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Directors’ duty of care, diligence and skill : a comparative study of Japanese and Canadian law Toriumi, Tetsuro 1983

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DIRECTORS' DUTY OF CARE, DILIGENCE AND S K I L L : A COMPARATIVE STUDY OF JAPANESE AND CANADIAN LAW  by TETSURO TORIUMI L L . B . , Waseda U n i v e r s i t y ,  Tokyo  A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF LAWS in THE FACULTY OF LAW  We a c c e p t t h i s  thesis  as c o n f o r m i n g  to the required  THE UNIVERSITY OF BRITISH COLUMBIA J a n u a r y 1983  T e t s u r o T o r i u m i , 1983  standard  In p r e s e n t i n g  this  thesis i n partial  f u l f i l m e n t of the  r e q u i r e m e n t s f o r an a d v a n c e d d e g r e e a t t h e of B r i t i s h Columbia, I agree that it  freely  t h e L i b r a r y s h a l l make  a v a i l a b l e f o r r e f e r e n c e and s t u d y .  agree t h a t p e r m i s s i o n f o r extensive for  University  s c h o l a r l y p u r p o s e s may  for  financial  Law  The U n i v e r s i t y o f B r i t i s h 1956 Main M a l l V a n c o u v e r , Canada V6T 1Y3 Date  27  January,1983  Columbia  my  It is thesis  s h a l l n o t be a l l o w e d w i t h o u t my  permission.  Department o f  thesis  be g r a n t e d by t h e h e a d o f  copying or p u b l i c a t i o n of t h i s  gain  further  copying of t h i s  d e p a r t m e n t o r by h i s o r h e r r e p r e s e n t a t i v e s . understood that  I  written  ABSTRACT  Most the  o f the powers general  therefore  meeting,  important  controlled. view  control  between  directors diligence;  of  common  law  managerial  kinds  has  of  have  been  diligence  and  skill.  been skill  found  J a p a n e s e law where  This  paper  regarding  compares  directors'  Board  of duties:  company  It is  are  properly  law  adopt  administration  duties  contrasts  In  of care,  i n Japan.  as  effective  nearly as  i t has been  duties. liable  directors  a  and  addition, skill  and  have been  liability  In  Canada,  few  cases  of a duty  i s suggested  are  two  of  a r e numerous found  Japanese  principal  a and  where care,  instances  liable.  and  Canadian  f o r mismanagement and  It  the  i n developing  are  f o r breach there  the development  i n the elaboration  There  contrasts  there  between  and  duties.  between  Directors.  powers  the  not i n  duties.  the performance of t h e i r  differences  are vested  shareholders.  in  that  these  of  Conversely,  and  of  Japanese  and  fiduciary  directors  in  and  i n Canada  not and  the  whether  important  duties  corporation  allocation  directors  are  duty  enlargement  see  fiduciary  there  directors'  the  two  and  in  Canadian  on  have  but to  Both  similar  However,  o f t h e modern  law  negligence  reasons  f o r the  C a n a d i a n and J a p a n e s e p r i n c i p l e s :  one i s  i i i  whether than  or  not directors  simply  standards  owe  a  duty  t o t h e company; t h e o t h e r of  care,  diligence  and  to  third  parties  rather  i s the s t r i c t n e s s of the skill  which  are  owed  by  directors.  By to  comparing point  Canadian and Japanese  out  differences  which  encourage  directors  skill  i n performing  their  but  law, i t i s intended  also  to increase duties.  to  suggest  t h e i r care,  not  possible diligence  only ways and  iv T A B L E OF  CONTENTS Page  I.  INTRODUCTION  II. A.  DUTY OF  the  and  A GOOD MANAGER UNDER J A P A N E S E LAW  L e g i t i m a c y o f Power and  Before  2.  Directors  5  1950  5  and  Representative Directors  3.  6  (a)  Directors  6  (b)  Representative Directors  9  Board  of D i r e c t o r s  12  4. E x e c u t i v e Committee Duty of Care o f a Good Manager 1. Outline 2.  5  Control  Comany  1.  3.  B.  C A R E OF  Allocation in  1  14 17 17  Duty of Care With Respect to the Conduct of C o r p o r a t e B u s i n e s s and I m p l e m e n t a t i o n of Business Decisions  21  Duty of Care of Corporate  27  (a)  With Respect to the Business A c t i v i t i e s  Observation  R e p r e s e n t a t i v e D i r e c t o r s ' Duty O b s e r v a t i o n ( K a n s h i Gimu)  27  (1)  Basis  (2)  D u t y o f O b s e r v a t i o n on a M a t t e r W h i c h Was N o t B r o u g h t Up f o r D i s c u s s i o n a t Board Meetings  32  Duty of O b s e r v a t i o n of the R e p r e s e n t a t i v e D i r e c t o r Who i s i n Charge of a S p e c i f i c P a r t o f C o r p o r a t e Management  37  Duty of O b s e r v a t i o n of the Representative Director  39  (3)  (4)  a) b)  f o r the Duty  of  of Observation  27  Nominal  Background S u b j e c t i v e C o n d i t i o n s of L i a b i l i t y  39 43  Page (5) (b)  o f t h e Duty  Ordinary Directors' (1)  Duty  of Observation  51  Duty o f O b s e r v a t i o n o f t h e E x e c u t i v e D i r e c t o r (gyomu t a n t o t o r i s h i m a r i y a k u )  58  Duty o f O b s e r v a t i o n o f a Nominal D i r e c t o r a n d o f a D i r e c t o r who w a s Absent from a Board Meeting  61  D i r e c t o r s ' Duty and D o c t r i n e o f Disregarding the Corporate Entity  71  (5)  Causal Relationship  73  (6)  Intentional  75  (4)  1982 Amended C o m m e r c i a l  or Negligent Act  Code  78  1.  Persons D i s q u a l i f i e d  2.  The S u p e r v i s o r y A u t h o r i t y  3.  M a t t e r s t o be D e c i d e d Directors  4.  Report  5.  Right t o Call  6.  Inspection  t o t h e Board  as D i r e c t o r s  80  o f t h e Board  Solely  of Directors  by t h e Board o f  of Directors  a Meeting  85  o f t h e Board  o f the Minutes  from  of Directors  t h e Board  AND  Meeting  Position  B.  Standard o f Care,  87  89  of Directors Skill  86  DILIGENCE  UNDER C A N A D I A N LAW A.  82  83  D I R E C T O R S ' DUTY OF C A R E , S K I L L  1.  46  52  (3)  III.  of Observation  Duty o f O b s e r v a t i o n Over M a t t e r s Not B r o u g h t up f o r D i s c u s s i o n a t B o a r d Meetings  (2)  C.  Limitation  89 and Diligence  Common L a w  90 90  (a)  Expected  Knowledge  and E x p e r i e n c e  (b)  A t t e n t i o n and D i l i g e n c e Required t o be D e v o t e d t o t h e Company's A f f a i r s  92  94  vi Page  2.  (c)  Delegation  (d)  Summary  Statutory  To Whom a r e D u t i e s  D.  Statutory  E. IV.  on O t h e r s  98 100  Modification  C.  1. 2.  and R e l i a n c e  Owed  Reform  of Standard  o f Care  103 108 113  O p p r e s s i o n Remedy Derivative Action  113 114  Securities Regulations  116  CONCLUSION  118  FOOTNOTES  131  BIBLIOGRAPHY  157  -  I.  The  accepted  the  responsibilities  kinds in  the  of  duties:  concept  concepts  The  approach  of  a  INTRODUCTION  i n both of  1 -  Canada  directors  duty  of  care,  of negligence;  and  is  and  Japan  that  establishing  directors  diligence fiduciary  in  and  have  skill  d u t i e s based  two  founded on  the  equity.  position  in  Canada  has  been  summarized  in  the  following  terms:  " S i n c e d i r e c t o r s and o f f i c e r s a r e e n t r u s t e d w i t h the management o f t h e p r o p e r t y and a s s e t s o f t h e c o r p o r a t i o n , w h i c h i n t u r n i s owned by t h e s h a r e h o l d e r s , t h e y are s u b j e c t to f i d u c i a r y d u t i e s . In a d d i t i o n , t h e y must e x e r c i s e c a r e and s k i l l i n managing t h e a f f a i r s of the corporation. The f i d u c i a r y d u t i e s and the s t a n d a r d s o f c a r e and s k i l l r e q u i r e d o f d i r e c t o r s and o f f i c e r s have been d e v e l o p e d and e l a b o r a t e d i n the c a s e law and, t o some e x t e n t , c o d i f i e d i n companies legislation."1  On  the  1889)  other  hand,  (hereinafter  contains  the  provides  that:  the  Japanese  referred  essential  law  to  Commercial as  governing  the  Code  (Law  "Commercial  directors  No.  Code")  i n Japan.  "The r e l a t i o n s between t h e company and t h e d i r e c t o r s shall be governed by the provisions relating to mandates." 2  48,  It  -  As  a  the  result, company  manager.^  directors  have  according  to  i n addition,  2 -  a duty the  t o conduct  standard  the Commercial  of  the business care  of  Code p r o v i d e s  a  of  good  that:  "The directors shall be o b l i g e d t o o b e y any law, o r d i n a n c e and t h e a r t i c l e s o f i n c o r p o r a t i o n as w e l l as resolutions adopted a t a general meeting of shareh o l d e r s and t o perform t h e i r f u n c t i o n s f a i t h f u l l y on b e h a l f o f t h e company." 4  Moreover,  t h e Code  competition  also  provides  and i n t e r v e n t i o n  director's  b y t h e company  conditions  of a transaction with  the  o f how  method  a  t o decide  to  (Article  h i s company  directors'  duty  avoid  264),  (Article  the  265) and  remuneration  (Article  269) .  However, of  there  director's  common  duties  law has  standards  o f care  depends upon t h e s k i l l , a  director  Japan.  as  of fiduciary  ability,  t o be  as  reasonably  well-qualified  director.  judgement  do n o t t h e m s e l v e s  create  In  Canada,  in  the  developing  i t has been  i n the  duties.^  expected  knowledge  A director  t h e development  effective  and s k i l l  and s k i l l  has p e r s o n a l l y .  and  nearly  duty  and enlargement  standard  c o n t r a s t s between  i n Canada  n o t been  of managerial  elaboration  The  are important  a t common l a w  and e x p e r i e n c e  i s not expected Directors'  liability,  even  which  t o be a  errors  i n  though the  -  errors  demonstrate  corporate Board  meeting  decided Board  affairs.  on  rationale the basis  must  may  affairs  take  of the directors  In addition, while  a t the meeting,  corporate the  the unfitness  i s presumed  meeting  3 -  t o have heard a  escape  director  i s not present  consequences  The c o u r t s  and t h e i r  choose  to  of  explain  d i l i g e n c e and  themselves  i f they  a  at a  f o r t h e consequences  of care,  the shareholders  who a t t e n d s  was d i s c u s s e d a n d  i n h i s absence.  o f t h e low standard  the  what  who  liability  discussed  that  a director  t o manage  skill  company  appoint  bad  directors.  On  the  contrary,  fiduciary many  duty  cases  i n  Japan,  has n o t been  while  the  positively  where - d i r e c t o r s have  been  legal  developed,6 held  mismanagement o r f o r n e g l i g e n c e  i n performing  Moreover,  i s another  between whom  i t seems  that  t h e Canadian  duties  a r e owed  there  and Japanese a n d t o whom  common l a w , a d i r e c t o r ' s d u t y to  h i s company  owes a d u t y but to  also  only.  However,  and i s l i a b l e  t o any person  the d i r e c t o r ' s gross  i nhis under  not only  negligence  capacity Japanese  contrast  respect  i s liable.  to At  as a d i r e c t o r i s law, a  t o t h e company  director  ( A r t i c l e 266)  foreseeable  (Article  duties.  striking  director  who h a s s u f f e r e d  f o r their  their  with  of  there are  liable  attitudes a  principle  266-3).  damage d u e  -  From  a  standpoint of  writer The  that  the  criticized  be  corporation  law,  area  listed  regulate trade will  a  wider  parties,  in practice  the  force  suggests  higher  duty  the  narrow.  seems  modern a  ie.  toward In  minority  shares,  too  courts  the  to  to  be  business standard  beyond  to  a  i s workable.  corporations. small  of  duty,  i t seems  l a x and  Canadian  terms  indeed, i s moving  the  their  by  in  lawyer,  i s too  experience  and  to third  Canadian of  developed  Japanese  expected  civil  principle  inadequate  environment. can  care  as  -  a Japanese  Canadian  standard of  4  the Japanese  view  Securities  Laws,  the  of  corporations  increased  which  requirements  directors  to  improve  paper  examine  for  their  i n the which  publicly reporting  standard  of  care.  It  i s intended  cases  and  Japanese and  to  was  duties  trends  be  III.  be  British  and  Common  then discussed A detailed be  1,  law and  Canadian  statutes  to  the  insofar  i n Chapter  IV.  i t is  Commercial as  compared w i t h between  with  statutes  In a d d i t i o n ,  principles  comparison  t h e n made  discussed.  1982  compare  I I , Japanese  discussed.  amendments  October  and  Columbia  In Chapter  new  directors.  law w i l l  will  and  introduced  analyze the  will  Chapter  Japanese  be  to  statutes.  e n f o r c e d on  on  statutes  Federal and  cases w i l l  which  in  the  cases  proposed  in this  they  Code  cast  new  and  Canadian  that  of  Canadian Finally,  Japan  law  and  future  0  -  II.  DUTY  OF  5 -  CARE OF  UNDER  A  GOOD  JAPANESE  MANAGER  LAW  A.  A L L O C A T I O N AND L E G I T I M A C Y OF POWER AND I N THE COMPANY  1.  Before  The  1950  Commercial  basis, 1938,  CONTROL  was  Code,  first  using  drafted  German  pursuant  concepts  i n 1899 and h a s been  1950, 1966, 1974 and 1981.  promulgated  legal  to  Each  specific  such  as  amended i n  amendment  historical  a  needs  was and  circumstances.  As the of  a result  o f t h e 1950 amendment,  present  Commercial  Anglo-Canadian  Code  company  adopts  t h e a d m i n i s t r a t i o n between  of  the  shareholders, meeting. not to  only  Before  exclusive  Ultimate exercise  their  1950, each  to administer  represent  Although  who  a  b y U.S. m o d e l s ,  similar  view  l a w on t h e a l l o c a t i o n  and  company.  inspired  d e c i s i o n s on m a t t e r s  control power  lies  through  of control shareholders with  the  the general  o f the d i r e c t o r s had a u t h o r i t y  internal  the corporation  d i r e c t o r s and  to that  corporate  i n dealings which  power o f t h e s h a r e h o l d e r ' s  affairs, with  but also  the public.^  d i d n o t come w i t h i n t h e m e e t i n g h a d t o b e made  -  by  a  majority  requirement  of  corporate However, Boards  law  organ. as  a  the to  form  Nor  was  matter  functions company  9  of  a  the present  of  council i n many  formed pursuant before  the execution  conferred  there  Board  fact,  large  by  entering  organ,  f o r a Board  and into  who legal  Hence,  directors  (torishimariyaku) without  company,  and  are  officers  behalf.  the  there  corporations of  of the  Directors  c a r r y out the r e s o l u t i o n s o f the Board  corporation  a  necessary.  the business  can  meeting  as  to the a r t i c l e s  as a n e c e s s a r y  shareholder's  a  Directors  system  ors  the  not  (kansayaku) .  law which p r o v i d e s corporate  was  1950, t h e s u p e r v i s o r y  of  on a u d i t o r s  D i r e c t o r s and R e p r e s e n t a t i v e  Under  a  Nevertheless,  to oversee  were  -  directors^,  o f D i r e c t o r s were  incorporation.  2.  of  6  two  Direct-  a r e needed meetings  can  relations of  authority to directors  who  and  represent  categories  representative  of  on  of the  i t s  directors: represent (daihyo  torishimariyaku).  (a)  Directors  A  stock  company  must h a v e  at least  three  directors,-'--'-  -  and in  these directors Japan.  7  do  However,  -  n o t h a v e t o be a  company  Japanese  Japanese  may  require  directors  have  provision  i n the a r t i c l e s  of  incorporation.12  Directors  are  by  resolution  appointed  shareholder's directors  meeting.13  cannot  exceed  resign  from  his office  office  when  he  incompetent  relating from  to  office  show  removed term  becomes the  at  any  or  by  during  his  without from  However,  his office a the  a  justifiable company  the  director  may  is  to  adjudged  by  who  removed  a  special  has  expiration is  the  be  without the  damage  hold  provisions  may  reason  any  of  the  director  before  general  between  term  a  office  or  director  the  ceases  relationship  at a shareholder's meeting  cause.  ^  bankrupt  ^  that  a  of  and  i s governed  time  at  term  time  live  r e s i d e n c e by  years.14  any  mandates.15  from  recover  two  the d i r e c t o r  to  resolution  dies,  The  at  because  company and  nationality  or  need been  of  his  entitled  to  caused  by  his  removal.1^  If for  the  shareholder's meeting  the  wrongful  removal  of  a  has  director  a c t , or v i o l a t e d  a  law,  rejected who an  has  a  resolution committed  a  executive order  or  - 8  the  articles  from  incorporation,  office.  three of  of  Shareholders  percent  the  of  company  the  for  court  for  removal  after  the  date  meeting.17 i n case  is  instituted,  of  the  substitute  A  the as  still  have  six  the  resolution  court of  the  i f  shares  within  thirty  of of  the  such  and  (torishimariyaku  to  a  days  general  an  such  i t deems  upon  least  apply  director  order  at  issued  even b e f o r e  may,  removed  may  resolution  the  be  held  months  director,  the  injunction  action,  an  action  necessary, appoint  daikosha)  application  by  a a  by  any  director  has  interested.18  who  and  is and  vote  company.  for  a to  be  (bucho)  or  a  corporation  of  a  Board  representative  duty  to  manages  of  a  but the  not  who  is  not a  manager  rank have statutorily  in  delibera-  to  represent  company by  Directors.  simultaneously branch  participate  meetings,  director  high to  a  board  director  director  employees  not  the  at A  a member o f  rare  may  number o f  emergency, the  he who  last the  of  an  authority  tions  of  director  director  the  the  powers  provisional person  total  Pending  or  suspend  -  It a  i s not  acting at a l l  representative  chief  of  a  department  (shitencho).  authority  to  prescribed  Such  represent extent  due  the to  -  their  executive  directors.  (b)  position,  Commercial  Code  provides  t o be  represent  t h e company.20  A at  t h e number  elected  a board  tive the  the power  There  as  shall  be  at a  of Directors  majority procedures.  remove  or  statutory  to  limit  The view 22  Ministry and  remove h i m a t any  provide  representa-  that  by  a  resolution  meeting.  view  holds  The that  supervisory  a of  employs  resolution  or not the  directors, as  by  as t o w h e t h e r  general  assumes  them  may  appointed  This  representative  function.  director  of Directors  i s no  and t h e Board  i s n e g a t i v e . 21  to  a  i s appointed  o f i n c o r p o r a t i o n may  shareholders  Board  for  the Board  i s a controversy  directors  view  by  director  meeting  There  articles  status  of representative directors.  representative  time.  their  Directors  directors  on  not  1 9  Representative  The  9 -  the  basic Justice i t  majority since  functions  Board  the over  must  have  of  that  element adheres in  of  to  the  registration  -  When a or,  representative  by  virtue  expiration  well.  -  d i r e c t o r ceases  o f h i s removal  o f h i s term  resignation, as  10  of office  he c e a s e s  hand,  office  by t h e Board  status  as a r e p r e s e n t a t i v e  a  In  t h e Commercial  the  direct-  shareholders,  as a d i r e c t o r , o r h i s director  when he i s r e l e a s e d  o f D i r e c t o r s , he m e r e l y  from  loses h i s  d i r e c t o r , and c o n t i n u e s  to  director.23  officers  secretary provide  articles shall  there  as  or treasurer.  of  president  Code,  such  for a  articles  president  president,  and  incorporation.  i s usually  "supervise" as  tion.  The  usually cases,  chairman,  chairs  president  who  that  i s an  the  responsible  i n the articles  the meeting  "chairman"  director.  Some c o m p a n i e s  generally of  the Most  president and he i s f o r the  provide f o r  of  incorpora-  the former  president,  t h e Board.  honourary  h a s no p r a c t i c a l  i n the  companies,  o f t h e company  ultimately  (kaicho)  companies  officers  a representative  management o f t h e company. "chairman"  Japanese  other  provide  defining  vice-president,  I n most  management  being  i s no c o n c e p t  However,  of incorporation  regarded  a  the  t o be a r e p r e s e n t a t i v e  On t h e o t h e r  be  by  t o be a  title  powers,  In  some  for a  past  but i n  other  cases  the  those  of  chairman  A  the  may  possess  president.  In  powers  the  often  grants,  the t i t l e s  directors  of  directors  vice-president,  directors.  They  may  or  may  directors,  but  usually  responsible  for  divisions  corporate  management,  they of  executive  some  be  of  i t s  representative  are the  executive  respectively  company  such  engineering  products.  T h e s e d i v i s i o n s a r e s e t up b y t h e c o m p a n y ' s  internal  d i r e c t o r s have a u t h o r i t y both  corporate  corporation. corporation,  As a  business may  parties.24  affairs to  the  and  company's  to  and e x t r a - j u d i c i a l  s e t up  as  and  against  to  manage  represent  director  of the corporation, n o t be  to  authority  representative  do a l l j u d i c i a l  thereon  the  rules.  Representative  the  of  or,  divided  to  lines  as  divisions  internal  the  senior junior  marketing,  along  incorpora-  to not  the  of  and  (jomu-torishimariyaku)  cases,  to  director.  