codifies the common law fiduciary duty of not making a secret profit, not having a conflict of duty and interest, and acting bona fide in the best interest of the company without having an improper purpose.
The debate in Canada surrounds the question as to whether the true test is one of an �improper’ purpose or that of a �primary’ purpose. Academic opinion supports a �primary’ purpose doctrine.[253] If a director acts in good faith, but his purpose is improper, he may run afoul of his fiduciary duty, unless, his primary purpose is not an improper purpose.These questions have not been analysed seriously in Caribbean courts. Is the correct approach to interpret the provision in accordance with Canadian judicial decisions and discard the apparent intention of Parliament in the given Commonwealth Caribbean territory? A second option is to look to the intention of Parliament of the given Commonwealth Caribbean and a third option is to attempt to discern a broad Caribbean jurisprudence to guide the matter. It is difficult to discern a Commonwealth Caribbean jurisprudence on the interpretation of the fiduciary duty of directors, and in most instances the section was simply copied from the Canadian legislation. It must be therefore, that the legislature intended for the Canadian cases to form a precedent for interpretation in the Commonwealth Caribbean.
B. Duty of Care and Skill: Objective or Subjective?
The issue becomes even more problematic under an examination of the duty of care and skill. There is no doubt that the intention of Parliament in Canada and in the Commonwealth Caribbean was to raise the standard
of care, diligence and skill at common law. The question arises as to whether the test is objective, subjective or mixed objective/subjective. The objective approach is the more onerous one, where a director or officer is judged on the standard of what a reasonable person would have done in his circumstances. The combination of objective/subjective is the former objective interpretation, but also takes into account the specific director whose actions are called into question and his circumstances. The subjective test is entirely based on the individual director and that director’s abilities.
After much debate, the Supreme Court of Canada recently held that it is a purely objective test.[254] Does this mean that the Caribbean territories which have copied this provision are saddled with this precedent? I would hope not, but given that the words are also copied verbatim from the Canadian legislation in most Commonwealth Caribbean territories, the risk is that it will be so interpreted.Jamaica, perhaps, in anticipation of a restrictive interpretation of the provision, took the step of including a due diligence defence so as to retain some element of subjectivity. The Jamaican provision may introduce different challenges but at least this will reflect its own jurisprudence and not that of another jurisdiction which may not prove suitable for the region.
C. The United States' �Business Judgment Rule'
Another question that arises from this is whether the intention of the legislature in the various Commonwealth Caribbean territories was to take into account what is known as the United States’ �Business Judgment Rule.’ The �Business Judgment Rule’ is the rule that creates a presumption that directors are not liable for a breach of care, diligence and skill for a decision, provided that, there was no conflict of the director’s duty and interest, the director was informed and reasonably believed the decision was appropriate at the time it was made, and that the director had a rational belief that it was in the best interest of the company.
There is much debate in the wider Commonwealth, namely the United Kingdom, Canada and Australia, as to whether this formulation forms part of their law or whether they have their own style of the Rule. The conventional view is that there is a Commonwealth Business Judgment Doctrine where it is accepted that a businessman’s foresight is not to be substituted with his hindsight.
In Australia, before the enactment of a provision introducing Australia’s own style of the Business Judgment Rule,[255] Parliament introduced amendments to encourage the development of an Australian Business Judgment Rule in the courts.
This is significant as the acceptance of this Rule at common law and the new provisions on directors’ duties of care and skill, suggest that it must be taken into account when assessing the liability of a director for breach of his duty. In fact, it has been suggested in the Jamaican Eagle case,[256] that the Jamaican courts have accepted this as a part of the law, although that the judge misapplied it to the concept of a fiduciary duty.There is no mention of contemplating to incorporate the Business Judgment Rule in the Draft Report of the Joint Select Committee of Parliament in Jamaica on the Companies Bill 2001.[257] Perhaps the inclusion of a due diligence defence in Jamaica is an indication of the enactment of Jamaica’s own Business Judgment Rule. This begs the question as to whether the other Caribbean territories have left it to their own courts to develop. If this is the case, this is a dangerous line to follow, especially if not contemplated when copying/enacting legislation. The Commonwealth Caribbean territories may yet find a result that was not intended by the legislature if the legislation does not make it clear whether there is such a rule.
In the recent BCE case,[258] the Supreme Court of Canada accepted that the American-style Business Judgment Rule forms part of the Canadian corporate law jurisprudence.[259] This may well mean now that there is Canadian precedent for the adoption of the Rule in the Commonwealth Caribbean. One however must bear in mind that most Caribbean territories adopted the Canadian corporate model prior to the 2004 amendments to the CBCA, which forms the basis for the adoption of the American-style Business Judgment Rule in Canada.
