Bennett Jones’ Special Committees Report: Frequently Asked Questions

Introduction

Special Committees have evolved as a mechanism to manage actual or perceived conflicts of interest in corporate governance. Special committees are mandated in certain circumstances by Canadian securities laws, and advisable as good corporate governance under corporate law and fiduciary duty. The rationale for implementing a Special Committee in ESG matters are identical to the rationale for implementing such a committee in any other important matter of corporate decision making, namely when factual circumstances make it advisable to further insulate a board's decision making from any potential allegation of conflict of interest.

Furthermore, special committees are typically "ad hoc" committees, as opposed to standing committees, meaning they are formed for a limited duration to address a particular transaction or circumstance. They are also typically composed entirely of independent, non-management directors. With this in mind, a special committee may be warranted in response to specific climate-related litigation, or a transaction or response addressing a climate-related issue for an organization. The decision of whether or not a special committee is warranted is a nuanced one, dependent on the transaction or event at hand. A board should seek internal or external legal advice concerning its fiduciary duties early in a process to determine whether the formation of a special committee will be advisable or helpful.

It is critical to obtain legal advice early and before a special committee is formed. Although the initial stages of a transaction or an investigation may appear routine or straightforward, regulators or other stakeholders may test this perception, including through litigation. The initial decisions made by the board in establishing its process for reviewing a transaction or conducting an investigation may ultimately prove to be the most critical.

Please see the Responsibilities and Liability section of our publication titled "Special Committees: Frequently Asked Questions" below and visit our website for the complete document. You can find the full table of contents at the end of this document.

Section B: Responsibilities and Liability

1. What are the duties of a member of a special committee?

Members of a special committee are generally subject to the same duties as other directors. Special committee members have a duty to act honestly and in good faith with a view to the best interests of the corporation.^[i] Members will be judged against the level of skill and diligence that a reasonably prudent person would exercise in comparable circumstances. To satisfy these duties, special committee members must exercise independent judgment and should not use their position for personal gain. All information surrounding the special committee's activities should be kept confidential until members have agreed to disclose the information. Members of a special committee have a duty to avoid conflicts of interest. Any conflicts should be disclosed and discussions about conflicts should be recorded in the special committee.

2. Who bears the responsibility for a special committee's decisions?

Each member of the special committee must satisfy his or her duties as a director and is responsible for the recommendations and decisions of the special committee (unless he or she voted against a particular recommendation or decision).

The board generally retains responsibility for making a final decision after considering the recommendations of the special committee. The board may rely on the advice of the special committee as long as adequate systems and procedures were in place to ensure the special committee made an independent and informed recommendation.

3. Does a director assume new liability by serving on a special committee?

A director who serves on a special committee is subject to the same duties as other directors. That said, the actions of special committee members are likely to be scrutinized more closely by courts, regulators and other stakeholders, especially in the context of high-profile transactions or investigations.

Special committee members are required to exercise the care, diligence and skill of a reasonably prudent person in comparable circumstances. In general, a higher standard of care, diligence and skill will be expected from special  committee members than from directors who are not serving on the special committee. All the same, directors who serve on a special committee will be protected by the business judgment rule if the special committee is duly established, independent and adheres to a reasonable process to evaluate relevant facts and consider the interests of affected stakeholders.

Directors who serve on a special committee may be subject to an increased risk of scrutiny from shareholders. For example, shareholders may alter their votes at subsequent annual meetings based on their views about the performance and recommendations of special committee members.

4. How can members of a special committee protect themselves against personal liability?

To protect against personal liability, special committee members should make sure they understand and carefully discharge their duties as directors. Special committee members should consider retaining independent professional advisors, as appropriate, and take time to consider the interests of all affected stakeholders. Procedures should be implemented to manage conflicts of interest. The special committee should be given sufficient autonomy and adequate resources to allow it to independently complete its objectives.

Special committee members should review the insurance policy the corporation offers to directors. Special committee members should confirm that their service on the special committee is covered by the insurance policy and, in particular, whether non-arm's length transactions (such as insider bids or related party transactions) are covered. If there are limits to the coverage offered by the corporation's insurance policy, special committee members may purchase additional insurance. Special committee members should also ensure that applicable indemnities that do not currently exist in favour of the corporation's directors are included in the special committee's mandate. If members of the special committee are directors of a subsidiary corporation, they should ensure that the parent corporation provides indemnification as well.

In connection with a change of control transaction, the special committee may also consider whether the definitive agreement should contain provisions to ensure that appropriate run-off insurance coverage is obtained and to limit the purchaser's ability to restrict or weaken indemnification arrangements in favour of the directors after closing.

See the full report here.