by t h e a r t i c l e s  (senmu-torishimariyaku)  superior  latter  i s usually a representative  company  tion,  chairman  the  represent is  acts  the  authorized relating  to  the  limitations  bona  fide  third  -  When a r e p r e s e n t a t i v e may as  make d e c i s i o n s are retained  shareholder's  power  may,  by  all  a  or  a a  of  the  of the  Board  of  merely  has  corporation  directors,  each  of  them  must be  has  or  more  of  them  However, the  to  Board  act  two may  the  exercise  corporation  of Directors,  j o i n t l y , 25  a  n  (  bind  j such  a  registered.26  Directors  Board  of  Directors  decisions  affairs  stock  of  matters  authority of  he  out the resolutions.  resolution part  or  such  h i s d i s c r e t i o n ; he  independently.  restriction  makes  meeting  to carry  h i s power,  However,  the exclusive  authority  his  The  within general  representative  Board  by h i m s e l f .  are not w i t h i n  where  -  director exercises  Directors  Even  3.  12  and  i s composed  of  a l ldirectors.  concerning the administration  supervises  the performance  of  of  each  It  corporate director's  duties.27  The  Board  of  Directors  matters  other  than  Article  260(2)  of  the the  may  entrust  matters Commercial  decisions  which Code  are 2 8  to  on  certain  designated a  by  particular  -  director  or a  president  with  meeting  of  director,  law  Board.  that  does  the  of  not  majority  of  vote  of  a majority  present majority  to  has  given  may  meeting.31 actually  not To  meet  resolution directors  Board  can  be  of the t o t a l  at  passed agree  present number  quorum. be  authority  meetings  of  by  minimum  increased  presides  least  a at  must  quorum  be and  of incorporation.30 proxy  the  place  time;32  with  of the  but not decreas-  the  them  at  of directors  by  and  i s invalid,33  the proposition.  a  incorporation.  business,  by  to  meetings.29  transact same  any  at the meeting;  This  represented  by  or the president;  adopted  of the a r t i c l e s  be  implicitly  or the president  articles  v o t e r e q u i r e m e n t may  director  day-to-day-  called  this  the  a  be  i s to chair  the d i r e c t o r s  by t h e p r o v i s i o n s  may  the chairman  who  the  matters.  of  constitute  the  has power t o c a l l  specify  the  out  Directors  usually  provisions  Resolutions  ed  on such  director  In p r a c t i c e ,  i s r e g a r d e d as b e i n g  Customarily, the chairman  under  least  carries  the Board  director,  so, only  The  the Board  unless  particular if  and  decisions  -  of directors.  o f t h e company; h e  entrusted  A  subcommittee  determines  business  13  at  a  directors  even  A  Board must  otherwise  a  i f a l l of the  T h e r e f o r e , where t h e  -  presence quorum,  of  a  such  meeting.  a  resolution  nor  they  and  to  director  d i r e c t o r may  Directors  Statutory  -  nonresident  certain can  14  be  express  who  can  a  the  to  Japan  special  vote  on  but  a  for  a the  in  a  resolution  3 4  quorum. ^ 3  attend they  for  interest  that  of  r i g h t to  opinions,  required  come  for purposes  have  their  to  have  neither  counted  auditors  have  is  Board  have  no  meetings right  to  recorded  in  vote. ^ 3  Business the  transacted  minutes  and  auditors  Executive  Committee  is  legal from  said  that  structure reality  corporate  present.  the set  and  organ  Board out  of  (a)  impossible  especially  the  of  to  of  not  a  big  be  the  directors  Directors Commercial  carry  following  to  by  must  and  3 7  business  for  is  meetings  i n the  does  supervision  It  Board  subscribed  statutory  It  at  out  envisaged Code  its  performance reasons:  is  in  divorced  function and  the  as  a  business  3 8  expect  the  Board  company,  to  fulfill  of  Directors,  its  function  -  promptly. Board  In  busy  timely  (b)  (bucho),  with  There  is  might  leak  the  a  because of  branch  a  business  have  number  are  of  employee of  a  (shitencho)  or  result, to  may  chiefs  managers As  the  them  simultaneously  daily  risk  that  the  they  have  company's  out  because  of  of  minutes  of  and  principal  most  companies  are  too  frequent  and  meetings;  taking  meetings  big  month  (kojocho).  their  board  a  and  are  managers  most  once  large  who  department factory  only  is  directors  -  practice,  meetings  directors  15  for  office  their and  the  legal  the  each  and  secrets  requirements  proceedings  lodgment at  business  of  Board  disclosure  branch  office  for  at  the  of  the  company;39  (c)  There  inside  the  directors critical  such  executive in  three  are  and  Under  are  order  or  functions  of  directors ^ 4  a n <  3  most  As  a  result,  the  ranking  of  as  a  barrier  to  substantial  discussion.  committees, cope  ranks  directors.41  circumstances,  to  four  with  large  separate the  companies from  the  inconvenience  have  Board  come of  to  have  Directors,  associated with  the  -  Board  of  called after  The  Directors.  jomukai I960.  ratio  increases of 90%  with  corporations the size Even  exchanges,  o r more, have  and  having  are  commonly  were  established  executive  committees  a l lof with  i n  and t h e number  old statistics  a  one o r more  a r e found  directors,  and most  of the corporation  rather  corporations,  committees  iinkai,  committees  4 2  of  securities yen  Executive  or keiei  directors. of  16 -  which  show  are  stated  listed  capital  executive  about  on  of 5  with  having  21  the  billion  committees.  i n 84.7% o f corporations a l lcorporations  that  Such  11 t o 20 or  more  directors. ^ 4  The is  m o s t common n u m b e r o f m e m b e r s four  twelve.  t o seven. 4 4  consist  4  of  i s eight to  Approximately 80% o f t h e executive  committees  Many  i e . there  of the executive  Although  legally  of  organization  practice  an e x e c u t i v e than  Board  i s a of  committees  non-director  consist of a l l  some o t h e r  committee  the  t h e power o f e x e c u t i v e  a r e no  committees  the representative directors plus  the  committee  T h e s e c o n d m o s t common r a n g e  of directors only,  members. ^  o f an e x e c u t i v e  members. ^ 4  lower  branch  Directors,  i n  i s comprehensive  - 17  and  a substantial  -  number of c o r p o r a t i o n s leave the  decision  making to such committees.  The an  r e s u l t s of the  i n v e s t i g a t i o n as to whether d e c i s i o n s  e x e c u t i v e committee on  Board of D i r e c t o r s the  Board  of  corporations, rejected the  or  B.  1.  DUTY OF  shows  that,  altered  an  by  the  Board.  alterations, This  4 7  In  etc.  indicates  of  the  the  or a l t e r e d  in  executive committee d e c i s i o n s  have been r a r e . quite  submitted to  have been passed, r e j e c t e d  Directors  rejections,  play  proposals l a t e r  by  about  60%  by of  have never been remaining  40%,  committee  decisions  executive  committes  that  important r o l e at p r e s e n t .  CARE OF  A GOOD MANAGER  Outline  The  relationship  governed As  a  of  the  by  the  result,  whether  between provisions  directors  company w i t h they  directors. ^ 4  a  are The  the  have  company of  law  a duty  standard  of  representative care  required  and  its  relating to  to  conduct  care of  is  mandates. the  4 8  business  a good manager,  directors  i s of  directors  a higher  or  nominal  degree  than  - 18 -  that  with  which  b u s i n e s s . 50  The  degree of care position  or  particular  he  is  expected  standard  of  care  t h a t a reasonably  occupation  would  circumstances  to of  execute a  his  director  own  i s that  competent manager i n h i s  be  required to  i n which a d e c i s i o n  take  in  the  i s made or an  a c t i o n i s taken.  D i r e c t o r s who  have done any  a c t which v i o l a t e s  care of a good manager are j o i n t l y damages f o r l o s s e s caused  A d i r e c t o r who liable  to  company. third  has  the  Code does p r o v i d e directors  to  a  is  party  D i r e c t o r s are a l s o  a  party  a good manager.52  liability  in t o r t  identical.54  5 3  to  the  l e g a l o b l i g a t i o n to  statutory l i a b i l i t y  i n order jointly  f o r damage caused  mandatory  is  However, the Commercial  to p r o t e c t the  and  severally  intentionally  negligence i n the course of performing of  a  no s p e c i a l  for s u i generis  party. third  he  on a mandate.  third  liable in  act which v i o l a t e s h i s duty  since  But a d i r e c t o r has  p a r t i e s based  severally  of  to the company.51  done any  company  and  the duty  This l i a b i l i t y  third  liable  or by  of  to  gross  t h e i r d u t i e s of care  i s incompatible with a  s i n c e the e s s e n t i a l  c o n d i t i o n s are  not  -  A  "third  from  party"  i n this  context  itself,  and  t h e company  creditors stock  Under  but  also  Japanese  laws,  persons  includes  potential  condition  "foreseeability  of  negligence;  of  liability  Therefore,  i f a  plaintiff  injury  and  relationship  apart  not  only  investors  party,  and  status  indirect  liability  damages,  director  or  i s  i e . damages  suffered directors'  by  third  but also parties  misconduct  corporation.56  owes  caused  without  a  or  a  range special  the duty duty  relation  of  t o any  to  third the  damage.  applicable by  not  only  the  for  financial  about by t h e d i r e c t o r s '  for direct as  i s no  o r any other  special  a  plaintiffs".  status  of a tort  of the corporation brought  maladministration,  there  not abridge  i s , i f he s u f f e r s f o r e s e e a b l e  statutory  distress  his  is  the foreseeable  his  does  a  victim  damage"  "foreseeable  loss,  result,  creditor,  whatever  director  a  of  however,  i s inside  a defendant  As  shareholder,  to  suffers  with  defendant.  This  a l l  therefore  shareholders,  limitation  a  means  exchangers.55  necessary  of  19 -  damages,  direct any  i e . those  result  damage  of to  the the  - 20 -  Furthermore, the Board, are  i s based  those d i r e c t o r s who  deemed  liable  i f the conduct  to  have  joined  upon a r e s o l u t i o n  have voted  the  f o r the p r o p o s a l  conduct, 57  and  meeting  the  act.  Directors  who  attended  are  thus  j o i n t l y and s e v e r a l l y with the d i r e c t o r who  committed  of  actually  the  Board  and d i d not r e c o r d t h e i r d i s s e n t i n the minutes  presumed  to  liabilities  have  assented  of d i r e c t o r s  to  to the  the  The  proposal.58  company  cannot  be  are  waived  except by the unanimous consent of a l l the shareholders.59  The  duty  of  care  of  a  good  manager  can  be  conveniently  examined under two heads:  (1)  the duty of care with respect to the execution of c o r p o r a t e business and business d e c i s i o n s ;  (2)  and  the duty of care with r e s p e c t to checking on the conduct of corporate b u s i n e s s ;  D i r e c t o r s perform Board  of  their  Directors  administration  of  d u t i e s by a c t i n g  which  has  affairs  of  a  duty  the  as a member of a to  determine  corporation  s u p e r v i s e the execution of each d i r e c t o r ' s  duties.  and  the to  -  2.  -  21  Duty of Care With Respect t o the Conduct of C o r p o r a t e B u s i n e s s and I m p l e m e n t a t i o n o f B u s i n e s s D e c i s i o n s  Directors  have  company w i t h have  seen,  that  with  a  the  the  which The  according  to the  and  so-called  and  the  The  purpose  of  a  of  is  forecast  he  i n an  of  of  standard  nature  of  or  authority  courts  should  in  substituting  foresight. directors implemented them wrong  be  when  they  them and  of  care  the  assigned  that  of  to  to earn can  carry  on  f o r the  make a n  accurate  conscious  the  hindsight  should  be  have  made even  of  though the  the  and  It  perfect  Therefore,  not  business  damage t o  managers  company.  inadequacy  the  careful  banks  business  possible for  differ  speculative  environment. of  own  director.  a  profits  economic  caused  risks.  we  than  (eg.  One  take  As  would  scale  to  the  his  must  faithfully,  have  execute  corporate purpose  is  of  degree  The  their  Judges  higher  i s t o make a p r o f i t .  duties  future  a to  businesses),  directors  the  the  business  a good manager.  of  degree  attempt  the  is  of  expected  concern  that  care  the  is  primary  unusual  of  a company  business  conduct  required  venture  position  directors'  to  standard care  business.  business  duty  directors' to  condemn  decisions  events  have  company.  and  proved  -  There  are  some  recent  22  -  precedents  which  illustrate  this  doctrine:  (a)  In  the  judgment  20,  196760 i  his  company  discount held  of  of  the  Osaka  District  case where a d i r e c t o r  na  by  selling  nearly  10%  their on  the  steel  Court caused  on  April  losses  materials  purchase  price,  to  at i t  a was  that:  " I t i s not u n u s u a l f o r the managers of a b u s i n e s s c o n c e r n t o make b u s i n e s s d e c i s i o n s b a s e d on l o n g - r a n g e j u d g m e n t and t o r e s i g n themselves to suffering a temporary loss. We should permit them to take such r e a s o n a b l e r i s k s t o some e x t e n t . " 6 1  (b)  In the 1975,  judgment of the Tokyo High i t was  6 2  held  Court  on J a n u a r y  29,  that:  "We s h o u l d s u f f i c i e n t l y c o n s i d e r t h a t we may call a director to account based on the r e s u l t of h i s conduct under the p r e t e x t o f loose-spending management, however, in so d o i n g we may h a r m t h e d i r e c t o r ' s discretion or elasticity of business management by condemning h i m e a s i l y and e x t e n s i v e l y . "  (c)  This  doctrine  Tokyo  District  director his  was  borrowed  company's  well-stated Court  of  money on  f i n a n c e s were  i n the  March  1,  behalf of tight.  Judgment 1978  6 3  of  the  where  h i s company  a  when  -  23 -  B u s i n e s s management i s commonly a s s o c i a t e d w i t h some r i s k y a c t i v i t i e s . Therefore, i t is n o t always appropriate t o place legal responsibility f o r f a i l u r e i nthe director's d u t y t o t h e c o m p a n y o n a d i r e c t o r who m e r e l y c a r r i e d o u t a t r a n s a c t i o n , w h i c h was r i s k y to a naturally anticipatable extent as a matter o f business, on behalf of h i s company, b a s e d o n h i s e x p e r i e n c e , insight a n d r e a s o n a b l e e s t i m a t e a s a b u s i n e s s manager, even though events have u n f o r t u n a t e l y proved h i mwrong.  Courts  should  directors' when be  wrong,  ment lower  since  from  such  an  this  courts' precedents  Supreme  t o t h e case Court.64  director's  company  (rensa-tosan),  approach  linked  point  should  this  became  the directors  would  a n d make  v . Unknown  case  swept  where  up i n a  t o i t s customer's  directors  business  o f view,  easily  have proved t o make  be u p h e l d .  o f Unknown In  hindsight for the  decisions later  management  From  their  a n d t o condemn  business  business  passive.  called  held  t o substitute  foresight  the directors'  shrink  be  be wary  I  manage-  think,  these  A t t e n t i o n must decided the  by t h e  defendant  chain-bankruptcy  bankruptcy,  i twas  that:  It i s illegal65 that the o r i g i n a l decision condemned the r e p r e s e n t a t i v e d i r e c t o r s i n c e i t acknowledged the representative director's t r a n s a c t i o n was l o o s e - s p e n d i n g lending on the b a s i s o f o n l y one f a c t , namely t h a t when the customer company went bankrupt, the amount of the l o a n from h i s company t o the customer company was more than the amount o f c o n s t r u c t i o n work orders h e l d by the customer company.  -  The J u d g e s been  suggested  based  company's become  company  whether  It  company  whether  that  Japanese judgement  to  unnecessarily  8  business  manager. who  not  the  and  of  the  repayment  to  his  lent how  Dr.  company  provides  that  of  an  erred  a  basis  director's lending.  almost  insisted  American  careful  standard  after  become  has  activities  However,  has c l e a r l y  the be  has  the  67  Osakadani  should  to the  money  loose-spending  cases  apply  director,  money  much  customer  precedents.^6  to say, the general i s  director  line  director's  director  or  has  when  director  company was  should  rule"**  customer  or  not the representative  them,  courts  the  have  h i s company  The c o n s i d e r a t i o n  or  this  of  time,  lent  as j u d i c i a l  addition  Needless  director  to  should  to the representative  that  t o the customer  established  In  after  when  director,  impossibility  and so f o r t h .  seems  of  repayment  the representative  deciding  lending  of  foreseeable  representative  for  the o r i g i n a l decision  to the representative  become  time  -  consideration  company's  customer  that  a  impossibility  known  customer  and  on  that  24  not  are of care  omniscient proper  in a  judgement  "business to  decide  negligent.69 required  and  i t i s  that  to  of a  omnipotent condemn  with  a  respect  -  to  a  business  business  decision  he managed  It  i s a breach  directors'  i t s affairs  time  insight  reasonable  the  skill  two  adopt  conduct.  on  26, 1 9 7 6 ,  October  the  duty  of  promissory before  promissory company. June who  3, did  to  a  drawing  where  i t  note Again,  1976,  state  step the  ordinary  in  i t was  7 3  neither  since was  would  or  could  i n t h e Judgment i t was  held  research  that on  manager  i t was  are  no  the  expect  of a  bankrupt circum-  that  the  the bankrupt  Supreme  a representative business  Court  t o draw  special  by  a  a breach  become  settled  the  with  which  director  to  of  ability  for evaluating  had  were  be  of  at when  o f t h e Supreme  that  reasonable  affairs  decisions  that  there  obviously  7  criteria  company  even  position. ^  Court  held  a  i f the  question  business  i n a like  Supreme  of  standard  In t h e Judgment 7 2  as  0  of the representative  note  such  stances  care  7  the  of  appropriate  director's  him  judgement i s  the  and prudence  are  that  took  o f an  of  o f a good manager  of  criteria  required  following  examples  of care  of h i s business  director  against  required  damage t o t h e company,  i n consideration  the  measured  The  policy  faithfully.  i n the duty  exercise  unreasonable  and  or  manager and has c a u s e d  if  the  25 -  Court  on  director  affairs  and  -  standing  of  the  although  he  knew  prepare  his  bankruptcy was  of  company and  -  which  was  customer's for  the  in  fact  financial  eventuality  d e s u l t o r i l y continued  short  of  funds,  difficulties, of  with  the  the  nor  customer's transaction,  liable.  Needless by  customer  26  to  keeping  thereby  say, the  cause  Representative without  a  representative  company's damage  reasonable  negligence.  In  the  November 28,  1979,  financial  to  directors  the who  begin  funding  i t was  held  a  plan the  who  difficulties  creditors  Judgment of 7 5  directors  are  raise secret  are  and  negligent.  business also  funds  7 4  enterprise liable  Tokyo D i s t r i c t  Court  that:  "When t h e c o m p a n y i n t e n d s t o s e t a b o u t a n d carry out a large scale enterprise, eg. constructing the golf links in question, which required s p e c i a l know-how and a l a r g e amount o f money and had an effect on many creditors' interests, before they begin the e n t e r p r i s e , the directors o f t h e company s h o u l d f i r s t c a r r y out extensive research on whether the new enterprise will succeed or fail and also should establish an o b j e c t i v e and reasonable plan that endorses the funds r a i s e d f o r the c o n s t r u c t i o n and operation o f t h e i r new enterprise. However the defendant representative directors did not do anything about t h i s in this case. They s w a l l o w e d the explanation of the local persons concerned regarding the purchase of the s i t e f o r the golf links, and the construction fund. Then, they began to c o n s t r u c t the g o l f l i n k s simply relying on the expectation of enrollment securities deposited by candidates f o r membership in the  in on  -  27  -  completed links. As a result, they ended up abandoning t h e i r e n t e r p r i s e s i n c e they c o u l d not purchase the s i t e f o r the g o l f l i n k s . Therefore, we m u s t c o n c l u d e t h a t t h e d e f e n d a n t representat i v e d i r e c t o r s committed gross negligence i n the execution of their duty as representative directors." The D u t y o f Observation  (a)  Care With Respect to the of Corporate Business A c t i v i t i e s  The R e p r e s e n t a t i v e D i r e c t o r s ' ( K a n s h i Gimu)"  (1)  Basis  f o r the  Japanese  Duty of  courts who  directors'  business  illegal  activities  representative directors  from  activities  by  called  the  Although try  to  other  held  not  that  conduct are  checking of  in  on  the  order  to  duty  to  in on  business  their  absolute  liability  directors  activities.  