D. Duty on Directors to Take into Account the Interests of Employees and Shareholders
The corporate governance provisions in Caribbean statutes also generally include a duty for directors to take into account the interests of employees and shareholders of the company when determining the best interest of the company.[260] The problem is that oftentimes the interests of the company and other stakeholders conflict.
This requirement has caused some difficulty in the United Kingdom. The debate there centres on the delicate balancing act required of directors to avoid breach of their overriding duty to the company.[261] Although proponents of the stakeholder theory of corporate governance, which is the theory which sees the governance of companies in the context of a wider group of persons beyond shareholders to include creditors, employees and the community in which the company operates, welcome such provisions. Detractors cite the general view that directors cannot know whose interest to serve if their responsibility is other than making maximum profits for stockholders.[262] How the Commonwealth Caribbean territories will resolve this inevitable dilemma remains to be seen. The goals of United Kingdom legislation, whether leaning in favour of a stakeholder theory or not, should not be that of the Caribbean, if the region’s corporate reality is taken into account. The approach, of necessity and good sense, must be aligned with the reality of the region.In developing the jurisprudence of the Commonwealth Caribbean, many territories have adopted provisions promoting stakeholder interests. The region now has to decide whether the stakeholder theory is to be widely or expressly adopted by the courts or through legislation. This, of course, must bear in mind that to redefine directors’ responsibilities in these terms may well lead, �...Io a lack of accountability on the part of the directors to anyone since there would be no clear yardstick with which to judge their performance.’[263]
In the BCE case, the Supreme Court of Canada stated that where the interests of the shareholders and other stakeholders conflict, the director’s duty is to the corporation. This clear statement of the law puts to bed, any notion that directors have been given an impossible task of balancing competing interests, at least in Canada.[264]
E. Complainants’ Remedies
Another concern for the Caribbean is that of the breadth of the complainant’s remedies.
Most Commonwealth Caribbean territories have copied the Canadian provisions on derivative actions and the oppression remedy. These provisions allow directors or officers, former directors or former officers, shareholders, former shareholders, debenture-holders and former debenture-holders, the Registrar and �any other person who, in the discretion of the court, is a proper person to make an application to bring an action’ against the directors once it is brought in good faith, is in the best interest of the company and reasonable notice of the action is given to the directors of the company.[265]It is significant that in interpreting this provision, courts in Barbados, and Trinidad and Tobago have given the phrase �any other person who, in the discretion of the court, is a proper person to make an application’ an extremely liberal interpretation, beyond, it appears, that which was contemplated in Canada. In the Barbadian case of Canwest International Inc. v Atlantic Television Ltd,[266] parties to a pre-incorporation contract with a company were treated as �complainants’ based on the �...broad power to do justice and equity in the circumstances of the particular case.’[267] In the Trinidad and Tobago case of Five Star Medical and Ambulance Services Ltd v Telecommunications Services of Trinidad and Tobago Ltd,[268] the court adopted the very wide discretion to determine who in the circumstances of the particular case is a proper person to be elevated to the status of the �complainant’ for the purpose of section 242 of the Trinidad and Tobago Companies Act.
In the BCE case, a group of Bell Canada Enterprises (BCE) bondholders vigorously contested a plan for the acquisition of BCE on the basis that the leveraged buyout would increase BCE’s indebtedness, thereby reducing the resale value of the bonds on the securities market. The case involved an action based on the oppression remedy, whereby the bondholders insisted that the directors acted in a manner that at the very least, unfairly disregarded their interests. It was established that there is need for a plaintiff to firstly establish the reasonable expectation asserted and then to establish that the reasonable expectation asserted was violated by, either, oppression, unfair prejudice or unfair disregard of a relevant interest. The plaintiffs, in this case, not having established the reasonable expectation of the preservation of the investment grade status of their debentures by the directors, lost their appeal.[269]
Various criteria were used in the case to ascertain whether the bondholders had a reasonable expectation, some of which involved the adoption of American case law. Whether this is the way in which the Commonwealth Caribbean courts will decide cases involving the oppression remedy remains to be seen. Thus far, however, cases from Barbados and Trinidad and Tobago on the oppression remedy have not made it clear that �reasonable expectation’ need first be established. The variations on the oppression remedy and the definition of �complainant’ in the Caribbean will surely challenge any cohesive corporate jurisprudence regarding stakeholder rights.
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