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Directors must act prudently and on a reasonably informed basis.
In October, the Supreme Court of Canada released its decision in the case of Peoples Department Stores Inc. v. Wise. Peoples Department Stores Inc. was a wholly owned subsidiary of Wise Department Stores Ltd., and the Wise brothers were directors of both corporations. As directors, the Wise brothers caused Peoples Department Stores Inc. to act as buying agent for both itself and its parent Wise Department Stores Ltd. The purchased inventory was transferred by Peoples Department Stores Inc. to its parent Wise Department Stores Ltd. without security, despite its known financial instability.
The lower court of Quebec determined that the Wise brothers, as directors of Peoples Department Stores Inc., failed in their duty to the Corporation by not obtaining adequate security from the parent with respect to its accounts receivable.
The Supreme Court of Canada, without negating the fiduciary obligations of the directors to act in the best interests of the Corporation which they are serving, held that in carrying out their duties, the decisions of the directors must be reasonable business decisions in light of all circumstances. The Court found that the Wise brothers, as directors of Peoples Department Stores Inc., did consider all circumstances, and did make a reasonable decision for the benefit of both the corporation and its parent.
The case illustrates the necessity for directors of corporations to exercise due diligence in making their decisions, and in the need to have due diligence considerations recorded in the Minutes. If directors act diligently and in good faith, the courts will apply the “Business Judgement Rule” and will not hold the directors liable where that decision turns out to not be in the Corporation’s best interest.