The  from  e x i s t e n c e of  prevent  other  business  (kanshi owe  from  they  i f they  carrying  This  performance  observation  activities,  prevent  liable. ^  illegal  directors  other  7  representative directors other  representative  themselves  engaging  duty  Observation  check  directors'  prevent  illegal with  do  of  Observation  have  directors  Duty  on the  a  is  gimu). duty  to  engaging  in  are  not  visited  fail  to  prevent  illegal duty  business to  try  to  - 28 -  prevent  other  business  activities,  possibility illegal  However,  of  the  i n illegal  existence  the other are  of the  directors'  the  necessary  l o t o f argument of  directors. duty  characteristic  observation  Scholars  of observation  of the  have  debated  i s grounded  membership  o r on t h e i n t e r n a l  corporation  about  on  position of the representative  o r on t h e i r  Directors, a  a  f o r the duty  their  director,  the  activities  has been  representative whether  engaging  liability.  there  basis  and  of discovering  business  conditions  the  d i r e c t o r s from  with  o f t h e Board  chain  respect  of  o f command i n to  business  activities.  The is the of  a t t i t u d e o f t h e Supreme unclear.  representative  Kozai  h e was b u s y w i t h  that:  attorney,  the  i n this  regard  v. M u t o  where  left  7 7  the a f f a i r s  representative director  h i s other  a p r e f e c t u r a l assembly,  patent  K.K.  d i r e c t o r Muto  a company t o t h e o t h e r  since of  In Senbi  Court  a  Supreme  work  a s a member  v e t e r i n a r i a n and a Court  held  only  -  29  -  "Representative d i r e c t o r Muto f a i l e d t o perform h i s duty through mala f i d e s , o r by g r o s s n e g l i g e n c e because although a r e p r e s e n t a t i v e d i r e c t o r has a duty t o give attention generally to the a f f a i r s o f h i s company, Mr. Muto e n t i r e l y left t h e a f f a i r s o f h i s company t o t h e o t h e r r e p r e s e n t a t i v e d i r e c t o r s and o v e r l o o k e d the other representative directors' unfair p r a c t i c e s and d i s o b e d i e n c e of his duty."  In  my  so  that  duty  opinion,  this  i t does  of observation  Under  the  directors  provide  any  grounds  acts  representative and  to  position  tive  on  authority ordinary  on  '  ^  them  in  based  directors  to  relation on  their  itself.  to give to  s  comprehensive  director  i t i s improper  of  placed  of  comprehensive  such  activities  of representative  activities  and  to the business  representation.79  of observation  directors  a l l judicial  a u t h o r i t i e s , i t i s improper  collegues'  addition,  representative  directors'  d i r e c t o r s have  a duty  their  t o do  for a  directors.  i s no r e s t r i c t i o n  joint  unrestricted  impose  Code,  relating  There  without  interpreted  of representative  representative  rights  In  be  are authorized  company.78  the  may  Commercial  extra-judicial the  not  decision  representa-  observe who  the assume  -  executive  in  the  directors.  On  Board  supervise  of  because  directors  organization the  to  contrary,  Directors  which  the  execution  of  observation  characteristic  has  a  duty of  grounded  the  of to the  Therefore,  be  of  not  members  duties  81  cannot  position  are  the  directors.80  are  representative  they  of  representative duty  -  positions  inferior  the  30  the  on  the  representative  director.82  In  contrast,  of  observation  director  as  a  Directors, execution Board  to  director activities  Moreover, in to  the  i t shall  results  from  duty  each  properly must of  understood  constituent  whose of  be  the  is  exercise the  every  p o s i t i o n of  each  to  Board  other  right  to  check  the  o r  every on  the  director.  conduct  of  superior  positions  have  authority  the  directors  position.  In  most  three  four  of  directors  ranks  p  of the  function,  inferior or  the  supervise  this  s t r u c t u r e may  the  duty  member o f  directors occupying  supervise  the  director's duties.83  have  corporate  that  Japanese are  in  an  companies, set  up  by  -  the  Articles  which  The  of Incorporation  divide  By-Laws  up  the  of  director  the  of  most  head  division. director  responsible  next  division.  Above  directors  (senmu  units and  rank  or  him  are  In  should  such  be  holding  of  an  office  interpreted  superior  positions  the a c t i v i t i e s  positions  i n the performance  the basis  control  and  However,  this  the  have  a  the  of larger (shacho) at the the law directors  a  of directors  of the general  duty  to  in inferior  of their  functions,  business authority of  supervision duty  and  (kaicho)  that  or  managing  organization,  supervise  on  senior  the president  so  a  i s usually  i n charge  the board  of  managing  departments  the  shacho)  manager,  of  who  of  (hira  i n command  three  o f t h e company, w i t h  top.  director  i s that  the  level  torishimariyaku)  (fuku  the chairman  from  be a f a c t o r y  torishimariyaku),  f o r two  vice-presidents  come lowest  t h e second  The  of Directors.  companies  who m i g h t or  The (jomu  t h e Board  The  Rules  duties.  of the ordinary  torishimariyaku), department  by  employees.  i s that  o r t h e By-Law  directors'  are prepared  directors  ranks  31 -  i s not a  by  a  duty  superior. that  can  8 4  be  -  derived  from  director  itself  the  to  autonomous of  the  position  since  of  the  office.  control  8  i s intended  dealings  with  it  inherent  executive  observation  on  grounded  is  in  based  the  on  of  the  on  the  organization  office  of  representative  assist  the  company  It  does  supervisory as  directors  have  also  have  to  that  basis.  in i t s  carry  with  within  the  seen,  will  within  will  not  power  we  positions and  is  supervision  which  outsiders.  although  representative  hierarchy  to  representative  duty  duty  The  5  of  and  inferior  director  any  this  supervisory  company,  (2)  -  the  authority  superior  32  hold  the  observe  many senior  corporate the  duty  of  Duty of O b s e r v a t i o n on a M a t t e r W h i c h was not B r o u g h t up f o r D i s c u s s i o n a t B o a r d M e e t i n g s  Courts tive  have  broadly  acknowledged  d i r e c t o r s ' duty  of  to  another  director's  not  brought  up  This  applies  for  in question  an  ordinary  was  observation  representain  breach  of  duty  discussion  at  Board  whether  is  the  a  the  8  7  which  Scholars  was  meetings.  d i r e c t o r whose  representative  director.  relation  conduct  d i r e c t o r ^ or  also  8  approve  of  -  these is  precedents.  a contrast  the  grounds  However,  between t h e e x t e n s i v e  on m a t t e r s  discussion  at  Board  directors'  duty  tive  director  ordinary  were  a  director  higher  business  may  the other  scholars  also  director's only to the duty  i s stricter  a duty o f observation  audit  the business  Board  of  based  supervision  However,  the  representative opportunities  an  representative  a  certain to  Some  representative  because  based  he  owes  not  on t h e a u t h o r i t y  but also  observe  a  of  supervisory control  and  t o an i n f e r i o r . 8 9  although  director to  than  opportunities  authority  of a superior  firstly  matters.  w h i c h h e h a s a s a member o f  Directors, on  brief  directors' activities.88 that  up  representa-  to conduct  frequent  argue  duty  a  a  who h a s t h e a u t h o r i t y  observe  these  standard  because  more  the  of  representative  that  director  have  and  on  i t i s held  owes  not brought  f o r the  of observation  some d e c i s i o n s ,  there  discussion of  meetings  o f the grounds  that  d i r e c t o r s ' duty  which  discussion  In  i t seems  f o r the ordinary  observation for  33 -  i t  may  have  the  seems more  other  that  a  frequent  directors'  -  activities  than  part-time always  the other  higher the  the degree be  activity  of care,  to  relation  to  another  meetings.  the  because  a  superior of  cannot  as  control  a  based  member  duty  and  duty  duty  of  i s  i n duty  a  stricter  based  on t h e  supervision  of  a  i n a d d i t i o n t o the duty  the  Board  e x p l a i n why a r e p r e s e n t a t i v e  strict  a  t o owe  that  on t h e a u t h o r i t y o f of  why  of observation  argument  supervisory  t o an i n f e r i o r ,  observation  audit  a  of  of  matter  of  breach  a  and i t  be r e q u i r e d  duty  director's  authority  even  owes  but a  the question  representative owes  known  up f o r d i s c u s s i o n a t b o a r d  Thirdly,  he  director  of observation,  director's  w h i c h were n o t b r o u g h t  have  i s not a matter  d i r e c t o r should  p o s i t i v e and c e a s e l e s s  of the other  Secondly,  of observation  t h e answer  not  director i n  or should  this  of the duty  especially  i t does  known  representative  of a duty  representative a  had a c t u a l l y  a  standard  can't  general,  director's activity.  that  sphere  i n  director,  the representative  wrongful  supposing  of  that  himself  director's of  an o r d i n a r y  directors,  mean  question  34 -  i n the following  of  business  Directors,  d i r e c t o r owes  situations:  -  a)  A  35 -  representative  whose him of  office  organization  t o assume control  director  of  a  does  the general  corporation  not  authorize  business  and s u p e r v i s i o n  authority  i s fixed  with  the  duty.  b)  A representative in  c)  the organization  There or  i s a mutual  among  the  same  rank  The  duty  director  of  or  is liable.  of observation directors  positions  observation though  representative  of  duty  involved  between who  have  under  the  of the office.  even  control  i s not  of the o f f i c e  representative  organization  d)  d i r e c t o r who  and  i s  required  i s  under  he  director's  supervision  of  another  authority  i n the  a  or  organization  the office.  Therefore, correct  that  observation ordinary  I  am a  of  the opinion  representative  should  director's  generally duty  that  i t i s not  d i r e c t o r ' s duty be  stricter  of observation,  of  than or  an  that  -  a  36 -  representative  inevitably which  director  owes a d u t y  was  generally  of observation  not brought  up  and  on a  for discussion  matter  at  Board  meetings.  Although, tive to  as  supervise  the  above,  the  autonomous  observation position  a  representa-  supervising  i s no  from  the  directors.  adopt  of  holding  the  of  Board  of observation  of  which  a  representative  he  other  on  actually  place  a  has the a u t h o r i t y  supervision  Moreover,  as  duty  the  should  more  should  the  we  he  the  in  Consequently,  director  observe  based  representative  and  have  is  the  of  representative may  of  position  when  control  duty  duty  from  member  duty  responsibility only  to  constituent  there  the  p o s i t i o n s , which  i s derived  itself.  stricter  for  a  of  addition  which  derived  director  in  of  Directors,  director  execution  in inferior  organization,  is  discussed  d i r e c t o r i n a s u p e r i o r p o s i t i o n has the duty  directors on  was  over  other  we  should  not  call  to  account  only  because  frequent directors'  the c r i t e r i a  opportunities activities. of wilful  or  a  to We  gross  negligence director known  As  a  i n question  of the other  result,  matter at  the t e s t of whether  we  criteria  judgemental  was or  not  should  activity  whether  independent one  deciding  other  the  for discussion  just  either  have  activity.  i s n o t an  in  the  up  but  director  of  or  that  brought  factors  known  business  consider  liability,  representative have  should  meetings for  knew  representative  director's illegal  i n question  Board  either  the  of  whether  knew  or  directors'  the the  should illegal  or not.  Duty o f O b s e r v a t i o n of the Representative D i r e c t o r Who i s i n C h a r g e o f a S p e c i f i c P a r t o f C o r p o r a t e Management  Viewed  from  above,  i t would  been  an  division  the  basis  of  seem t h a t  organizational  directors  and t h e i l l e g a l  question  did  business  under  director factors  may  be  come  theory  among  the  under  in  division  of  charge  one  of the important whether  he  to the  activities  the a  has  representative  business  of  there  relating  the  f o r deciding  discussed  the fact that  decision  of the business  not  the  representative judgemental  either  knew  or  -  should  38  have known o f  business  activities.  defence  (koben).  In  Taiyo  Kogyo  K.K.  -  the  other  directors'  I t c a n n o t be  v.  Kurosawa, ^  an  u  illegal  independent  i t was  held  that:  "Even i f the a r e a o f a c t i v i t y under t h e defendant representative director's c h a r g e was ' b u s i n e s s ' ( e i g y o ) , he owed a duty of o b s e r v a t i o n over the business a c t i v i t i e s of the other r e p r e s e n t a t i v e director who was in charge of accounting ( k e i r i ) . T h i s i s b e c a u s e he owes a duty to pay attention to c o r p o r a t e b u s i n e s s g e n e r a l l y as he i s a p e r s o n who h a s t h e a u t h o r i t y t o e x e c u t e corporate business generally as a representative director. However, i n t h i s case the d i r e c t o r d i d not commit an a c t o f g r o s s n e g l i g e n c e b e c a u s e he did n o t know o f t h e i l l e g a l business a c t i v i t i e s of the other r e p r e s e n t a t i v e director who was in charge of accounting, and he had examined the accounting documents which did not reveal the unlawful appropriation. Those documents were s u b m i t t e d by the representative director who was in charge of accounting at the monthly management m e e t i n g s whose c o n s t i t u e n t members w e r e a l l d i r e c t o r s . "  Then t h e of  the  court held  defendant  negligent.  that  the  corporate  management  representative director  was  not  -  Although the  39  I cannot  court,  I  agree with  can  representative  -  agree  part  duty  observation  of  business  of  of  to by  another  reasons  i t s  who  corporate  activities  charge  with  director  specific  the  is  result  in  another  that  charge  management  protect  given  does  against  part  of  a  of  a  owe  a  illegal  d i r e c t o r who  specific  by  is in  corporate  management.  In  my  view,  liable  i f he  other's of  a  representative knew  misconduct.  divided  ought  Similarly,  observation  for  suggests  that  have acted  the in  without  the  most  Background.  of  the  even  he  the  has  spelt  Kogyo cases  know  know o f i f he  a  out  case, will  the nor  other's duty in  that be  be  of the  case  found  to  negligence.  Duty of O b s e r v a t i o n of Nominal Representative  a)  neither  reasons  Taiyo  known  be  i n most s i t u a t i o n s  should  misconduct.  in  have  should  responsibility,  director will  a p o s i t i o n w h e r e he  decision  to  However,  management  representative in  or  director  the Director  According  to  the  material  -  supplied total of  40  by  -  the  number  Ministry  1982  1,509,367  was  were were  tions.  However,  stock the  corporations Tokyo  1,400. with  a  Stock  capital  than  those  80  96  of  Therefore,  Cdn.  (heisa  stock sole  tendency  especially "hojin  into  nari"  corporations  $50,000.00)  account  for  a l l companies,  and  of  be  has  than  50 M i l l i o n y e n account f o r  corporations.  said and/or  most  closely  held  The  increased Most  of  stock  i n recent incorporate  number  of  remarkably these  years.  small from This  enterprises,  corporations,  (the incorporation  9 3  that  have been transformed  to  on  stock  gaisha).  proprietorships  recent  stock  yen  I I .  corporations  the  Million  small  corporations  of  10  may  War  their  $250,000.00)  corporations  World  number  approximately  a l l Japanese  i t  corpora-  i s  than  at less  are  since  list  less  corporations  tiny  which  percent  of  and  Exchange  capitalized  percent  corporations  total  Cdn.  (approximately  which  liability  that  as  of  the  I t i s said  9 2  (approximately more  limited  the  i n Japan  2,901,247,  stock  1,123,532 1  Justice,  of the corporations  October,  9  of  is called  movement).  9 4  -  It  is  41  easy  because  the  capital  is  -  to  form  minimum only  $ 1,750.00).95  are  required.  At But  because  requirement  is  routine  of  the  documents  for  conformity  The  result  of  survey  the  stock  using the  dominant  stock  This  still  general  as  However, tions  i t i s not have  representative to  needed  directors  use  only  review  legal  the  forms;  efficacy.  motives  form  shows  expectation  will  have  i s because stock  the  for that  that  a  business public  corporations  at in  large enterprises.  to  expected  of  i s an  regards  promoters  for business  corporation  large  with  corporation  motive  advantages.96  are  officials  them  a  (approximately  this of  check  stated  seven  registry  not  yen  for  least  The  do  corporation  requirement  nominees.  they  stock  350,000  Cdn.  meaningless  a  do to  unusual  nominal  such  directors,  directors, any  for  who  corporaincluding are  s u b s t a n t i a l work.  make  up  required  by  the the  minimum  not They  number  Commercial  of  Code  -  which  specifies  have  at  there  -  42  that  least  are  a stock  three  lots  directors.  of  i s t h e husband,  the  and  their  senior  eldest  unusual  corporations  simply  to  directors'  social  confidence  gain  business  i t  social  not  nominal  the and  i s  is  t o have  utilize  and  whose  director  Moreover,  directors  to  Indeed,  9 7  vice-president i s  managing  son.  f o r such  must  corporations  president wife  corporation  nominal  reputation  credit  f o r the  company.  Of  course  hand  the individual  and  other  the  are  Therefore,  business  in  law  although  transaction  with  place h i s trust is  not  orations,  with which  personal  directors.  separate  a p e r s o n who stock  these are  while  on  carries  corporation  tiny  to  In general,  should  carry  stock  similar  and  on a  property, i t  wealth  the property  on  corp-  to  placing their  reputation  the  personalities.  f o r businessmen  proprietorships, the  corporation  i n the corporate  unusual  transactions  a  d i r e c t o r s on t h e one  sole  trust i n of  the  founda-  - 43 -  tion and  of these i n fact  such  tiny  than  However,  of  such has  i n limited  course  not  personal  to say  guarantees  and  when  loss  property  have  liability  come  Article  Code.99  only  liability  of  i n charge  of  directors  This  the l i a b i l i t y  directors.  In  article  cannot  corporate  of the  covers  not  representative  business  management  o f nominal  representa-  such a  situations,  have  nominal  representative directors  Conditions  corpora-  266-3(1)  the  be  the directors  courts  Subjective  displayed  can  who  the  pursue  Commercial the  prestige  the  those  from  to  under  that  i n Japan  a l lp a r t i e s  their  tive  as  to  liability.  recover  also  act  party  companies  insolvent  but  with  It i s fair  become  for  i n contracts  interested i n the business  involved  tion  weak  to  incorporating small  more  i s very  f o r the other  directors  g u a r a n t o r s . 98  given  b)  i t i s common  the  people are  corporations  corporations  require legal  tiny  tendency  to  the hold  liable.  of Liability.  Nominal  -  -  44  representative above  as  expected to  damage  shareholders  the  not  they  basic  issue  relating  to  266-3(1)  is  subjective  relates  to  a  party the or  to discharge intention  the  violation  simply  intention  grounds  under  gross  Article  requires  negligence  his director's  of  for  representative  article  or  to  Therefore,  the  third  the  caused  is  rights.  nominal  intention  the  any  they  in  has  It  to  not  result,  that  the  whether  failure whether  of  are  participate  have  party's  director  a  party.  third  liability  As  activity  third  that  the  directly  business a  or  duty.  a  the  his  directors  any  do  fanciful  the  described  by  to  violate  been who  discharge  illegal  have  representative directors  normally  or  directors  gross the  a in  duty,  negligence  third  party's  rights.  The Kozai tive  leading K.K.  v.  director  company since  case  he  to  this  Muto^Ol  where  M u t o , who  left  the  was  in  other  busy  regard the the  is  representaaffairs  representative  with  his  other  Senbi  of  a  director  works,  was  -  sued  by  although drew  and  a  45  possessor the  Supreme  Court  dishonoured  the  bill  consent.  