Duties and Liabilities of Chief Financial Officer — Best Practices

Lisane Dostie, President, ISALégal inc. Marie-Josée Neveu, Senior partner, Fasken Martineau

Outline

• Duties

• Some Statutory Liabilities

• Grounds of Defence

• Best Practices

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Duties

• Section 122 of the Canada Business Corporations Act:

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“Every director and officer of a corporation in exercising their powers and discharging their duties shall:

a) act honestly and in good faith with a view to the best interests of the corporation; and;

b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.”

Duties (cont'd)

• Scope of duties:

•  Duty of loyalty •  Act in the best and sole interests of the corporation

•  Duty of honesty •  Respect the trust granted •  Manage assets to attain the corporation’s goals •  Refrain from abusing one’s position as officer

•  Duty to act in good faith •  Crucial element for indemnification purposes •  No specific definition •  Good faith is presumed

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Duties (cont'd)

•  Duty to act personnally within the confines of their powers •  Fully exercise their power without delegating them unless permitted •  Act in such a manager that neither they nor the corporation violate the

law, statutes and by-laws •  Respect the corporation’s policies, where applicable

•  Duty of care •  Administer business to the best of their judgment in an informed and

reasonable manner •  Develop supervisory and control functions, especially in the case of

open corporations •  Duty of prudence

•  Act with reasonable care and prudence, in light of their skill, experience and duties within the corporation

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Some Statutory Liabilities

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•  In the last decade:

•  2001-2002: Scandal and bankruptcy of Enron and WorldCom

•  July 2002: Sarbanes-Oxley Act of 2002 (SOX)

•  June 2003: Draft Regulation 52-109 respecting Certification of Disclosure in Issuers’ Annual and Interim Filings

•  March 2004: Passing of Regulation 52-109

•  December 2005: Ontario’s Bill 198 introducing civil liability for disclosure

•  March 2006: Alberta’s Bill 25

•  November 2007: Québec’s Bill 19

Some Statutory Liabilities (cont'd)

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•  52-109 seeks to improve the quality and reliability of information provided by issuers

•  52-109 requires CEOs and CFOs to personally certify that the annual and interim filings of the issuer do not contain misrepresentations and that the financial statements and other elements of financial information included in the annual filings of the issuer give a fair presentation of its financial condition

•  Documents to be certified by the CEO and CFO include: •  annual information form; •  annual financial statements and annual MD&A; •  interim financial statements and interim MD&A.

Some Statutory Liabilities (cont'd)

•  FORM 52-109F1 CERTIFICATION OF ANNUAL FILINGS FULL CERTIFICATE •  I, *****, President and Chief Executive Officer, certify the following: •  1. Review: I have reviewed the AIF, if any, annual financial statements and annual MD&A, including, for greater certainty, all documents and information that are incorporated by

reference in the AIF (together, the "annual filings") of <identify issuer> (the "issuer") for the financial year ended <state the relevant date>. •  2. No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the annual filings do not contain any untrue statement of a material fact or omit to state

a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, for the period covered by the annual filings.

•  3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the annual financial statements together with the other financial information included in the annual filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the annual filings.

•  4. Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in Regulation 52-109 respecting Certification of Disclosure in Issuers’ Annual and Interim Filings (c. V-1.1, r. 27) , for the issuer.

•  5. Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the financial year end •  (a) designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that •  (i) material information relating to the issuer is made known to us by others, particularly during the period in which the annual filings are being prepared; and •  (ii) information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed,

summarized and reported within the time periods specified in securities legislation; and •  (b) designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of

financial statements for external purposes in accordance with the issuer’s GAAP. •  5.1 Control framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is <insert the name of the control framework used>. •  <insert paragraph 5.2 or 5.3 if applicable. If paragraph 5.2 or 5.3 is not applicable, insert "5.2 N/A" or "5.3 N/A" as applicable. For paragraph 5.3, include (a)(i), (a)(ii) or (a)(iii) as

applicable, and subparagraph (b).> •  5.2 N/A •  5.3 N/A •  6. Evaluation: The issuer’s other certifying officer(s) and I have (a) evaluated, or caused to be evaluated under our supervision, the effectiveness of the issuer’s DC&P at the

financial year end and the issuer has disclosed in its annual MD&A our conclusions about the effectiveness of DC&P at the financial year end based on that evaluation; and (b) evaluated, or caused to be evaluated under our supervision, the effectiveness of the issuer’s ICFR at the financial year end and the issuer has disclosed in its annual MD&A (i) our conclusions about the effectiveness of ICFR at the financial year end based on that evaluation; and (ii) for each material weakness relating to operation existing at the financial year end

•  (A) a description of the material weakness; •  (B) the impact of the material weakness on the issuer’s financial reporting and its ICFR; and •  (C) the issuer’s current plans, if any, or any actions already undertaken, for remediating the material weakness. •  7. Reporting changes in ICFR: The issuer has disclosed in its annual MD&A any change in the issuer’s ICFR that occurred during the period beginning on <insert the date

immediately following the end of the period in respect of which the issuer made its most recent interim or annual filing, as applicable> and ended on <insert the last day of the financial year> that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.

•  8. Reporting to the issuer’s auditors and board of directors or audit committee: The issuer’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of ICFR, to the issuer’s auditors, and the board of directors or the audit committee of the board of directors any fraud that involves management or other employees who have a significant role in the issuer’s ICFR.

