Acting as an outside director or officer

A director of a company, for instance, attracts very different risks than a member of a school parent planning committee. In some positions, you will be comfortable knowing that the risk of liability is so remote as to be almost non-existent. In others, the risks will be such that you will only act if adequately protected. And in others, the potential liability for matters ranging from unpaid taxes to corporate governance failures will be so great that you will not want to accept the appointment. Carry out whatever due diligence about the organization and others involved in it that may be necessary in order to fully identify any risks or potential liabilities.

Protection may include directors’ and officers’ insurance (D&O) policies purchased by the organization on the private market, or an indemnity provided by the organization seeking your involvement (assuming the organization has the financial wherewithal to make good on the indemnity). If you buy excess insurance, that policy may "drop down" to provide an element of outside directors’ and officers’ liability (ODL) cover. In addition, the CBIA offers a policy specifically designed to provide some coverage to lawyers who sit on boards other than their law corporation. Your insurance broker can provide you more information.

Even with D & O liability insurance, however, directors may still find themselves personally exposed because of deductible amounts and restrictions on the scope or limits of coverage. Further, the mere existence of insurance can encourage claims by those searching for a “deep pocket,” particularly if the director might be held to a higher standard of care because he or she is a lawyer.

Unless you are prepared to offer legal advice or services (see below), make it very clear at the outset that you are not. If you are asked for legal advice, refuse. Ask the board, council or committee to confirm its understanding of your circumscribed role when you first join and, as appropriate, on an annual basis thereafter. A board, for instance, can pass a resolution that it will seek any legal advice or services required from outside counsel, not you.

The collegial environment of a small board or committee can create risks very similar to those that lawyers face when acting for friends or family. Read: About to act for family and friends? (Resist — it's just too risky)

Legal advice provided on an ad hoc basis may end up being just plain wrong, as it may be based on a factual matrix that’s deficient. For instance, a not-for-profit organization may ask a lawyer sitting on its board for legal advice about managing a personnel issue with an employee, without providing all of the details needed for informed advice. Lawyers willing to offer informal views will want to confirm, in advance and in writing, that the organization will not rely on that advice but will consult its own lawyer for legal advice. Optimally, the minutes will reflect the caveat, as well.

Any lawyer who agrees to sit as a director of a company at the request of a client may want to reconsider that decision or, at the very least, firmly establish parameters for that involvement, given the increased risks attracted:

• You must recognize and manage the very real risk of “split loyalties” – the potential conflict between your duties to the client as lawyer and the separate duties to the company as director. If the company starts to fracture and litigation looms, privilege issues can be extremely difficult to sort for the lawyer wearing two hats.
• Developments in the law suggest that matters may become even messier given the potential liability of the law firm for the acts of its lawyer partner qua director. In a class proceeding in Ontario, a common issue relates to a claim that a director (also a lawyer) is statutorily liable as a director for alleged misrepresentations in relation to a company’s takeover bid circular, and that such liability also extends to the director’s law firm. The director and his firm had acted for the company. The law firm’s motion for summary judgment dismissing the claim that it is vicariously liable for the actions of its partner qua director, as well as a claim in negligence, has been denied, although the defences may be raised at trial.

Exclusion 6.2 of the policy (the “business exclusion”) will operate to exclude coverage if, for example, you have effective management or control of the organization, or a beneficial interest in the organization that exceeds an allowable threshold. You will want to consider whether or not your role triggers the operation of the Exclusion, as you – and your client – will want to know that your legal services are backed by insurance. LIF Coverage information: The Benefit and Business Exclusion (Exclusion 6).