In  declared  that  1  266-3(1)  w e n t on  a  representative  dishonoured Muto s  and  of  other  without  Article  -  in  this the  director question case,  the  purpose  of  i s to protect t h i r d  to hold  parties,  that:  "The above [principle] is not i n c o n s i s t e n t with the theory that i f a d i r e c t o r who i n the course of the execution of the undertaking violates intentionally or neglig e n t l y the r i g h t of a t h i r d p a r t y , he i s b o u n d t o make compensation for damage arising therefrom in compliance with the general provisions relating to unlawful acts. 1  0  bill,  2  However, a third party who has s u f f e r e d damage f r o m t h e d i r e c t o r ' s f a i l u r e to discharge h i s duty can recover h i s l o s s from t h a t d i r e c t o r on t h e b a s i s o f t h e p r o v i s i o n s o f a r t i c l e o f 266-3 o f t h e C o m m e r c i a l Code and the p l a i n t i f f need only assert and prove the director's intention or gross negligence in relation to his breach of his duty. The third p a r t y does not have to assert and prove the director's intention or gross negligence in relation to the v i o l a t i o n of h i s r i g h t s . Moreover, t h e r e i s no n e e d t o l i m i t t h e t h i r d party's r i g h t of compensation for damages in compliance with the provision of article 266-3 t o a c a s e where t h e company i t s e l f bears  -  46  -  the r e s p o n s i b i l i t y to compensate f o r l o s s to the t h i r d party under a r t i c l e 44 o f t h e C i v i l C o d e , on the premise t h a t the director had an i n t e n t i o n , o r was negligent in the v i o l a t i o n of the t h i r d p a r t y ' s right." 1 0 3  Then,  the  Supreme  representative  Subsequent lower of  Limitation  of  the  designed  to  Duty of  266-3  protect  pre-requisites causal  to  1 0  ^  decisions follow  the  and  1 0 4  approach  d a m a g e ; 106  a  n  (  j ^he  intentional  or  vention  a  of are  representative reasonable  Observation  of  the  third  relationship  activity  a  nominal  liable.  and need  grossly law  or  very  between  the  prove  duty  is  are  two  the  need  director's party's  the  director's  act  in  charter.  important  Code  third  negligent the  there  liability:  the to  director's extent.  Commercial  parties,  director's  business  factors  the  decision.  Section  a  held  Court  decisions  Although  for  director  Supreme  court  this  Court  contra-  Both  these  in  limiting  of  observation  the to  - 47 -  What  i s the necessary  Goyo  Shiko  held  that:  K.K.  v.  causal  Fujiwara  relationship? et  a l . ,  1  0  7  In  i t was  "the pre-requisite to a claim for i n d i r e c t damages^O^ i a causal relat i o n s h i p between the d i r e c t o r ' s breach of duty, bankruptcy of the corporation and the third party's damage. In a d d i t i o n t o t h i s , when t h e r e p r e s e n t a t i v e d i r e c t o r does n o t p a r t i c i p a t e i n corporate management but leaves i t entirely to another representative director, the pre-requisite i s a causal r e l a t i o n s h i p between an i n t e n t i o n a l o r grossly negligent failure i n the duty o f t h e r e p r e s e n t a t i v e d i r e c t o r who i s l e f t i n c h a r g e o f c o r p o r a t e management, and the bankruptcy of the corporation and the third party's damage. ... However, t h e b a n k r u p t c y o f t h e c o r p o r a t i o n i n t h i s case i s a chain-bankruptcy (rensa-tosan) linked to i t s main customer's bankruptcy. ... I t i s n o t e n o u g h t o a c k n o w l e d g e t h a t t h e r e was a n intentional or grossly negligent f a i l u r e by t h e t r u s t e d representative director in not discontinuing the t r a n s a c t i o n s w i t h t h e main customer i n i t s e a r l y stages ... A s a r e s u l t , t h e plaintiff corporation cannot claim damages from the defendant because there i s not a causal relationship between t h e bankruptcy o f the corporation and any v i o l a t i o n of duty of observation of the defendant s  representative d i r e c t o r who left corporate management entirely to other representative d i r e c t o r . "  In  Maruyoshi  nominal  Kozai  K.K.  representative  v.  director  Sato of  1 0 9  a  the the  where  a  bankrupt  -  company could  was  sued  not  company,  48 -  f o r damages  collect  bills  i t was h e l d  by  a  from  customer  who  the . bankrupt  that:  "The r e p r e s e n t a t i v e d i r e c t o r who was left entirely in charge of the corporate management and a c t u a l l y h a d t a k e n c h a r g e o f t h e management i s n o t liable f o r damages to a third party since there was no intentional or grossly negligent a c t i n h i s business activity. The application of the principle of natural reason (jori)HQ i n d i c a t e s t h a t i t c a n n e v e r be accepted that the responsibility f o r damages c a u s e d b y t h e t r a n s a c t i o n c a n be p l a c e d on the other representative director who did not participate in the transaction."  The  Judges  then  relationship third the  party's  of  damages  i s  attitude  and  quite  the  who  entirely  of  between  the breach  the  of duty  had to  left the  a  of the  other  directors.  acceptable  toward  to  a  cautious  the recognition of the  existence  a r e l a t i o n s h i p o f adequate  third  existence  causation  director  management  representative  of  adequate  representative  corporate  It  denied  party's  damages  assume  causation and  a  between  a  director's  - 49 -  intentional However,  or grossly negligent  I have  construction Sato.  I  some d o u b t s  adopted  think  liability  of a  corporate  i t improper  not  of natural  of  the  liable.  there courts  court  to  conditions  the  have  observation.  representative management only  short  of  whether  the  directors  or  director  entirely  director funds,  to  who  was  knew  he  could  left  i s not  v.  liable,  Sato,  that  the  party's normal  director  entirely  has  I f  theory  third  i f the left  to  who other  h i s duty defendant corporate  directors  the customer  have  in  i s himself  not under  the other  who  the  the basis  had d i s c h a r g e d  Therefore,  to  causation K.K.  management  other  imputability.  representative  the corporate  on  who  Kozai  occurred  left  the  management  adequate  assess  i f the  representative  the  (jori)  v. the  who  resorting  the latter  Maruyoshi  would  K.K.  determine  to  f o r the former's  should  damages  left  corporate  applied  properly  of  to  by  reason  E v e n when  i s room  Kozai  entirely  director  duty.  the t h e o r e t i c a l  the representative director  control  of  representative director  representative  that  about  i n Maruyoshi  management  principle  breach  foreseen  was was the  -  customer's company's and  bankruptcy have  bankruptcy.  the of  As  intentional  f o r what  Kurosawa^12 was  in  company, his to  was  was  held  a  activities  appropriated and  by  who  was  may  the  grossly  Kogyo  acts  of  K.K.  director,  customer  with  a  of  duty  the other  t h e company's  who  to  relating  representa-  of accounting  money  v.  bankrupt  respect  observation  i n charge  identify  negligent act,  of  of  damages,  relationship  business  of  own  1  1 1  to Taiyo  corporate  caused  we  representative the  his  corporation's  negligent  and  damages.  of h i s duty  director  the  between h i s f a i l u r e  to a  a  of  party's  grossly  called  sued  business  purpose  be  where  charge  third  director  amounts  neglect  tive who  or  party's  must  subsequently  a situation,  causation  the t h i r d  attention  and  In such  adequate  and  prevented  representative  and  -  bankruptcy,  might  either  50  to h i s  and  personal  bankruptcy.  that:  "The d e f e n d a n t d i d n o t commit gross negligence b e c a u s e he d i d n o t know o f the i l l e g a l business a c t i v i t i e s of the other r e p r e s e n t a t i v e d i r e c t o r who was in charge o f accounting, and he had examined the accounting documents,  It  -  51  -  submitted by t h e r e p r e s e n t a t i v e d i r e c t o r who was i n c h a r g e o f a c c o u n t i n g at t h e m o n t h l y management m e e t i n g s whose constituent members were a l l directors. The u n l a w f u l appropriation of money was not revealed i n the accounts."  The  criteria  tional  and  for distinguishing  grossly  negligent  between  acts  i s  inten-  discussed  below.  (b)  Ordinary  D i r e c t o r ' s Duty o f  An  ordinary  he  i s a  which  for  has  of  authority  director  when  he  opinions  in to  conduct  either  imposing  the Board duty  bear  of  duty.H  cases of  directors' (gyomu  tanto  to matters  at board  the  or  Directors  responsibility to  the  a  meetings. H 6  third  representaThere  4  from  over  the  no  the  executive  were b r o u g h t However,  is  scholars'  torishimariyaku) which  the  Therefore,  3  observation or  since  supervise  observation,  of  duty  of  to  to supervise  the a  of observation  d i r e c t o r s . H-  should  execution  relating  discussion  of  neglects  representative directors'H5  of and  of h i s duty  director's  objection  a duty  member  the duties  breach  party, tive  the  ordinary a  owes  constituent  execution an  director  Observation  business up f o r  there  is a  -  controversy of  observation  discussion  (1)  about  52  -  whether  where  at Board  courts  matters  should  were  not  impose  brought  a  duty  up  for  meetings.  Duty of O b s e r v a t i o n Over M a t t e r s Not B r o u g h t up f o r D i s c u s s i o n a t B o a r d M e e t i n g s  Formerly, duty  of  matters  lower  courts  observation which  discussion U n k n o w n , I-*-  at 7  had  not  board  i t was  on  had  refused  a  director been  meetings.  held  to  relating  brought In  impose  up  Unknown  that:  "Ordinary directors owe a duty of o b s e r v a t i o n over the business conduct of other d i r e c t o r s r e l a t i n g to a matter w h i c h was b r o u g h t up f o r d i s c u s s i o n a t board meetings. H o w e v e r , t h e y do not bear a duty of observation over the representative directors' general business conduct in addition to the duty of observation mentioned above. ... t h e p u r p o s e o f t h e p r o v i s i o n , w h i c h provides where business conduct has been performed i n accordance w i t h the r e s o l u t i o n of the board meetings the director who has assented to such r e s o l u t i o n s h a l l be d e e m e d t o h a v e d o n e such a c t , p l a c e the r e s p o n s i b i l i t y on o n l y t h e d i r e c t o r who h a s a s s e n t e d t o the resolution. As a converse interpretation, (hantai kaishaku), i t s h o u l d be h e l d t h a t t h e d i r e c t o r does not bear a duty of observation over the business a c t i v i t i e s of a representative  a to  for v.  -  53 -  director relating to matters not brought up for discussion at board meetings. ^  Also,  i n Unknown v. U n k n o w n ,  i t was h e l d  1 1 9  that:  "Since i t i s p r a c t i c a l l y impossible f o r an ordinary director (hira torishimariyaku) to supervise the business conduct o f the representative director relating to matters not brought up for discussion at board meetings, i t s h o u l d be h e l d that the necessary conditions f o r the duty of observation over the business activities of the representative director i s constituted not only because he i s a director but also because i t i s a matter of business c o n d u c t r e l a t i n g t o a m a t t e r w h i c h was brought up for discussion at board meetings or because of special circumstances where he could easily supervise the representative director i n the business conduct i n question."  However,  i t  director  i s  t o account  representative relating up  unreasonable  director  t o a matter  for discussion  take  any  special the duty.  when  proper Board  Moreover,  had  which  measures,  representative  to  call  a l t h o u g h he knew  and  neglected  had  a t Board  meeting  not  meetings, eg. so  director i t i s held  that  his  not been he  from that  to  a  duty  brought d i d not  convocation forth,  a  of  a  prevent  breaching h i s the provision  -  which been  the  have  to  meetings,  the  the  of  the  a  may  not  responsibility  treatment  did  does  a director would  be  responsibilities  Board  meetings.121  theory  to by  brought  up  for discussion  has  become  first  follow  the  this  Hashimoto by  s  et  new  line.  of  a  than  them  at  to  the  a  avoid attend  duty to  Board  in  al  Supreme In  to  v.  Court  meetings,  lower  dishonoured  sued bills  This court  Hashimoto  et  decision  to  Kobayashi were  of  matters  scholars.122  et  a l , directors  possessors  other  relation  reflected  al!24  i  in  among  Kobayashi  that  i s r e g a r d e d as  imposes  not  decisions.123  the  participate  neglecting  directors  been  to  imply  permit  on  has  to  undeservedly favourable  that  dominant  has  deemed  not  who  who  refer  not  observation  tendency  be  not  has  resolution  director shall  who  for directors  the  the  responsibility  their  Thus,  the  does  and  bear  as xt  co-actor.120  act  director  resolution  director  with  resolution  performed  liability  where a b u s i n e s s a c t i v i t y  i n accordance  Board  assented  in  -  provides that performed  of  54  et  al  v.  f o r damages which  were  -  55  -  drawn by  their  company b a s e d  of  duty  of observation  their  activities in  charge  of  conducted did  of the the  hold  excessively  affairs  court held  relating  of  a  at  meetings  caused  the  neglect  to  the  business  director  who  was  The  director  company.  activities  Board  and  the d i r e c t o r s '  representative  business  not  on  his at  company's  own  left  discretion,  a l l , drew  bills  bankruptcy.  The  that:  " S i n c e t h e Board o f D i r e c t o r s has authority t o inspect the conduct of the business of t h e c o r p o r a t i o n , a d i r e c t o r , as a c o n s t i t u e n t member o f t h e B o a r d o f D i r e c t o r s , o w e s a duty of observation to the c o r p o r a t i o n with respect not only to matters which were b r o u g h t up f o r d i s c u s s i o n a t b o a r d m e e t i n g s but also to general matters which were performed by a representative director. F u r t h e r , a d i r e c t o r has the duty t o ensure that corporate business i s properly carried out through the supervisory duty of the B o a r d o f D i r e c t o r s , i f n e c e s s a r y , by means of the c o n v o c a t i o n of board meetings or a r e q u e s t t o t h e d i r e c t o r who i s a p p o i n t e d by the Board of Directors to convene Board meetings t o convene such a meeting."  The  Commercial  whether  each  meetings  when  director  to  Code  director the  at had  Board  convene  that  time  authority  of  Directors  the  Board  C o m m e r c i a l Code p r o v i d e d as  follows:  did to  not convene  had  specify Board  appointed  meetings.  a  The  -  56 -  "Article 259. The m e e t i n g s of the B o a r d o f D i r e c t o r s s h a l l be c o n v e n e d b y each d i r e c t o r ; however, t h i s s h a l l not apply i n cases where t h e Board of D i r e c t o r s h a s a p p o i n t e d a d i r e c t o r who i s t o convene such meetings."  Though  influential  director  requested  appointed such  a  who  made  to  this  that  Directors  days  demand,  director  t  w  a  a  cases  to  been  convene  refused,  the  convene  the  might  that  this  authoritatively. new  amendment  October  to the  1,  1982  has a p p o i n t e d a d i r e c t o r t o convene  the  any d i r e c t o r  t h e Board  meetings  receiving  convening  t h e Board  the of  may and  the  In  of  dispatched,  where  a  Board  meetings,  i n  where  has  desirable  s  enforced  of  convene  that  who  meetings  the request  Code  specifies  convene  director  s h o u l d be r e s o l v e d  Commercial  Board  but  i n s i s t e d that  Board  by h i m s e l f , 1 2 5 £  question answer  the  t o convene  meeting  director meeting  scholars  request him to i f within  request  Directors  the has  five notice  not  been  t h e d i r e c t o r who made t h e r e q u e s t may  the  Board  of  Directors  by  his  own  authority.126  In  addition  t o t h e above  reasons,  I  think  the  -  Supreme  Court  57  decision  following  reasons:  a)  discussed  As  I  that  the  was  but  director  a  The  ings  c)  knew  we  of  but  of  the  It  is  proper Board  discussion  i s not  matter  in at  independent  of the  factors  representative  should have  illegal  known  conduct  reject  or  of  not.  indiscrimin-  relating  brought  to  up  a  for  meetings.  duty  of  observation  attendance  their  of  an  the  not  their  from  Board  for  the  recognize  up  observation  at Board  from  should  for  the  or  was  upheld  whether  should not  directors'  derived  we  whether  which  discussion  be  no m o r e t h a n o n e  duty  matter  not  director's  Therefore, ately  or  either  other  of  brought  determining  b)  above,  meetings  criterion  the  should  criterion  question board  -  at  constituent  is  Board  not  meet-  memberships  Directors.  insufficient business of Directors  for  auditing to  the  effective  function  judge matters  of  and the  passively  -  relating up  d)  -  58  only  to  matters  which  f o r d i s c u s s i o n a t Board  Each  director  authority  to  is  convene  were  brought  meetings.127  clearly  vested  a  of  meeting  with  the  Board  of Directors.  Duty o f O b s e r v a t i o n o f t h e E x e c u t i v e D i r e c t o r (gyomu t a n t o t o r i s h i m a r i y a k u )  Here  the  term  mean  "directors  part  of  "executive who  corporate  administration  are  director"  i n charge  management, (somu),  of  finance  (kikaku).  Almost  a l l corporations  directors  specific  responsibilities.  In  company where d i v i s i o n s  highly  differentiated  highly  specialized  director his  may  thought  corporate difficult  have and  and  no  care  such  each  functions, choice on  the  management under for  (zaimu),  and  some  of business  are  division  has  to  h i s charge. to  planning  assign  specific  directors  general (eigyo),  each  but  to  specific  as  business  (jinji),  used  a  such  personnel  a huge  is  executive concentrate part  of  I t may  supervise  the be the  -  business  59 -  activities  of  other  corporation's  management.  stances  only  have  an  whether  or  not  the  negligence the  existence  since  the  derived  Board  Kuroda did  negligence  et al.,  n o t know  dishonest  l 2  the fact  8  of  act,  the other  of  executive  director's  His  lack  of  small  imagining  another  director's  because  of  In  a  such  since  impossible  the  vast  case,  the  a director  this  that  within that  of  of  case there  company's  be  to  gross  relates to i s room f o r  i t  their  other  observation.  amount  business  who  the  should  would  for directors to  illegal  v.  directors'  under  where  size  i s  of h i s  Rindoshin  wholly  h i s duty  circumstances  practically  De  that  out  i t seems  itself  observation  responsibility,  However,  negate  structure  knowledge d i d not  company,  do n o t  executive  company  t o have v i o l a t e d  negligence. a  the  committed  o f h i s membership of  i t was h e l d  division  judged  of  I n Bank  carried  decision  of observation  duty  of Directors.  has  the  circum-  the  and  the business  from  of  such  on  director  o f the duty  from  but  However,  influence  directors'  not  company, the  or gross  sectors  be  discover  activities corporation.  divisions  may  be  - 60  highly  specialized  and  at places  distant  located factors  should  courts  judge  committed  With of  an  important  director's  charge  care  of  a  of  a  good  directors itself  when  they  indicates  discharging  the duty  no d i f f e r e n c e b e t w e e n executive  director's  standard  of care  director  who  of  interpretation not  a  since i s  between  that  between care  the  and  the  who  i s not i n  of  corporate  required  ofa l l  their to  the standard  care  duties,131 be  there  met  i n  should  of care  of observation  be  i n the and t h e  of observation  of a  of a specific  part  management.  difference  insists  of  o f care,132  be  standard  the duty  standard  i n the duty  should  of  part  i s not i n charge  corporate  who  discharge  duty  when  question  director's  director  which  the  i n  difference  However,  These  negligence.129  scholar  a  business  consideration  standard  of  manager,  other.  director  specific  management.13°  each  into  to the executive  of  of  or gross  i s one  executive  places  from  the  there  i s  their  taken  negligence  care,  standard  be  whether  respect  there  -  that the  The  correct  any d i f f e r e n c e i s standard  of  care  -  involved  i n  61 -  the  difference  between  director's  duty  the  duty  in  charge  of  the  observation  scope  of  of observation  of observation of  management, of  duty  a  the business  i s a  and t h e scope  part  of  reflection  activities  a  executive  o f a d i r e c t o r who  specific  which  the  but  under  of  i s not  corporate  of the  extent  each d i r e c t o r ' s  charge.  