•  Date: December 14, 2011 •  _______________________ •  [Signature] •  President and Chief Executive Officer • 

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Some Statutory Liabilities (cont'd)

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•  Sections 225.8 et seq. of the Securities Act provide, among other things, that: •  The purchaser or vendor of a security

•  may bring an action against the issuer, its directors or its officers •  who authorized, permitted or acquiesced in the release of that

document containing a misrepresentation •  or who failed to comply with a timely disclosure obligation

Some Statutory Liabilities (cont'd)

Grounds of Defence

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• Statutory defences •  A CFO personally sued for damages under the civil liability regime

of the Securities Act (s. 220) must: •  Prove that he acted with prudence and diligence; or

•  Prove that the plaintiff knew, at the time of the transaction, of the alleged misrepresentation.

•  “Directors and officers will not be held to be in breach of the duty of care under s. 122(1)(b) of the CBCA if they act prudently and on a reasonably informed basis. (Peoples v. Wise, Supreme Court of Canada, 2004)

•  The CFO must prove that he has taken adequate control measures and had no reason to believe that the public document contained false information.

Grounds of Defence (cont'd)

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• Business Judgment Rule “The court looks to see that the directors made a reasonable

decision not a perfect decision. Provided the decision taken is within a range of reasonableness, the court ought not to substitute its opinion for that of the board even though subsequent events may have cast doubt on the board's determination. As long as the directors have selected one of several reasonable alternatives, deference is accorded to the board's decision.”

- Maple Leaf Foods Inc. v. Schneider Corp. (Court of Appeal for Ontario, 1998)

Grounds of Defence (cont'd)

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• Business Judgment Rule “While courts are ill-suited and should be reluctant to second-

guess the application of business expertise to the considerations that are often involved in corporate decision-making, they are capable, on the facts of any case, of determining whether an appropriate degree of prudence and diligence was brought to bear in reaching what is claimed to be a reasonable business decision”

- Peoples v. Wise (Supreme Court of Canada, 2004)

Grounds of Defence (cont'd)

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• Does the business judgment rule apply to a CFO’s decisions? •  In Kerr v. Danier Leather (2007), the Supreme Court of

Canada recognized that the business judgment rule does not protect decisions relating to a corporation’s financial disclosure requirements

•  It does apply to CFO decisions, but not to contents of public documents such as financial statements

Grounds of Defence (cont'd)

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• Danier •  Plaintiffs had acquired $65 million in securities under Danier’s 1998 initial public

offering (“IPO”) •  Two weeks prior to the IPO’s closing, Danier filed a final prospectus containing a

forecast for its fourth quarter •  Ten days after the IPO closed, Danier issued a press release announcing that

“exceptionally hot weather” had resulted in lower than expected sales of leather garments

•  Danier had publicly revised its forecast for its fourth quarter and its share price dropped almost 30% in the four days following that announcement

•  However, near the end of the fourth quarter, the initial sales forecasts indicated in the final prospectus were attained

•  Investors sued for damages arguing, among other things, that the prospectus contained a misrepresentation of a material fact and/or that the prospectus did not report a fact that was material on the IPO’s closing date

•  Plaintiffs also argued that a disclosure, by amending the final prospectus prior to the IPO closing date, was required in order to correct the misrepresentations, and that the value of the securities at the time of the IPO was artificially high due to a misrepresentation of the facts

Grounds of Defence (cont'd)

•  Danier (cont'd) •  The Ontario Superior Court of Justice concluded that Danier, its

CEO as well as its CFO had to pay approximately $15 million to investors owing to Danier’s misrepresentation of facts in its prospectus at the time of the IPO

•  The Court of Appeal for Ontario cleared Danier’s officers by applying the business judgment rule to the decision made by the CEO and CFO not to disclose the results of their in-house analysis before the IPO closing date

•  The Supreme Court confirmed the findings of the Court of Appeal for Ontario’s judgment, but expressed its disagreement regarding the application of the business judgment rule by explaining that it cannot be used to limit the continuous disclosure requirements applicable under securities legislation and regulations

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Best Practices

To limit your risks, consider:

•  Efficient control measures •  Develop and disseminate a disclosure/communications policy •  Provide the corporation with internal control systems •  Create a disclosure steering committee

•  Implement a procedure for responding to continuous disclosure requirements and correcting information in the event of an error

•  Ensure compliance with these policies •  Ensure that adequate warning is given, whenever necessary, in all of the

corporation’s public communications containing forward-looking statements •  Consult experts whenever necessary •  Review minutes •  Have a solid liability insurance policy •  Do not change your habits

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In Summary…

• Dare to ask the right questions,

• At the right time,

• To the right people …

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In Summary…

• Dare to ask the right questions

•  WHAT? •  Nature of the problem

•  Discomfort

•  Lack of understanding

•  Doubt as to illegality/potential illegality

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In Summary…

• At the right time

•  WHEN?

•  Proactive vs remedy

•  Process steps – 1 to 10 …

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In Summary…

• Of the right people … •  WHOM?

•  Internal or external lawyer

•  Chairman of the Board or CEO

•  Audit committee

•  Internal or external auditors

•  Whistle Blower

•  Specialized consultants

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In Summary…

• Due diligence … before joining the team

•  Validate the business’s values based on your reference scheme: the past is often an indication of the future

•  Be in harmony with … YOUR VALUES and the corporate culture – mission/vision/value

•  Before choosing – impose your vision or jump ship !

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THANK YOU

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