Duty o f O b s e r v a t i o n o f a Nominal D i r e c t o r and o f a D i r e c t o r Who Was A b s e n t f r o m a B o a r d M e e t i n g  The to  nominal  d i r e c t o r i s a d i r e c t o r who  a d i r e c t o r s h i p under  the  corporation  discharge  a  tendency as  made  an  corporation. corporate existence duty  i s  There  especially i n tiny  liability have  s p e c i a l agreement  he  h i s duty.  directors have  that  a  since  a  to  director  on  exculpatory  policy of nominal  and  many  escape  agreement  to  They  from  the plea  to  nominal  corporations.  standpoint  with  expected  their  that  they  with  the  i t i s improper  from  admit  a  the  d i r e c t o r s who d o n o t owe a n y  the provisions  organizations  not are  t r y to  However,  i s elected  their  relating duties  to are  corporate mandatory  -  provisions  which  uniformly persons  62  the  aim  to  legal  related  special  -  to  regulate  relations  the  agreements  definitely among  the  corporation.  of  this  and many  Therefore,  type  are  held  invalid.133  In  order  to  director's reference a  conduct to  director,  not,  supervise  the  duty  intervals.  attend  activities,  business  to  of  business good  nominal  director at  or  proper  supervise  corporate  the  business  information  state  property,  of  and  reports  the  by  manager,  held  should  the  directors'  execution  a  necessary  grasp  corporate  of  meetings  directors'  board and  care  i s the  the  representative  company's  meetings  acquire  representative the  of  board  These  representative  the  the  w h e t h e r he  should  allow  of  the  corporate  ask  with  to  for  the  regard  corporation's  to  daily  business.134  In  Unknown  director  was  dishonoured  v.  Unknownl35  sued bill  representative  where  f o r damages by which  was  director,  a  a  part-time  possessor  drawn although  by  the the  of  a  other court  -  acknowledged report  that  relating  difficulties meetings was  examine  board to  only  where  the  bankrupt  the  K.K.  of  of  to  his  the  efforts  circumstances  et  the  of  company  and  court  every  of  Moreover,  director  6  became of  the  this  bankrupt  approximately  he  and  3  financial  the  visited  business  director  account.  time  1  acknowledged  corporation  oral  Yoshii  institutions,  The  the  v.  influence  director  heard  al  recession  that  representative  that  and  account,  submitted  director's  applied.  he  inspect  insufficient.  financial  and  Board director  books of  held  a  financial  the  not  documents  Kogu  visited  heard  monthly  did  financial  were  representative books  he  court  defendant  month  corporation  the  the  by  was  corporation  shown  raising,  oil-shock  the  a  fund  defendant  principle  once  the  actual  restrictions  corporation's  d o c u m e n t s and  because  director  attended  The  Takaji  so-called  that  the  since  on  corporation  in  defendant  discuss  meetings.  Again  the  to  financial  grasp  the  the  liable  relied  -  and  to  held  but  63  reports sometimes he  general  had advice  the from was given to  - 64  prevent  mistakes  Nevertheless, his  duty  monthly did  i t was  since  oral  not  should  any  have,  and  with  i s liable  board  subject  was  the  take  about  that  the  correct.  He  them  though  to perform  to  he  the  any  he  strong  liability  for  i s that  a  long  that  for discussion,  meeting  measures.137  did  he  measures  representative  director  activities.138  j  n  from  K . K . Kojin  knew  not  absent  take view  any among  director i s  t h e Board  to  or  improper  he was  r e a s o n and t h e r e f o r e  appropriate  from  without  an  an a b s e n t from  a  absent  absent  The m i n o r i t y  that  i s absent  sufficient  and  an  time  although  i n advance  of  meeetings, the  has been  o r when,  listed  he  were  scholars  i s , however,  when  had n e g l e c t e d  from board  when  known  Board  appropriate scholars  among  reason  have  he  accepted  reports  failed  meetings  sufficient  without  simply  who w a s a b s e n t  director  liable  that  regard  view  from  held  management.  intervention.  majority  should  business  doubts  and he  Furthermore, director  he  i n  business  have  supervision  the  -  meeting  he  cannot  prevent  illegal  a  business  v. Unknownl39  where  65  -  the  -  responsibility  discussed,  i t was  liable  since  meeting  where  for  for held  they  a  bogus  that  the  were  discussion  and  proper  measures  being  introduced  neglected  to prevent at  from  the  the  were  the  d i v i d e n d was  they  was  directors  absent  the i l l e g a l  dividend  board  brought  to  take  illegal  up any  dividend  shareholders'  general  meeting.  As  this  for  case  the  settlement  dressing, real  related  advance,  of  i t the  that  may  not  just  of  the  may  one  of  the  absences  whether  has  acquired  of  that  state  of  the  taken  proper  number  or  Board  in  However  frequency  of  meetings;  meetings  held  is the but at  representative whether  information to  to  the  decision  the problem  Board  corporation's measures  window  accounts  theory.  that  activities;  necessary  on  this  to supervise the  business  the  conclude  attended  intervals  directors'  said  from  liability  s h o u l d h a v e known  majority scholars'  b e , o n e may  he  based  settlement  be  director's  proper  accounts  and t h e d i r e c t o r s  state  follows  t o the d i r e c t o r s '  business;  prevent  the  he  has  grasp  the  and  has  director  - 66  from  illegal  In  -  business  other  words,  activities  whether  supervised  the  activities  i n accordance  a  good  the  standard  an  ordinary  skill  On a  and  the  business  prudence  nominal  closely  their  make up  directors.I isolated  4 0  from  usually  the  receive  normally Taking there  do this  are  standard  the  Such  remuneration.  duty  director's  of  the  criteria  of  insight  required  of  with  reasonable  aspect to  to the  sympathy. (heisa who  are  not  number  of  hold  board  required  negligence  which to  in his  and  of  at a l l .  consideration,  d e l i b e r a t e on  establish a duty  they  corporations  meetings  into  usually  amount  held  the  in  management  closely  most  simply  corporate  small  of  expected  d i r e c t o r s are  a  duty  gaisha),  nominal  only  making  In  directors,  circumstance  care  care  subject  as  some p r e c e d e n t s of  business  of  s t a t u t o r y minimum  These not  properly  duty  i s one  persons  forth.  position.  merits  elect  discharge to  like  corporations  shareholders  order  and  d i r e c t o r always  held  the  against  there  which  has  manager  in a  hand,  observation  to  ability  so  directors'  with  measured  of  other  he  representative  manager  and  of  the  nominal  observation.  -  In  Yamashita  director  v.  was  -  Segawa  sued  dishonoured director's  67  et a l  1  4  f o r damages  bills  which  bankrupt  l  w  here  by  were  company,  a  a  nominal  possessor  drawn  of  by  i t was h e l d  the  that:  "A nominal director, who does not receive remuneration as a director, d o e s n o t i n v e s t money i n t h e c o r p o r a tion and does not partake i n the c o r p o r a t e m a n a g e m e n t , d o e s n o t owe a d u t y o f o b s e r v a t i o n on t h e r e p r e s e n t a tive director's business activities which would extend t o a duty t o the representative director t o convene a board meeting unless there are s p e c i a l c i r c u m s t a n c e s w h e r e i n he knows o r c o u l d have known that the representative d i r e c t o r w i l l v i o l a t e h i s duty or carry out illegal business activities and w i l l c a u s e damage t o t h e c o r p o r a t i o n o r a third party. I t i s appropriate to i n t e r p r e t t h e s i t u a t i o n so t h a t t h e r e is neither mala fides nor gross n e g l i g e n c e i f he n e g l e c t s t h e d u t y o f observation even i f he owes such a s t r i c t duty of o b s e r v a t i o n . " 1 4 2  However,  there  mitigating director  at  a  of  the there  duty  distant  activities  some  circumstances  Specifically, director's  are  of  place  there,  participating  1 4 3  cases which  duty are  that may  of  cases  acknowledge relieve  observation. which  o b s e r v a t i o n because and or  i s busy where  a  deny he  the lives  i n h i s business he  has  i n c o r p o r a t e management  not because  been of  -  illness  and  he  acquainted  more  a  tion; to  the  director  actual  of  office,  he  only  list  special  knowledge  and  managements^; by  or  an  who  to  business.  by  law a  5  of  the  some  cases  o l d person  rarely  appears  where  he  h i s name  and  of in  neither  t o be  does  not  experience  in  the  and  the  in  his  have  any  corporate is  representa-  real  never  added  corporation  autocratic  of care  and  power  over  the  other  allows  management  of  the  should  supervise  the  like  business  activities,  o f a good manager,  of  the  insight  manager in a  director  directors'  criteria  experience  prudence  or  4  become  1 4 7  the duty  business  1  holds  meddle  representative  the  and  where  management  directors  by  age  arbitrary,  director  corporate  with  i s an  allows  directors  However,  Again, he  to  condition  1 4 4  the  tive  opportunity  i n the c o r p o r a t i o n nor r e c e i v e s remunera-  where  managed  no  where  75 years  corporate  invests  had  management.  than  the  -  has  with  corporate excuse  68  with  standard  required  of  reasonable  position.  He  measured  of  ability,  an  ordinary  skill  should  know  and the  - 69 -  conditions property  of  corporate  i n order  directors'  not  allow  of  should duty  not  of  over  A  supervise  only  conditions  of  imply  grasp should  other  the  of  that  not  be  supervisory directors'  duty  business  Accordingly, director's  to  courts standard  business of the  real and  a director's  lack  information  reason  business  business  d i d n o t make  a  supervisory  sufficiently  grasp  the corporation's  corporation's  the  property  directors'  corporation's  the necessary the  his  can  Therefore,  he  of  directors'  when he h a s a  property.  knowledge  obtain  evade  should  and h i s l a c k  corporate  director  the  activities  may  and to  non-  management  conditions  the representative  activities.  corporate  the  him  His  h i s duties,  business  allow  corporate  activities.  h i m t o evade  knowledge  and  the representative  i n the corporate  corporation's  of  to supervise  business  participation  business  circumstances  a l le f f o r t s to allow  to  him to  circumstances,  and i t  for mitigation  of h i s  oversee  the  representative  activities.  should of  care  not by  mitigate  considering  \  the the  -  director's of  work,  and  personal sickness,  experience  were  proper  the  conduct  of  cannot  representative because  lack  corporate  unreasonable  that  know t h e c o n d i t i o n s and  property  placed  on  neglecting breach. the  On  to directorships  who  and  sickness, o l d experience  Further,  a  director  t h e more  duties the less  of the corporation's that  him f o r the r e s p o n s i b i l i t y  supervisory  d u t y . < r t i  of  sickness,150  comes  o  r  to  business risk  i s for  in  case  of  he  knows  of  business  should  be  and  placed  f o r neglecting h i s  reasoning  e  on  i t is  the responsibility  supervisory  the  activities  of the corporation's  t h e more t h e r i s k  work,149  to supervise  etc.  assume  the  supervision  be  o f work,  t h e more  i s to  by  business  the contrary,  conditions  property, on  his  to  I f this  by  by h i s d i l i g e n c e ,  him  knowledge  ignored  knowledge  management,  the  will  expected  pressure  of  of  business  through  directors'  of their  or  of  persons be  lack  pressure  management.  Directors,  assigning  practice  or  eg.  o f the law, which  directors  Board  companies  age  o l d age  of corporate  representative  in  circumstances,  not so, the s p i r i t  ensure  of  70 -  lack  that  pressure  o f knowledge  of  -  corporate  managementl51  mitigation  of  duty  of  duty  care  also  of care,  Moreover, duty  of  meetings since a  meddle cause of  have  e  n  not  by  or a nominal  who  of  whether  the director's that  the  Board  for a  long  time,  never  autocratic  allows  i n h i s business for mitigation  observation.  he  i s  director.154  an  Indeed  convene  an  active  representative  management  directors to cannot  directors'  i t i s in precisely  where  representative  directors that  of Directors  to  Furthermore,  the other  o f those  of the  activities.152  t o deny  held  there  own  director's  of observation  reason  been  for  director's  d i r e c t o r ' s business  meeting,153  a Board  causes  the ordinary  corporations  by  t  o  d i r e c t o r has the a u t h o r i t y  existence  director  r  i . e . the duty  observation  Board  the  fits  i t i s improper  each  director  a  the representative  representative  (4)  71 -  are strong  be  a  duties those  autocratic supervision  i s needed.  D i r e c t o r s ' Duty and D o c t r i n e o f Disregarding the Corporate Entity  It  has been  said  that  when  Article  266-3  o f the  -  Commercial  Code,  director's to  fulfills  of  a  a  the  corporate  entity  is  not  a  in  the  of  third  the  corporation,  liable  of  does  relating  applied and  to  come not  have  to  actor the  director  concurrently On  hold  handle  a  the  that  a  a  any  **  the  dominant so  1 5  to  corporation.  does  not  entity.  shield  shareholder  who  the  disregarding  doctrine  a  article  for  corporate  corporate  have  and  the  the  applies  the  function  c a n n o t be  sole  for  person,  substantial  courts  more  i t may of  a  disregarding where  Article  266-3  be  be  said  function the  the  a the  nominal corporate  substantial  given  that  interest  A r t i c l e 266-3  than  does  corporation  necessary  and  corporate  should  provides  corporation.  cases  the  a  of  Therefore, fills  a  director  contrary,  affairs  of  properly  director  small  is  behind  dominant  a  doctrine  responsibility shielding  to  disregarding  However,  who  which  1 5 5  sustitutional  of  doctrine  -  liability  a director  doctrine  72  the  entity  priority  of  fulfilled, in  doctrine  entity.  conditions  doctrine are  the  ful-  1  5  of  7  In both  disregarding the  application  former because  -  concrete general a  73 -  provisions  should  provisions.  representative  and  concurrently  by  disregarding  corporation director Article  However,  director a  sole  priority  a creditor  (a  shareholder)  the  separate  who  has property when  a  account  entity call  of  the  by  representative  i s not s u f f i c i e n t t o cover  call  director  to  t o account  over  can  dominant  a n d , a t t h e same t i m e ,  266-3,  property  take  a  other  applying  director's a  creditor's  damages.158  Since  the doctrine  entity  only  particular the  even  ( 5)  affects  parties,  separate  extend  to legal  legal the  entity  the  corporate  relations  between  effect  of  disregarding  of the corporation  relations  i n t h e same  Causal  of disregarding  fact  between  other  does  not  parties,  situation.  Relationship  The  existence  of  the  director's  to  the  a  business  corporation  requirement  causal  for a  or  relationship  activity the  director's  and  third  the party  liability.  between damage i s  a  The  -  causal  relationship  discussing nominal one  director's  precedent  causal  into  liability,  liability.  which  because  very  hard  relationship nominal  of  the  to  prove  question  in  particularly the There  denies  of  i s in  the  fact  director's  non-existence  adequate  director's  negligent  breach  party's  unjustly  to  strictly  prove  relationship of  party's  damage.  plaintiff causal  duty  to  of  of  a  is  a  for  able the  of  a  to  existence the  nominal  i f a  relationship,  the  to  activities,  the  other  t o account  may  court  a  a  to  causal  the  third  requires of  would  director  director's there  because  be  nominal  existence  result  more  a  director's  and  the  t h e more p o s s i b i l i t y  called  and  plaintiff of  observation  the  i t  a  a  grossly  neglectful  prove  attention  or  observation  require  Moreover,  i n that  between  However,  strictly  unreasonable  be  duty  between  breach  there  causation  damage.  be  that  intentional  of  tolerant  director  will  come  relationship.  i s  third  has  directors'  liability  It  -  74  he  a a be  pays  business i s that will  he  have  -  more  opportunity to prevent  unfair  business  Therefore, to  a  the concrete  director's and  or  negligent  grossly  be the  that  duty  brought the  breach  of  of  a t Board  Intentional  duty  proving  the  and  when  affirms  which  was n o t  time,  of  dilutes of  of observation.162  or Negligent Act  or  of negligence i n respect of the f a i l u r e  has been  observation,  guilty  he  corporation  f o r any damages  he  guilty  has been  eases  of the duty  a director  of  j t may  which  If  duty  the  relationship  specificity  of  intentional  meetings  c a u s a t i o n a n d , a t t h e same  i e .the duty  his  duty  itself  need  relationship  the responsibility.161  up f o r d i s c u s s i o n  concreteness  care,  i n  o f o b s e r v a t i o n on a m a t t e r  adequate  from  i s no  director's  t h e judgement  requirement  the  there  causal  failure  the other  should bear  said  directors  activities.160  observation  latter  other  c o u r t s have h e l d t h a t  acknowledge  between  (6)  75 -  of wrongful  i s  liable  caused  of wrongful  intent in his to  to it.163  intent  the i f  or of gross  -  negligence  in  observation, persons is of  a  good  he  i s  of  of  an  liable  in  and  the  the  Therefore,  judging  Directors,  spares  any  to read  failure  effort  It  i s impossible  of  care  of  care with  concerned. negligence  a  A  i n this  negligence  party's as  right  but  d i r e c t o r . 1^6  director  attend  should  the  be  or negligence But  concerning  gross  criteria  to  minutes  is  duty  that  director's  or gross  nominal  i n h i s duty.  explanation  third  manager  i n the  of  from the f u n c t i o n o f the Board  the  negligence  standard  business  the t h i r d of  to  i s the standard  or gross  h i s breach  duty  damages  corporation  of  of  of observation  i s not h i s negligence  of  gross  in  prudence  negligence  the violation  that  breach  rj^e d u t y  ordinary  skill  director's regard  a  m a n a g e r , 1^5  position  nor  respect  required of a director  reasonable  of  -  a s w e l l . 1^4  required  in  76  what  who  board  adjudged  meetings guilty  i n respect  there  never  of  of this  i s no  general  i s negligence  o r what  negligence.1^7  to  concerning  negligence  since  indicate a  fixed  and a b s t r a c t  defining negligence  they  are  legal  or  gross  concepts  that  -  should  be  conduct there of  judged  in  abstract exhibit gross  case.  6  which  negligence case  involved  director  from  activities ordinary and  concerned,  out  include  t o e x e r c i s e even  any  acknowledge  conditions,  business t o an  reasonable must  the  of  the  and n a t u r e of  of the  the industry,  the  duties,  skill  suit  scale  forth.169  or  representative  the  economic  and so  difficulty  conduct  custom  a  business  illegal  with  the type  allotted  to evaluate  as t h e y a r d s t i c k  present  remuneration  and  such  the  his  to exhibit,  of  involved,  h i s own  to  illegal  industry  directors,  failure  used  degree  latter's  corporation  a  should  t o be  acting  which  i n the  of  this  conditions  every  by a p p l y i n g t h e s t a n d a r d  carrying  The  in said  or gross  i n preventing  director  details  in  the  and a p p l y  prudence.  we  director's  and/or  the  negligence  i s expected  representative  ease  a failure  Therefore,  particular  activities  Therefore,  be  means  one o u g h t  means  8  particular  negligence  negligence  director's  which  gross  H o w e v e r , i t may  the care  care.I  to  circumstances.  or  that  respect  f o r i t b u t t o judge  negligence  slight  care  specific  negligence  every  with  i s nothing  particular  the  77 -  number  of  t h e amount o f  -  Since  the duty  78 -  of observation  b a s e d on h i s p o s i t i o n ' interpreted  that  conform not o n l y  every  to the standard from  a person  and  experience,  but  to  as  prudent  a  diligence  shall  to perform and s k i l l  reasonably  prudent  C.  1 9 8 2 AMENDED COMMERCIAL CODE  The  new  amendment  review  "Corporations") on O c t o b e r o f t h e new  and s u p e r v i s e  strengthening for  example:  general  to Part  was  i s required  to  o f care  standard  shareholders'  the  position  and  appointment to  with  c a n be  have  the care,  expected  of a  person.  The most  amendments their  skill  of  considered  h i s duties which  or  o f h i s knowledge  who a c c e p t s  proclaimed  1, 1 9 8 2 .  t h e duty  be  in like  be  that i s  i t should  I I o f t h e Commercial  (Part II  9,  1 9 8 1 and  important  legislative  corporations  to  internally  by  of corporations  —  activities  mechanisms  proposal  Code  on J u n e  i s t o enable  business  the s e l f - p o l i c i n g  meetings;  the  person  A person  director  undertaken  objective  director  i s expected  circumstances.  enforced  as a d i r e c t o r ,  that  reasonably  regulates  i s a duty  rights  at  shareholders'  o f d i r e c t o r s and a u d i t o r s  to give  -  appropriate powers of  of  explanations  auditors;  Directors  to  representative  In the d r a f t kaisei  The it  tions of  the  which,  are  of  world  that  i t might  by  peculiar  and  of  the  the  the Board  duties  of  have  adopted  advancement  on  system  the  the l e g i s l a t u r e the  7  proposal  of  has  tried  the b u s i n e s s committee  system the  to  was  play  considered  Japanese  the  so-called  where  most  However, either  Directors  that  number  directors  system  (keiei  the  They system  business  the  ground  f o r the purpose  or  to a  As  t o improve  of the Board  1 7 0  lifetime  the on  a  corpora-  t o have a great  sufficient  Board  functions  expected  experience with  ( j o m u k a i ) . I -*-  was  iinkai)  of the corporation.  their  this  (keiei  (kikan  i n corporate management.  are obliged  committee  reduce  complementing  t h a n by  they  rejected  executive  result,  role  was  circumstances of  committees  unanimously the  a  that  of the b u s i n e s s committee  recommendations  that  of  committee  f r o m among t h e e m p l o y e e s  executive  authority  execution  organ  maneouverable  system  their  the  strengthening  f o r amendments t o t h e c o r p o r a t e o r g a n s  because  promoted  based  the  t o some e x t e n t ,  directors  employment  clarifying  corporate  and  proponents suited  meetings;  the business system  a  substantial  such  observe  plan  as  and  -  directors.  shian),  proposed  at  79  shell.  1  7  2  business  control  of Directors  rather  iinkai).  1  7  3  -  The  following  i s a rough  amendments w h i c h a  1.  good  are  80  -  introduction  relevant  of those parts  to the d i r e c t o r s '  of the  duty  of  new  care  of  manager.  Persons  Disqualified  When  director  a  improper  other  but  third  prohibit from  fails  business  corporation  to  also  to  parties.  the  who  taking  office  a g a i n as  a  director the  form.  in  has  old  disqualification  The  new  Code  lack  capacity  (a)  an  incompetent  (b)  a  person  a director.  his  creditors  and  reasonable  Code.  The in  a  to  duties  there  disqualified  the  this  to  director's  directorship that  only  However,  was  Commercial of  not  is  his  properly,  to  new  was act Code  statutory  following  persons  director:  person  having  i t  breached  provides  t o a c t as  duty  shareholders,  c o n c e r n i n g who  the  254-2)  damage  Therefore,  person  as  his  causes  a  express provision  (Article  perform  activity  no  puts  as D i r e c t o r s  or a quasi-incompetent  been  adjudged  bankrupt,  person;  but  not  reinstated;  (c)  a  person  having  been  sentenced  to  a  penalty  for  a  -  crime  p r e s c r i b e d i n t h e Commercial  Special  Treatment  Limited not to  (d)  Liability  passed  a  since  person  heavier  than  prescribed  In  (Kikan  persons  who may  who  been  imprisonment  plan  has  Criminal  two y e a r s o r he  the have  ceased  sentenced  due t o a item  to  crime  a  penalty  other  than  f o r whom t h e s e n t e n c e  t o be answerable  f o r whom  execution  tothe  i s pending  1 7 4  f o r t h e amendment  Kaisei  Shian),  n o t become  committed  Code,  or  t o the sentence;  (But those  organs  one  L a w f o r whom  n o t e x p i r e d , o r he ceased  the draft  t h e Law f o r  Auditors,  t h e end o f t h e sentence,  having  excluded).  Code,  Statutory  i n the preceding  sentence. are  of  Company  be answerable  and  is  81 -  a  1 7  j_4-  w  director  economic  t h e Company  ^  concerning a  proposed  s  a r e minors  crimes  Law,  corporate  and any  provided  the Bankruptcy  that  i n the Law, t h e  Composition  Law, t h e C o r p o r a t i o n R e o r g a n i z a t i o n Law and t h e  Securities  Business  capacity minor the  i sgenerally  i n  of a business parental  However,  restricted  h a s t h e same c a p a c i t y  conduct  person  Law.  under  as a l e g a l where  this  authority,  although  a  the C i v i l  Code,  adult  some  1 7  6  a  i nrelation to  has been  or  minor's  allowed other  by a legal  - 82 -  representative. legal may  a  representative's  be r e g a r d e d  full  age.  minor  effect  may.  provided  as h a v i n g  held  to  office cause  as  of  a  stipulates  that  a  great  corporations.  management  as a d i r e c t o r as a p e r s o n  the crimes  director,  Also laws  the  inconvenience  do  corporation.  crimes.  office  t h e same c a p a c i t y  f o r i n t h e above  corporate  t o take  of  i fthe law p r o h i b i t s i n d i s c r i m i n a t e l y  taking  be  a m i n o r who h a s o b t a i n e d h i s  consent  Moreoever, from  closely  be  Therefore,  1 7 7  the  to  economic  not always  Therefore,  leading  practical small, crimes  concern  the  the  new  Code  to disqualification  must  1 7 8  The S u p e r v i s o r y A u t h o r i t y o f t h e Board o f D i r e c t o r s ( A r t i c l e 260(1))  The  new  article  Directors' restrain  control  to  however,  t h e Board  directors  decisions  of  so as t o  o r conduct by t h e  directors.  had t h e a u t h o r i t y  directors'  strengthen  representative  t h e o l d C o d e was i n t e r p r e t e d  Directors the  over  any a r b i t r a r y b u s i n e s s  representative  Even  i s expected  duties  as  t o mean t h a t  to supervise mentioned  the performance o f  above.  d i r e c t o r s w e r e a p t t o make l i g h t  t h e Board of  In  practice,  of this  authority  - 83  since  there  T h e new  Code  Board  of  no p r o v i s i o n  specifies this Directors  performance  of  legislation  i s that  his  the  supervisory  fulfill  3.  was  -  relating authority  has  duty  i t ssupervisory  to  duties.  the  functions  intent  become  Board  that  of  the  of  the  conscious  Directors  sufficiently.  1  8  1 / y  the  supervise  The  director will  and  authority.  and p r o v i d e s  authority  directors' each  to this  of will  0  M a t t e r s t o be D e c i d e d S o l e l y by t h e Board o f D i r e c t o r s ( A r t i c l e 260(2))  It  i s practically  make  impossible  a l lthe decisions  tration for  of  the  corporate  Board  on  f o r the Board  matters  affairs.  to  vest  authority  to  decide  the  However,  under  t h e o l d Code,  the  affairs. might wide  be view  Directors of  the Board  representative  matters  Opinion delegated  was  the  was  that  may  with  to  the  only  as  the  such  matters.  authority  t o what  under  n o t be d e l e g a t e d ,  necessary  had t h e power  matters  to decide  adminis-  not n e c e s s a r i l y  the  to  representative  to  kind  that  vest  decide  corporate of  matters  director. the  express  1 8 1  clear  to  of  representative the  the  i t i s  administration  divided  authorized  t h e o l d Code  i t was  of Directors  director  concerning  was  Therefore,  Directors  with  t o what e x t e n t  concerning  of  director  of Directors  Board  The of  provisions  but a l l other  matters  -  may  be  narrow  delegated view  was  administration designated  In  order  Board  by  to  of  statutory  m u s t be  that of  the  the  the  decided  delegated  to  260(2) of  the  be  extends  to  of  examples  a d m i n i s t r a t i o n of the  the  Board  of  i f they  matters  corporate of  director.  Code p r o v i d e s  of  the  that  the  in  as  general  affairs  important  corporate  shall 8  3  which not  follows:  director important  (1)  Disposition property;  important  (2)  Loans  (3)  Appointment and e m p l o y e e s s u c h as  (4)  of  a  taking  large  amount; a  over  dismissal manager;  of  of  important  E s t a b l i s h m e n t , c h a n g e and d i s c o n t i n u a n c e i m p o r t a n t o r g a n s such as a b r a n c h .  be  Article  The board of directors cannot make a decide the f o l l o w i n g matters or other a d m i n i s t r a t i o n of a f f a i r s : and  and  matters  affairs  1  not  1 8 2  authority provides  the  were  delegated.  Code  The  concerning  D i r e c t o r s and  representative  Commercial  so  important  administration  by  even  supervisory  present  director.  matters  affairs,  Code, c o u l d not  following the  representative  corporate  authority the  -  a l l important  strengthen  the  concerning  the  Directors,  concerning gives  to  84  of  -  Report t o the Board  It  i s  in  order  their  f o r them  administration the  new  not  only  tive  every The  Directors  with  directors'  only  submit  sheets, on  director  financial  b u t must  who  report.  also  o f any 1  8  on  the  to  supervise  statements report  6  such  defect  or voice  purpose,  term  includes  the  execuat  administration  of  the Board  to  the  exercise  their  administration of  t h e d i r e c t o r must temporary  affairs. a  duty  h i s doubts  not  balance  i n concrete  owes  of  corpora-  the performance  and/or  report  this  Directors  the  to the board  a  0 r  to properly  Consequently,  the  of  as  concerning  exercise  concerning  furnish  information  business  also  but also  Board  have  i s  (which  i s to  them  F  administration of corporate receives  explanations the  and  duties.  the actual  this  matters  affairs  matters  the  months of  properly  information  directors, to  allow  t o decide  corporate  (Such decide  to  corporation's  affairs.)184  sufficient to  Directors  the d i r e c t o r s  three  260(3))  of Directors  report  purpose  business  authority  to  of  their  authority.  requires  affairs.  the  the Board  the representative  once  tion's  about  of corporate  Code  (Article  Board  to properly  directors)  least  the  information  supervisory  useful  of  for  t o make  -  of Directors  necessary  sufficient  85  1  8  terms Tn  5  to  e  seek  relating  to  - 86 -  Right t o C a l l a Meeting of the Board o f D i r e c t o r s ( A r t i c l e 259(2)(3) )  Under  the  convene  o l d Code,  a  might  Board  also  convene Code.  board  director  is  w  a t each, 8  the  other  However,  The  t o convene  t h e new C o d e ,  Board  matters Further, appointed  submitting  which under  are the  t o convene  such meeting  within  i f the date  he  there  a the new  was  meetings  Code  the meeting five sets  days  may  the  does  convene  not  clear  director's  convene  form.  a  who Board  i s entered the the  meeting.  director  not give  of the date  f o r such  convene  also was  that  the director  i n which  i f  to  statutory  of  each  insisted  in a  objectives  to  i n the  each  meetings  document  new  of  puts  other than  Board  the  split  appointed might  to  contradictory  i s a  scholars  Code  a director  d e s i g n a t e d t o convene  under  interpretation new  Directors  designated  resulting  directors  this  of  to  appoint a director  influential director  authority  the p o s s i b i l i t y  with when  was  applies  i s to avoid  t h e o l d Code.  by  same  a meeeting  1 8  who  y corporations  n  an  the Board  director The  particular  meetings,  meeting  or  n  passed  a  authority Under  o  meetings  meetings.!89 under  s  of Directors. when  Board  a  convening  resolutions  even  one  1 8 7 e  had  However,  meetings. r  director  meeting.  appoint  such  convene  Board  each  o f such  meeting  does  who notice  1 9 0  i s of  request, not  fall  -  within  two weeks  who h a s made  Inspection  Under  whatever often  contain  willing  inspection make  entering of  extent  any  business  time  from  or  creditor  during  However,  their  the contents important Code  or  corporation  for  an i n q u i r y  auditors.194  their  matters.193  concerning so  make  necessary  of  since  at  a  extracts  i s so e n t i t l e d  under  new  Code,  creditor  of the corporation  seeks  minutes,  he  must  an i n s p e c t i o n  the  the  by not  minutes  i s entitled only  to  to the  creditor  of  i t i s necessary  of the directors a  or  shareholder or  to inspect the court  o f the minutes  free  provisions  of the  and a  when  ask p e r m i s s i o n from o r copy  innocuous  when  the responsibility  were  were a p t  the minutes  only  either  o r some  shareholder  h i s rights  minutes  the  Therefore,  from  to exercise  into  minutes  the  a l l to  the inspection  that  hours,  o f the meetings,  corporations  minutes  of the  business  of shareholders or creditors,  the  that  Meeting  the minutes  secrets,  submit  strengthened  inspect  shareholder  objective.1^2  to  t h e new  are  at  extracts  their  from t h e Board  any  might,  o r make  request, the director  r e q u e s t may c o n v e n e a m e e t i n g h i m s e l f . 1 ^ 1  t h e o l d Code,  inspect  to  such  t h e day o f such  o f the Minutes  corporation  not  from  87 -  o r copy by  the  showing  i s necessary f o r  -  the  exercise  of  responsibility cannot feared  give  of  corporation.  rights  the  -  or  directors  permission  that  corporation,  his  88  to  for  an  or  inspect  auditors. or  remarkable  damages  i t s  corporation  1 9 5  parent  inquiry  to  might or  copy result any  into The  the court  i f i t is to  the  affiliated  - 89 -  III.  DIRECTORS' DUTY OF CARE, DILIGENCE AND  A.  S K I L L UNDER CANADIAN  LAW  P O S I T I O N OF D I R E C T O R S  Both  under  referred  t h e Canada  BCCA  Business  Corporations  t o a s t h e "CBCA") a n d t h e B r i t i s h  (hereinafter position  J  referred  t o as t h e "BCCA"),  i n the operation  provides:  of the affairs  Act (hereinafter  C o l u m b i a Company A c t d i r e c t o r s have  a key  o f t h e company.  The  1 9 6  "The directors shall, subject t o this A c t and t h e articles o f t h e company, manage o r s u p e r v i s e t h e management of the affairs and business of the company."  Although the  t h e CBCA d o e s  directors'  the  duty  corporation,  directors'  duty  n o t g o a s f a r a s t h e BCCA  to require i t adopts  and p r o v i d e s :  i n broadening  s u p e r v i s i o n o f t h e management o f the traditional  formulation  of  1 9 7  "Subject t o any unanimous s h a r e h o l d e r agreement, t h e d i r e c t o r s s h a l l manage t h e b u s i n e s s a n d a f f a i r s o f a corporation."  In  determining  these  duties  what d u t i e s a r e owed,  a r e imposed  their  o n d i r e c t o r s a n d t o whom  p o s i t i o n has been  compared  with  - 90  that  of  trustees.  analogous  to  that  of  of  their  relationship  to  the  standard trust  of  care  analogy  Indeed,  1 9 8  performance  -  trustees  in  duties,  they  company.  and  the  their  directors'  the  sense  stand  However,  that  in  a  in  respect  to  shareholders,  As h a s b e e n  i s the  fiduciary  in  relationship  i s inapplicable.  status  to  their the  stated:  " T h e i r p o s i t i o n ... i s v e r y d i f f e r e n t from that o f o r d i n a r y t r u s t e e s whose p r i m a r y d u t y i s t o p r e s e r v e the t r u s t property and n o t t o r i s k i t . Directors have to carry on business and this necessarily involves risk, ,.." 1 9 9  The  courts  condemn cause  recognize  directors  loss  this  when  they  therefore  act honestly  are but  unwilling  their  to  decisions  t o t h e company.200  B.  STANDARD OF C A R E AND  1.  Common  The  and  SKILL  Law  standard  directors contrast fiduciary  of care  developed  and o f f i c e r s between duties  the and  was  by t h e c o u r t s  very  directors' their  very  low.  and a p p l i e d  There  elaborated light  duties  to  i s an  obvious  and  enlarged  of  care  and  -  skill. been  The  criticized  business  As Ltd. to  standard  was  as  stated  inadequate  i n Re  diligence  difficult  City  in  by  the courts  terras  of  the  has  modern  depends  upon  position,  the  type  and  magnitude  of  any  of care  eg.  Board  directors  t h e number  and  and  that  there  applicable  to  there  several  are  appropriate  to  i s  no  h i s own  a l l companies  test  as p r o d u c i n g  general the  director  the  of the  of duties of  liability.  the  problem  conduct  that the  of  amongst  skill.  standard  situations of  of  company,  It  of  i n a l lsituations.  sort  the  the composition  level  universal  indeed  business,203  the immediacy  and  skill  since  of a  of  of the corporate  the d i s t r i b u t i o n  of  circumstances  structure  of Directors,  answer  i s  proposition  of the directors,  officers  It  specific  Company  clear  degree  i s expected  and  of the transaction,  presented,  any v e r y  director.  which  the size  complexity  a  general  the particular  his  Insurance  i s the p a r t i c u l a r  required  standard  Equitable Fire do n o t g i v e  o f what  to. s t a t e  required  regarded  developed  environment.201  the question  seems  -  care  , 202 t h e a u t h o r i t i e s  and  the  of  91  seem  care  However, to  courts  be  have  -  Expected  The  Knowledge and Experience  standard  common and  92 -  of  care  l a w depends  experience  and  upon  which  skill  the s k i l l ,  a  i s not required  of  skill  t h a n may r e a s o n a b l y  of  h i s ability, not required  for  standard clear  has  that  themselves  T  a  a  definite  may b e s o g r o s s  extent,  errors  liability,  that  they  d i r e c t o r t o manage c o r p o r a t e  The  conventional  City  Equitable  Fire  person  Directors  qualifications common  though  law  It i s do n o t  the  errors  the unfitness of  affairs.  law standard  Insurance  a  element.  demonstrate  A  degree  i n judgement  even  the  common  from  the  subjective  director's  create  a greater  any s p e c i a l  at  knowledge  personally.  be e x p e c t e d  this  0  expected  and experience.  t o have  office.204  has  to exercise  knowledge  be  ability,  director  director  are  to  was s e t o u t i n Re  Company L t d .  2  0  5  :  "A d i r e c t o r n e e d n o t e x h i b i t i n t h e p e r f o r m ance o f h i s d u t i e s a g r e a t e r degree o f s k i l l than may reasonably be e x p e c t e d from a person o f h i s knowledge and experience. ... d i r e c t o r s a r e n o t l i a b l e f o r m e r e e r r o r s of judgement." 2 0 6  Also  i n Re  Denham &  Co^,  2 0 7  a  director  was  released  -  from  liability  93 -  f o r not  perceiving  the  frauds  of  chairman of d i r e c t o r s i n c o n t r i v i n g the accounts to  show  a  gentleman  fictitious  and n o t a s k i l l e d  Moreover, Estates not  profit,  i n  Re  Ltd.,  liable  2  0  the court,  for  speculation  losses  i n rubber  he  was  "a  so as country  acountant".  Brazilian  8  since  the  Rubber  Plantations  i n holding  sustained  in  plantations,  said  and  the directors a  disastrous  that:  " [ A d i r e c t o r ] may u n d e r t a k e t h e m a n a g e m e n t o f a r u b b e r company i n c o m p l e t e i g n o r a n c e o f everything connected with rubber, without incurring responsibility f o r the mistakes w h i c h may r e s u l t f r o m s u c h ignorance."  But  i f he  must  i s acquainted  use  that  company's And  i f a  director  an e x p e r t  of  care  and  position. reasonably such.  knowledge  benefit  is  2  1  when  t h e company's and  i s appointed  t o be  However,  on  i s  i t s  2  expected  that  he  the degree  of a person  w e l l - q u a l i f i e d d i r e c t o r unless  the  business. °9  exercise  not  he  for  the ground  he must  expected he  business  experience  transacting  i n any f i e l d , skill  0  with  in to  that be  appointed  a as  -  The of  courts care  e x p l a i n the  and  skill  on  themselves  and  consequences  i f they  It  was  held  94  -  rationale  the  basis  their  the  that  the  company  choose  i n Turquand  of  v.  to  low  shareholders  must  appoint  standard  take  bad  the  directors.  Marshall !! that: 2  "however f o o l i s h the l o a n might have been . . . W h a t e v e r may h a v e b e e n t h e a m o u n t l e n t to anybody, however r i d i c u l o u s and absurd their conduct might seem, i t was the m i s f o r t u n e o f t h e company t h a t t h e y chose such unwise d i r e c t o r s . "  Also  i t was  wiser  than  held those  A t t e n t i o n and t o be D e v o t e d  While  a  presumed at  the  Board  who  to  have  meeting,  of  have  were  appointed  who  attends  heard  w h a t was  a  director  may  corporate  In Ashurst  v.  duty  alert  t o be  directors  not  bound  to  be  them.212  D i l i g e n c e Required t o t h e Company's A f f a i r s  director  meeting  quences  that  escape affairs  Board  meeting  discussed  who  is  not  liability discussed  M a s o n , 2 1 3 i t was at meetings  a  held that:  and  decided  present  for  the  in his  is  at  a  conseabsence.  in relation  to  the  -  95  -  " i t w o u l d be i n t h e h i g h e s t d e g r e e dangerous to permit directors t o say . .. w h e n any particular incident arise ... 'At what moment my t h o u g h t s were e l s e w h e r e . I did n o t h e a r i t ...'"  Also  i t was  held  Lord  Fermoy214  i n Land  Credit  Company o f  Ireland  v.  that:  " I q u i t e a g r e e t h a t i t i s t h e i r d u t y t o be awake and their being a s l e e p would not exempt them from t h e consequences of not a t t e n d i n g t o t h e b u s i n e s s o f t h e company."  Thus,  at  common  law,  corporate  affairs  in  presence  their  Directors' its  director's  him  If  over  for  liable  a  at  for  by  the  respect  meetings, minimum  of i t  the has  up  the  for  at of  Board  Board  the  duty  been  suggested In  I n s u r a n c e Company L t d . , 2 1 6  Re  which  which  have  of he  were  been  Directors. is  presumed  attend  that  there  Equitable  Romer, J . s t a t e d  a  renders  to  City  of  ensures  meetings  meetings,  directors'  Board  Therefore,  Board  them.  check  discussion  chairman  trust  of  to  The  to corporate affairs  done a t  requirement.  duty  executive.215  breaches  attends  a  meetings.  select  discussion  t o h a v e k n o w n w h a t was  In  Board  o t h e r members  director  have  were b r o u g h t  to  inattention  up  committed  which  authority  control  brought  directors  that:  Board is  a  Fire  -  96 -  "A d i r e c t o r i s n o t b o u n d t o g i v e c o n t i n u o u s attention to the affairs o f h i s company. His d u t i e s a r e o f an i n t e r m i t t e n t nature t o be p e r f o r m e d a t p e r i o d i c a l board meetings, and a t meetings o f any committee of the b o a r d upon w h i c h h e h a p p e n s t o be p l a c e d . He i s n o t , h o w e v e r , b o u n d t o a t t e n d a l l s u c h m e e t i n g s , though he ought t o a t t e n d whenever i n t h e c i r c u m s t a n c e s he i s r e a s o n a b l y a b l e to do s o . "  This  proposition  i s directed  solely  directors.  Officers  the  o f t h e company.217  affairs  Though a  fails  reasonably  In any  Re D e n h a m meetings  Bank,219  t  to  even  resolution  initiating  to  where  on  both  were  director  who  an  ultra  since  he  specific  the policy.220  check  but  not l i a b l e  suggest  that  for liability.  had not attended Savings  had not attended any meeting f o r  Moreover,  meetings  cases  whenever  y e a r s , a n d i n Re C a r d i f f  he director  a  be l i a b i l i t y i f  p r o v i d e s grounds  f o r four  attention to  meetings  & Co., 218 t h e d i r e c t o r  years,  held  Board  the  rarely  seventeen  was  there might  attend  possible,  non-attendance  non-executive  must g i v e c o n t i n u o u s  Romer, J . s u g g e s t e d  director  to  not was  vires was  Therefore, directors which  were  liable.  party  to  lending  absent  loans had been  corporate affairs  found  policy  from  made  a  Board  pursuant  have a duty t o brought  up f o r  -  discussion be  a t Board  meetings.  the extent of directors'  affairs.  Directors  corporate  affairs  executive business  from  activities  from Board  meetings.  check  that,  based  known  of  business, at  The in  Board  on  the fact  the  illegal  need  not  need  i n  improper  were  on c o r p o r a t e  to to  seems t o  investigate prevent or  not brought  or i f they  they  conduct  absent  duty  to  from  their  of Directors  or i s  knew  of  up f o r  were  i s not derived  the  illegal  law, the directors'  that  but i s derived  or should  the  s i m p l y from  have  corporation's  their  attendance  meetings.  o f t h e common  the statement 2 2 1  not  meetings  a t common  that  t o check  membership o f t h e Board  attitude  Bank  However,  duty  i f these  on c o r p o r a t e a f f a i r s  constituent not  do  engaging  a t Board  seems  do  and  discussion  It  97 -  l a w seems  of Stirling,  t o be  summed  J . i n Re C a r d i f f  Savings  :  "Neglect or omission t o attend meetings i s n o t t h e same t h i n g a s n e g l e c t o r o m i s s i o n o f a d u t y w h i c h ought t o be p e r f o r m e d a t t h o s e meetings." 2 2 2  up  -  Therefore, be  one  diligent  than  be  may  98  -  conclude  a t a l l , and  partly  that  not  i t i s better  attend  diligent,  and  a  meeting,  attend  and  not t o rather pay  no  attention.223  Delegation  The  and R e l i a n c e  authorities  not  be  of  a  indicate  entrusted  unqualified  Thus,  director,  officer  Davey  not  entrust  a  be  power held  duties  must  inappropriate of the left  person  of drawing  or  investments  to  the  who  is  o r even a shareholder  position  i n Dovey  obviously  must  a c c o u n t was  general  a director's  the handling  the uncontrolled  company's  The  to  Others  that  an  company  b o y . 224  with  to  official:  finance  on  of the  office not  a  company  c h e q u e s on  the  n e g l i g e n t . 2 25  i n this  respect  i s stated  by  Lord  v . Cory_226.  " [ A d i r e c t o r ] was e n t i t l e d t o r e l y u p o n t h e judgment, information and advice of the c h a i r m a n and g e n e r a l manager, as t o whose integrity, skill and competence he had no reason f o r suspicion."227  Also,  reliance  without  question  on  the information  of  -  those or  performing  99  -  specialist  a u d i t o r s , has  functions,  been h e l d  t o be  such  reasonable.  Thus, where  d u t i e s have p r o p e r l y  been  and  of  director  agents  absence  of  trusting duties were  grounds  for  entitled  of  the  officers.  2  2  3  3  1  officers  directors.  2  3  for  the  misdeeds  are  the  agents  of  of  justified  in  perform  the  directors  information 2  3  0  chief not  those  the  officers  i s ,  where  and  are  to  or  managing executive  responsible  officers  company,  not  since of  the  4  d i r e c t o r s are  within  them.  Company L t d . ,  (at  2 3 2  2 2 8  the  to  the  lawyers  in  directors,  directors  of  v.  of  These  about  Dovey  on  managers,  suspicions  about  rely  cases  general  In p a r t i c u l a r ,  others  to  agents  are  chairman  3  vicariously  and  There  2 2 9  a  left  suspicion,  officers  honestly.  directors,  the  company,  those  held  advice  the  as  2  3  5  Re  as  company  City  Romer, J .  2 3 6  required  information,  their  In  Cory,  page 492)  the  not  citing follows:  advice nor  Equitable referred to  the  judgment  to  entertain  and  conduct  raise  questions  Fire  Insurance  the of  judgment Lord  in  Davey  - 100 -  "I a g r e e w i t h w h a t was s a i d b y S i r G e o r g e Jessel i n Hallmark's Case and by C h i t t y J . i n Re Denham & Co. , t h a t d i r e c t o r s a r e n o t bound t o examine e n t r i e s i n t h e company's books. I t was t h e d u t y of the general manager and ( p o s s i b l y ) o f t h e c h a i r m a n t o go carefully through the returns from the branches and t o b r i n g b e f o r e t h e board any matter requiring their consideration; but t h e r e s p o n d e n t w a s n o t i n my o p i n i o n guilty of negligence i n not examining them f o r h i m s e l f , n o t w i t h s t a n d i n g t h a t they were l a i d on t h e t a b l e o f t h e b o a r d f o r r e f e r e n c e . "  Therefore, in  directors are required  t h e company's books  ground  only  when  f o r s u s p i c i o n b y some  t o examine  they  have  entries  been  given  reasons.  Summary  Although  officers  attention  to the affairs  subject gence  to  most do  to  of their  give  that  skill  are not also common  law  and d i l i g e n c e a r e unduly  modern  companies  homework  to  operations  just  meetings".237  to  "expect  and, d e s p i t e  and  be  dili-  executive  standards  low.  a l ltheir  familiarize  perform  continuous  c o m p a n i e s a n d may  of care,  a r e d i r e c t o r s who  skill  some  bound  duties  i t i s clear  company's not  stricter  than  officers, care,  are  of  However,  directors to  themselves  with  the  Romer J . ' s r e m a r k s ,  intermittently  at  Board  -  It  seems  that  diligence  these  elected  reasons  Therefore, have  -  low standards  of care,  members  other  o f t h e Board  than  the courts  any  their  have  Directors  business  skills.  not required  directors to  for office  result,  the  condemn  directors  for their  courts  cannot  greater  that  the case  office  a d i r e c t o r has, the l e s s time  on o t h e r s ,  i s . 238  j t i  s  i s  directors'  care,  clear  not  fair  skill  duties.  And  n o t be  required  should  experience of  and l e g a l l y  or s k i l l  i t i s  of  Shareholders  reserve  respect  to  the  minimum  authority  affairs,  and e n t r u s t  doubtful  only  to  check  this  encourage  in  performing  that  directors  any s p e c i a l knowledge, One  of the  features  i s the separation the  corporate  t h e powers  fundamental  that  he  not  diligence  t o have  from  responsible  does  for office.  management  Iti s  t h e r e l i a n c e he  the w r i t e r  and  t h e modern p u b l i c company  powers  incompetent  and a t t e n t i o n he  the less to  and  a  the q u a l i f i c a t i o n s f o r  and t h e g r e a t e r  quite  principle  their  the fewer  to h i s office,  and, as  r e l i a n c e on o t h e r s .  indeed  places  and  of  special qualifications  devotes  skill  come f r o m t h e r e c o g n i t i o n t h a t d i r e c t o r s a r e  frequently for  101  ownership.  of decision  corporate the  of the  affairs  management  d i r e c t o r s t o manage  or  of  with and the  supervise  -  the  management  company.  director  director,  fact  the  From t h i s  company  skill  of  do  not  o w n e r s h i p s and t h a t corporations  to  reasonable  before  and  The s t a n d a r d  of directors  the  directors cause also  parties.  i n small  director  of  since  of  the  skill  cart  and s k i l l  should  be  a  of  different i e .the  professional  diligence.  who  appointed  t h e bad d i r e c t o r s ' b u s i n e s s to their  i t s customers,  the  In  c a n n o t be r a t i o n a l i z e d b y  shareholders  not only  f o r small directors  put  of care  and  corporate  However, i t  courts  be  the  closely-held  corporations,  should  t h e low s t a n d a r d s  losses to  corporations  reasonable  liability  reasonable  professional  the  amateur  ignores  diligence.  that  from t h a t  'addition,  never  from  public  an  with  management  skill  i n large  with  writer  proper  directors  director  be  director  separate  of the  t h e modern  i t i s next to impossible  the w r i t e r  company  business  longer  elect  the horse.  public  no  The of  and  o f view,  should  t h e powers  corporations  to  point  diligence.  that  seems  affairs  but a professional  and  with  -  102  company  creditors  and  bad  activities  itself, other  but third  2 3 9  M o r e o v e r , a t common l a w t h e r e  are other  possibilities  -  for  a  lazy  question that the  d i r e c t o r t o escape  of causation:  a  director's  substantial  laziness  cause  held  points  o u t , t h e common  exculpatory by-laws, extent  Statutory  Both  officers their  duties  Both  require  with  every  care,  d i l i g e n c e and s k i l l  would  exercise.  was  reasonably proposed  Committee  and  that  standard  prudent i n  Lewtas  skill  by  and  elaborate  of association except  fraud  that  and  to the  o r come  provisions."  their  i s  2 4  into  1  Skill  t h e d i r e c t o r s and  powers  and  discharge  d i l i g e n c e and s k i l l . 2 4 2  director  This  ...  was  he  as  care,  o f Care and  provide  to exercise  care,  of  t o condone statutory  a n d t h e CBCA  have a duty  f o r which  effective  M o d i f i c a t i o n o f Standard  t h e BCCA  loss  i n articles  specific  t o prove  of attention  "diluted  purport  i s the  lack  Furthermore,  are probably  they  with  the  That  difficult  law duty  been  provisions  that  or  liable.240  which  conflict  a  of  to  has  liability.  i t i s very  sought  diligence  of  103 -  the  a  officer  reasonably  seems  director, a  t o be  exercise  prudent lower  standard  recommendation  o n Company Law R e f o r m  to  of  the  person  than  that  o f care the  i n Ontario.243  Th  that  Lawrence e  f  o  r  m  e  r  -  standard care.  not  However,  whether the  does  this  subject  Equitable  conform  although  statutory test  Fire  Insurance  that  the  common  law standard  law  a director  and  this  from  a t common  statutory  a  and s k i l l  particular  "reasonably  prudent  person".  requirement  i s i n addition  enactment  duties  shall  or  rule  or l i a b i l i t i e s  Moreover,  reasonably  prudent  intended  which action  law or  of directors  person  a decision  that subjective could  reasonably  o f h i s knowledge  that of  every an  equity  director imaginary that  of a  relating  this  director  diligence  and  would  relevant  to the  company.245  that every  •fhe p h r a s e  t o make  a t common  t o , and not i n d e r o g a t i o n o f ,  the .care,  c i r c u m s t a n c e s . 246 is  of  City  upgrades  T h e BCCA s p e c i f i e s  t h e CBCA s p e c i f i e s  exercise  "director  to  seems t o  t  whereas  that  standard  ^  o f care  only  the statutes require objective  anything  l a w i n t h e Re  Since  of  i t i s doubtful  adds  standard  of care.  the  any  to  of care  standards  Co. L t d . d e c i s i o n , 2 4 4  diligence  experience",  conform  that  i s required to exhibit  of care,  expected  i t i s said  formulated  writer  be  to professional  standard  the  degree  104 -  exercise  " i n comparable  or officer  skill i n  that  comparable  circumstances"  a l l of the circumstances  i s made i n c l u d i n g  a  the significance  t o t h e company, t h e i n f o r m a t i o n r e a s o n a b l y  i n  of the  available  - 105 -  to  the  director  available the  when  making  the  f o r making t h e d e c i s i o n ,  company,  the  director's  decision,  the  the a l t e r n a t i v e s  position  whether  time  open t o  he  i s an  o u t s i d e o r an i n s i d e d i r e c t o r o r i s i n c h a r g e o f a s p e c i f i c part  of  corporate  qualifications peculiar similar  such  as  a  Although  there  that  a  court  or  an  similar  phrase  read  deciding  the facts  deciding  t h e f a c t , Cashman L . J .  director  i s liable  such  of a particular  a  case.248  lower  the  provisions provides or  standard  that  the provisions  not  diligence  and s k i l l  s h o u l d be n o t e d t h a t  a  and  exercise  m i g h t be  expected  behalf.  diligence  and  by-laws.  BCCA  from  a  to  of a contract,  director  Actually, in  the standard that  man  or the circumstances  relieve  i tin  2 4 9  i t i s no l o n g e r p o s s i b l e  care,  i n the a r t i c l e s  the a r t i c l e s ,  shall  of  i tis  into  i f he f a i l s  as a r e a s o n a b l e  that  phrase  applied  f o r negligence  i t i s clear  the  process.247  i n t h e BCCA,  t o t a k e i n t h e c i r c u m s t a n c e s on h i s own  Furthermore,  special  accountant,  the decision-making  would  such degree o f care  director's  o f k n o w l e d g e o f t h e d i r e c t o r and  affecting i s no  the  lawyer  knowledge o r l a c k factors  likely  management,  skill  to by  expressly  t h e memorandum  o f h i s appointment the  of a reasonably prudent  duty  of  care,  person.250  the defence of a nominal d i r e c t o r ,  he  - 106 -  is  elected  the  to a directorship  corporation  duty,  i s  no  that  he  longer  under  a special  i s not expected  effective  as  a  agreement  with  to discharge h i s  means  of  avoiding  who  d i d not  liability.  In  addition,  attend  a  Board  position duty  i n terms  a t which  deemed  t o have  after  he  dissent  diligent attention However, diligence provided which  aware  a  who d i d , t h e CBCA  mail  Section  not present or action  resolution  the minutes  better  at a  taken i s  seven  he  days  causes h i s  o f the meeting,  or delivers  or  i t to the  of the corporation.251  this  i n  i s not a  in a  unless within  the  provision  the  CBCA  upgraded  director  resolution  was  encourages  meetings  a l l decisions  even  was  was p a s s e d  by r e g i s t e r e d  i n attending  that  of  been  upgraded.  who  thereto  placed with  that  to  have  than a d i r e c t o r  director  consented  office  i s clear  a  a resolution  h i s dissent  registered  well  i s significantly  becomes  t o be  might  of l i a b i l i t y  provides that  meeting  It  meeting  of diligence  118(3)  sends  a l t h o u g h a t common l a w a d i r e c t o r  or, at  which and  who  passed  was  least,  have  the  enough.  directors  been  BCCA,  In both  absent  i s deemed  in  from  t o be giving  made.252  the  duty  Acts,  i ti s  a meeting  t o have  of  at  consented  - 107  to  the  days  resolution  after  fore,  a  or  who  been  argued care  director  who was  resolution  unless  he  is  i t  enters notice  may  care  and  person would but  unless  not  having  or  until  the  defence  be  at  them  seven  they  question  of  liability.  having  having  read  a  the  the a l l  attend  dissented  reasonably  received  the  been  for  specifically a  or  has  d i d not  of  i t  of  liable  a  days  increase  that  of  to  aware  to  that  which  amendment  directors  have  instead  within  notwithstanding  should  read  such  j t  encourage  consented  becomes  finding  they  i n determining  have  dissent  of  by  resolutions,  the  a  to  encourage  diligence  negate  to  meeting  he  test  advisable  deemed  read  liability.253  a  the  The  escape  from  is  There-  a t t e n t i o n to  absent  made,  thereto.  any  provide  given  meeting,  pay  is  seven  resolution".  to  However,  the  not  the  presumably  resolution.254  directors'  of  dissent within  and  passed  courts  not  diligence,  was  resolution  after  does  that  and  does  aware  notice could  directors' a  i f he  becomes  director  minutes has  "he  only  -  prudent  This  test  resolution  i t  but  not  understanding i t .  In  addition,  tions, inspired  the by  at  least  standard the  i n the of  higher  case  care,  of  publicly-held  diligence  standards  and  required  corpora-  skill by  may  be  securities  - 108 -  law.  In  the  Construction director,  could  C.  and  Canadian  whom  s  that  "more  expected  [writing  was  i t saccuracy] with  of a  v.  because  such  Barchris  o f one  outside  required  of [the  investigation  director  the relevant  there  who  disclosure  h a s no document  h e was t h e p e r s o n  most  work".  i sa striking  attitudes relating  a director i s liable.  above,  2 5 6  company,  2 5 7  absence  but  also  damage.  of specific  capacity  Under  general,  to  any  Japanese  However, under statutory  a r e owed  law, as  and i s l i a b l e , person  has  Anglo-Canadian  provisions  creditors,  securities  no  Plaintiff  D e f e n d a n t owes h i m a d u t y  may  of care.  A tort  suffered  law, i n the  - and nott o  investors,  or others.  recover  to the  a d i r e c t o r ' s duty i n  potential  commissions  and t o  mentioned  not only  who  2 5 8  t h e Japanese  as a d i r e c t o r i s t o h i s company a l o n e  shareholders,  exchangers,  c o n t r a s t between t o whom d u t i e s  a d i r e c t o r owes a d u t y  foreseeable  In  Escott  TO WHOM A R E D U T I E S OWED?  seems t h a t  the  with  be  concerned  It  his  a  case  to the l i a b i l i t y  2 5 5  held  fairly  assuring  directly  States  d i r e c t o r ] i n t h e way o f r e a s o n a b l e  connection and  Corp.,  i t was  defendant than  United  2 5  ^  damages duty  stock  unless  the  i s n o t owed t o  -  the  w o r l d . " j  question:  Is there  defendant  to  instances  abridged  special some  the  relation  who  example,  a  case  duty  o f care  plaintiff by  the  judge  ...?"261  reason  of  indicating  a r e covered  Denning  M.R.  a  by  case  decide owing  Duties  However,  substantial  the  by t h e  are  the Plaintiff's  the duty  declared  must  i n this  t o t h e Defendant.262  authorities  persons  every  n  109 -  i n  many  status  or  there  a r e now  broadening  of the  o f t h e Defendant.  For  that:  " [ D u t y o f c a r e ] i s o w e d ... t o t h e p e r s o n t o whom t h e c e r t i f i c a t e i s i s s u e d a n d whom h e k n o w s i s g o i n g t o act o n i t ... B u t i t i s a l s o o w e d t o a n y p e r s o n whom he knows, o r ought t o know, will be injuriously a f f e c t e d b y a m i s t a k e ..."263  The  Supreme  conservative parties. duty  of  of  Canada  has  displayed  i n extending  the duty  v. Bamford,264  the court  of the specific  whether  of a class  test  could  a  that  be  to  more third  accountant's of  actual  use and r e l y  t o the duty  on  of care  The c o u r t d i d n o t need t o extended  t o whom  to a foreseen  an  the test  who w i l l  t o apply  somewhat  o f care  discussing  party.  o f people  more b r o a d l y s t i l l ,  n  Plaintiff  to a third liability  i  declared  was t h e p r o p e r  an accountant  knowledge or,  care,  statement  decide  of  attitude  I n Haig  knowledge the  Court  t o cover  the Plaintiff  Plaintiff.  actual belonged  - 110 -  In  New  Zealand,  i n Coleman  the  opinion  and  o u g h t n o t t o be  general  that  duty  much  followed.  The  J.  and  by  academic Court  and  that  the  in relation  director  toward  in a the  i s unclear whether Canadian  in  Coleman  to  shareholders.  that  the reasoning  they  same  footing  that  i s as  must  also  foreseeable a  civil  held  a  as  damage,  they 2 6 8  to  courts w i l l the duty that  duty  acting step  creditors  or  the writer  decision  been  widely  of  Mahon,  too  broadly  required  from  a  would  differ  and t h e  nature  practical  follow of care  Allen  If this  o r any  not  a  sense  the  shareholder.266  o u t t o them were  His  circumstances and  wrong  t h a t t h e r e was  a shareholder  fiduciary  themselves  given  lawyer,  seem  was  the decision  conduct  real  expressed  Wright  has  v.  i n Coleman v. Meyers.  owed  agents". be  extend  I t may  the directors  since the  v. Meyers and  but  of  upon a l l t h e s u r r o u n d i n g  had assumed  J.  J ' s ] c o n c l u s i o n was  to dealing with  which  v.  decided  reversed  standard  It  followed  then  discussion,  [Mahon,  the r e s p o n s i b i l i t y  Mahon,  to shareholders.  o f Appeal  the  depending  He  directors  that  director  M e t e r s , 265 i n Percival  followed.  held  stated  of  the decision  owed  generated  v.  Lord  person  any  earlier  7  held  f o r them  company  i s taken,  find  6  shareholders  "as a c t i n g  any  2  director  Haldane  to the  f o r the  reasoning  of a  Hyatt  foreseeable P l a i n t i f f . cannot  the  on  itself,  consideration who  suffered  However,  persuasive  as  reason  -  why  Canadian  tort  "foreseeable simply  law  the  Lords  duty  House  of  fact,  i n recent cases  seems  Lord Wilberforce  Even of  to  believe  that  ultimate  director which  Wilson, that:  that  not  close  the broad  to  reasonable  to  to  The  this  principle  at  the decision  English  result,  i n  s e t down  by  with  the  least  i n Haig  limitation  one  leading  v. Bamford  has  f o r w a r d and t h e r e i s e v e r y  reason  yet  that i t s  will  at least  ceased  be  a  advancing duty  as f a r as t h e d u t y  company's  Scott opened  v. a  of  the  authorized  Riehl  general  and  to  and  to  a l l reasonable  were  provisions  Supreme  of a director  wrongdoing  Schumak,271  account  received  to the trust J.  moved  Plaintiffs,  law b r i s k l y  a l l monies  contrary  more  duty  " f o r e s e e a b l e damage".  c o u r t s do n o t do away  i t has  for a and  seem  of  users of accountants' information.270  Furthermore,  Scott  limitation  i n Anns Case.269  destination  foreseeable  parties  to  foreseeable  Canadian  the  I t would  applying  commentator has argued moved  -  keep  t o have  i f the Canadian duty  should  Plaintiffs".  limit  Ill  Court  a  i n t h e company's  of of  and  the Mechanic's British  third  i s concerned,  where  deposited  to  in  Defendant name  into  withdrawn, Lien  Columbia  Act, stated  -  112 -  " T h e d i r e c t o r s may b e l i a b l e t o t h i r d p a r t i e s f o r a company's wrongdoing i f they have expressly authorized wrongful acts complained o f . "  However,  perhaps  even  duty  t o foreseeable  rule  which  against the  barred  directors  company.  company,  then  any  the  to  a  remedy  respect  company  itself  derivative  a  a  action  to  f o r i t s enforcement  i s an  i n default.  The  derivative  has been  I n Foss  t o t h e company cannot  a director  severely  o f t h e common l a w i s t h a t  v. H a r b o t t l e , 2 7 2  t o the corporate  against  owed  to the  law b u t i t sscope  shareholder  company  i s o n e owed  i s the only proper  a wrong done  i t , and  of  who h a s s u f f e r e d a w r o n g may m a i n t a i n  principle  of  law procedural  of duties  enforced  against those  o f t h a t wrong.  this  the limitation  shareholder  f o r breaches  the primary  a t common  than  t h e common  One o f t h e b a s i c p r i n c i p l e s  a person  redress  by  t o be  exists  applied  was  I f the duty  action  in  action  or officers  b y t h e company  only  significant  Plaintiffs  action  limited.  more  context  Plaintiff  for a  t  n  action  e  C  and h e l d  O  urt that  i n an a c t i o n t o  or t o enforce initiate  an  and wrong  a duty  owed  maintain done  a  to the  company.  However,  this  would  work o b v i o u s  engaged  i n t h e wrongdoing  company  and thus  prevent  form  injustices  where t h e d i r e c t o r s  t h e m a j o r i t y on t h e Board  t h e company  from  suing.273/274  of the  Statutory repealed provide  provisions the rule for  situations.  1.  Oppression  CBCA  v.  Harbottle  actions  234  director who,  person  to  unfairly  BCCA  and have  i n  and or  officer  i n the make  of  discretion  an  disregarded  231 p r o v i d e  a  abandonment  interference be  application  therefore  of  the  have  2 7 6  attempted  wider  to  range  this  shareholders  or  provision  a  where  to of  or  publicly-held  may  creditors.  2  be used 8  0  oppressive  judicial  non-  the  disputes does  has  provision i s  Although  this  proper  company  This of  other  i s a  the  2 7 8  security  any  o r has been  them.  ^  or  court,  f o r solving 2 7  to a  company,  judgement.  corporations, large  remedy  principle  particularly useful  application  a  their interests  i n business  closely-held  a  of  u n f a i r l y p r e j u d i c i a l towards  will  the  Remedy  person  an  and  2 7 5  REFORM  Sections  holder,  or  the  2 7 7  STATUTORY  or  i n Foss  113 -  derivative  D.  CBCA  i n  -  not  remedy  in  small  deny i t s  corporations  for protection  and  of the  - 114 -  2.  Derivative  Action  Statutory repealed to  provisions  t h e r u l e i n Foss  provide  2 8 3  and t h e B C C A  2 8 1  v. H a r b o t t l e  for derivative  situations. as  i n the CBCA  actions  F o r example,  BCCA  and h a v e  in a  wider  Section  2 8 2  have  attempted range  225(1)  of  provides  follows:  "A member o r d i r e c t o r o f a company may, with l e a v e o f t h e c o u r t , b r i n g an a c t i o n i n t h e name and on b e h a l f o f t h e company (a)  t o e n f o r c e a r i g h t , d u t y o r o b l i g a t i o n owed t o t h e company t h a t c o u l d be e n f o r c e d b y t h e company i t s e l f ; o r  (b)  t o o b t a i n damages f o r any b r e a c h o f a r i g h t , duty or o b l i g a t i o n r e f e r r e d t o i n paragraph (a),  whether the r i g h t , duty or under t h i s A c t o r o t h e r w i s e . "  However, enforce  shareholders  may  still  obligation  only  cause  t h e r i g h t s o f t h e company a g a i n s t  officers.  2 8 4  CBCA  Section  the  company a n d n o t t o s h a r e h o l d e r s  principle is  still  that  the d i r e c t o r ' s sole  preserved  inviolate.  2 8 5  t h e company t o  i t s d i r e c t o r s and  1 1 3 ( 1 ) and BCCA  t h a t d i r e c t o r s owe t h e d u t i e s p r o v i d e d  arises  151(1)  specify  i n these sections to  or creditors. duty  The o l d  i s t o t h e company  -  The  distinguishing  comparison with  (a)  The  The  derivative  action  action  (c)  features  The  court.  extends  irreparable  (the  institute  available  are  required  Japanese be  auditor)  may  passed the  or  since  is a  to  law, caused  action  to  to  only  in  an  party.  get  leave  except  of  cases  the where  t o t h e company by  the action he  not  intervening  instituting  institute  in  complainants.  to defending  d a m a g e may  shareholder  i s  provisions  are:  the corporation  Under  have  the Canadian  but to directors or  plaintiffs  days  of  action  t o which  company  -  Japanese p r o v i s i o n s  shareholders,  (b)  115  the  action,  only  after  demanded  the  enforce  the  the the  thirty  auditor  to  director's  liability.  (d)  The  court  has  been  may  the  fact  be  approved  consideration  when  dealing  application.  Under  bring  a  ratified  o r may  take  derivative the act i n  that by  the  with  Japanese suit  the  question.  breach  shareholders the  law,  even  alleged  the  when  merit  into  of  the  minority  may  the  majority  E.  SECURITIES  There  have  diligence  REGULATIONS  been and  skill,  regulations. directors' for  and  general  respect  Ontario  to  the  there  As  reasonableness  for  the  problem  Columbia' S e c u r i t i e s issuing is the  the  liable  t o pay  director  as  been  /  a  of  no  be  Act  result  is liable  misrepresentations  to  that or  in  do  not  they  cover provide  prospectus.  and  skill,  determining  reasonable  required  are  provides  any of  in a  securities  in a  diligence  care,  in  of  a  the  the what  grounds  misrepresentation,  whom  or  a  sue  regulations  care,  that  a  compensation for  to  of  for  standard  prudent  man  in  2 8 7  to  securities  securities  sustained  2 8 6  standard  mismanagement,  provides  shall  circumstances.  right  investigation  had  the  for misrepresentation  Act  belief  a  for  standard  Securities  that  has  in  securities  liability  reasonable  the  who  liability  constitutes  of  developments  Although  directors'  With  recent  that  person to  loss the  duties  who  signed who  or  the  damage 2 8 8  for his  prospectus.  2 8 9  the  director  a l l persons  purchase.  purchaser  a  owed,  This  of  the  British a  company  certificate  have  purchased  persons may  negligence  have  mean t h a t in  a  making  -  Although  these  publicly-held encourage  securities corporations,  d i r e c t o r s to  117  -  regulations these  increase  are  provisions  their  care  and  only  applied  to  are  expected  to  diligence.  -  IV.  There law  are  directors  to  and of  the  courts  care,  a  in  each  of  to  country law  directors  besides  the  duty  large  are  derivative  action  check  positive i s no  proof  direct  derivative  been  we  since  cannot  the  pecuniary  action.  quite  Nevertheless,  been  liable  performing directors  their have been  their  duties found  are our  hard  of  for  and  cases  the  affairs;  the  liable.  few  with  the  of  a  the  decided duty  brought  of when  on  the  shareholders  is a  in office who  or  Canadian  to and  bring  stark contrast  where d i r e c t o r s  mismanagement the  care,  hopes  remain  there  meet  of  benefit for shareholders  l a r g e number o f J a p a n e s e for  place  to  separated  judge,  cases  directors  between the found  corporate  f o r breach  the  great  business  to  of  closely-held  decisions; of  sued of  i t is  while  the  duty  and  reluctance  percentage  bankrupt;  skill  measures  the  affairs  to  their  have  small  proper  Japanese  and  although  are  takes  and  c o r p o r a t e management a r e  manage  have  diligence  example,  ownership;  expressed  very  companies  the  care,  h i n d s i g h t , businessmen's  where  there  skill  between Canadian  For  powers  directors  cases  obtain  the  and  of  of  n e i t h e r company  have  benefit  duty  corporate  diligence company,  the  companies  situation;  from  CONCLUSION  officers.  corporations, the  -  some b a s i c s i m i l a r i t i e s  relating  majority  118  have  negligence cases  in  where  -  It  seems  that  contrast: parties  One  of  by  directors.  In  both  cases  than the  Canada  companies. 90  and  derivative  of  where breach  a  the  of  care,  of  directorial have  duty  i s correct Article  third  parties,  care,  interpret third  to  that  266-3, which has  diligence Article  p a r t i e s , 292  and 266-3 a  n  c  j  and  a  have  is  skill  small  the owed  number  because  directors  seems  to  liable  very  some  of  their  or  are  their  covered  be  no  Canadian  to  a  and  third  cases  existence of  to the of  upgrading  directors.  provision held  f o r the  directors  in  for the  Japan.  Commercial  liability the  to  standard  Japanese  courts  protection to  the  cases  On  the  of  by  party  skill.  such  a  authorities  are  provides for directors'  skill as  other  to  who  instances of  contributed  third  liability  are  diligence  the  to  duty  the  a  this  against themselves  persons  found  numerous  say  only  there  there  care,  a  for  for shareholders to i n s t i t u t e  the  been  of  are  action  Although of  owe  diligence  of course  hard  reasons  company;  directors'  to cause  broadening  Code,  of  the  i t i s quite  a  there  i s a matter  contrary,' there are  It  Japan,  to  directors  directors  standards  action.  indicating  not  the  reluctant  colleagues  or  principal  to  This  2  two  -  simply  and  relating  naturally  are  i s whether  rather  strictness  duty  there  119  have  for wide  -  liability up  by  t o such  the  whose  fact  capital  writer  It  this  of a  director  a fiduciary  v.  Hyatt  are  2  9  that  3  since  for  the  on  company  itself,  If  step  of  a director  a  possibility  the  same  held  of i s  weak.  role  i s , as  i s taken  that  liable  the  266-3  i s  extend  However,  the duty  at least  there i s a statement owe  a  fiduciary  were  of  as f a r i n Allen  duty  o u t t o them  they  duty  With  company  to  as  acting  i s extended,  the  acting  f o r the  approach  regulations a  Code  consideration  o r any p e r s o n  respect t o the duty  to third  purchaser  in a prospectus.  t h e Commercial  to  agents.  another  to  companies  seems  Article  step, to creditors  securities  backed  fulfilled.  as  and t h i s  of a large  small It  of  themselves  footing  are mostly  many  courts w i l l  directors  they  that  misrepresentation  However,  very  i s concerned,  s u f f e r e d ' f o r e s e e a b l e damage.  director  great  and  Canadian  must be g i v e n , a t t h e n e x t  influence  a  to shareholders.  duty  shareholders  this  are  function  whether  as  them  there  and has b e e n a d e q u a t e l y  i s unclear  care  that  These d e c i s i o n s  foundations  that  desirable,  persons.  120 -  parties,  will which  be  care  t h e r e may  made suggest  for his  of  who  under that  negligence  be the a in  2 9 4  Article  266-3 h a s  also  been  used  -  extensively seemingly the  to  of  check  originally  care,  i t seems  corporate  Director.  such  of  266-3  fact  that  the necessity  with  a  one  of  company  by-products between  closely-held  small  respect  Japanese courts  to  courts have  subjective  observation)  not  to protect  like  of a  of  third  a private  used  p a r t i e s who  corporate  affairs  the  of  lack  be  i t seems  enterprise  a  publicly-held  a  of to  that the transacted  contributes strict  proper  large  to  i s grounded  t h e Board  to  Therefore,  Board  the duty  that  itended  that  circumstances  under  membership  was  the fact  the actual  of observation)  was  factors of the  not t o hold  companies  entity.  t o check  distinction  With  small  constituent  the corporate  the duty  with  increasing  The d i r e c t o r s '  of  companies  although  of  When o n e c o n s i d e r s  (duty  disregard  making  (duty  f o r small  affairs  Article  small  this,  the function  affairs  inconsistent of  the position  and  t o be one o f t h e c o n s t i t u e n t  state  put directors  veil,  e t c . , i s undesirable.  corporate  normal  meetings,  on  t o accomplish  s e l f - a u d i t system.  i s a  check  the corporate  intended  corporate  to  lift  necessary  standard  duty  it  to  121 -  by  duty, i s  legislative  company  and  a  company.295  the standard have  required  required.  standard  of  care,  higher  While  the  and d i d n o t r e q u i r e  diligence  standards common  and  than law  skill,  Canadian  adopted  a  a director to exhibit a  -  greater  degree  person  of  of  his  skill  than  may  knowledge adopted  of  manager.  degree  of of  a  good  care  that  required  to  take  decision  is  made  degree  than  the  or  an  director  prudent  required  a  standard that  a  reasonable  circumstances Japanese proper  to  required  with of him  However,  duties and  in  a of  good  corporation  as  than  courts  is  be  director  i f he  manager  managed  subsection can  be  diligence  faith  with  a  of which  he  was  a  has  and for  i f he the  director.  his  best  has  that  of  a care The care  in  the  under  the  that  i t is  erred or  in  a  policy  damage  to  faithfully. CBCA  a  own  of  take  a  higher  of  caused  152(1)  to  a  Japan.  decision  affairs  skill  view  to  be  which  degree  i t s  indemnified and  that  clearly  and  would  standard  that of  business  that  require  Moreover,  has  is  execute  interpretation  who  a  standard  standard  expected  i s an  the  in  CBCA  Canadian  behalf.298  to  to  the  lower  Japanese  that  objective  the  a business  BCCA  BCCA a n d  the.  might  respect  director care,  the  own  and  a  e  n  director  i s expected  Code, t h e r e  even  under  he  Canadian  a  competent  is  from  required  taken,  is still  his  condemn  company,  119(1),  on  standard  action  to  man  Commercial  judgement  the  by  objective standard, The  person,  required  t  circumstances  both  director  expected  particular  conform  reasonably of  an  which  Although  be  experience,296  reasonably  in  that with  b u s i n e s s . 297 every  a  -  reasonably  and  Commercial Code has care  122  2  9  9  subsection  breach acted  interests  of  his  honestly of  the  -  In  addition  to this  to  me  the following  courts  1.  that  impose  is  their  widely  There  make  the d i r e c t o r s ' duty  their  constituent  Japanese  attendance  of  a t Board  observation  meetings  membership o f t h e Board  but  of Directors  accepted.  that  contrary,  a nominal  director i s not given  " i t was t h e m i s f o r t u n e  of the  chose  such  unwise  On t h e  i t i s considered an appointment  conduct  the business  o f a good  The  Boards  companies directors.  as a  director".  i n Japan  that  director  should  o f t h e company  with  a  3  0  0  person  who  undertake  to  the standard  of  manager.  of  Directors  include  only  I t i s quite  outside  i s widespread.  that  they  care  Code  any  concept  accepts  Nearly  also  i t seems  standard.  from  i s no s u c h  three  factors  p o s i t i o n i n t h e Commercial  company  4.  i n the starting point,  further  The i n t e r p r e t a t i o n t h a t special  3.  a higher  not derived  from  2.  difference  The i n t e r p r e t a t i o n t h a t is  123 -  directors  a l l companies  of a  common  nearly small  a l l large minority  f o r there  out of a total  adopt  the "lifetime  Japanese  of  outside  t o be o n l y of thirty  two o r  o r more.  employment"  system  -  and  most  of  their  i t  directors  resident overseas.  or  Important  ringi  made  by  plan  i t  approval  This  The  the  means  him  employees.  is  clear  of  a plan  or  for  an  a  to  the of  final the  the  are  well  where  system  draws  for  is called on  important  In  in  charge,  legal  the  i t not  group  responsibility,  and  since  writing.  responsibility a l s o on  plan  affairs  rests  place  but  the  general,  corporate  to  for  of  important  matters  matters.  in  the  most  responsibility  i s recorded  the  i t is generally  the  on  up  approval  decision  informed  the  collective  the  matter:  chairman  a  i n charge  This  routine  by  i s involved i n t r o u b l e , a Japanese  the  in  inter-corporate  When a g r o u p  from  have  director's  employee  obtains  relatively  for  directors  and  order.  importance  heads  the  In  companies  that  reached  person  form  makes  directors  therefore, and  Who  president  department  Japanese  usually  in written  upon t h e  matters,  are  i n ascending  the  that  exposes  process.  system.  depends  from  h i s c o m p e t e n c e as  and  decisions  seniors  rare  come  criticism.  decision-making  his  on  structure  discipline  original  quite  reflects  business  -  directors  addition,  negligence  is  124  only  itself.  i t i s apt  on  group the  Therefore, to  be  tends person apart  considered  -  proper  that  -  125  a d i r e c t o r should  the n e g l i g e n c e  of those  below  bear him.  However, w h a t seems more f u n d a m e n t a l the question diligent  relating  3 0 1  i s the d i f f e r e n c e between  t o w h e t h e r o r n o t a d i r e c t o r becomes more  i f the courts  Anglo-Canadian  some r e s p o n s i b i l i t y f o r  place  thought  is  a  strict  that  responsibility  i t i s doubtful  that  liability  for negligent misrepresentation  would p l a y  improving  the quality  deter  pursuing an  negligent  adequate  directors' in  courses  penalty  On  3 0 3  that  i t i s , by  civil  liability  courts hold  for negligent  itself,  directors liable that  discharging their duties  liability  f o r negligent  say which  that  we  school  should  this  which  seems  t o be  a director with Rather,  Japanese  mismanagement  frighten  them  into  3 0 4  indicates that  Therefore,  of thought  adopt  be t h e  discontinuance  thought  negligent  will  might  strict  civil  mismanagement makes J a p a n e s e d i r e c t o r s  more c a r e f u l and d i l i g e n t . to  that  mismanagement.  diligently.  i s no a v a i l a b l e d a t a  i t i s thought  t o pursue  for their  a role i n from  and h i s  Japanese  not a goal  f o r negligent  3 0 2  civil  directors  mismanagement  reputation  the contrary,  the' expectation  There  of conduct.  loss of business  office.  in  o f d i r e c t o r s and  on h i m .  i t seems t o be  i s correct.  the p o s i t i o n  that  difficult  However, i t seems every  d i r e c t o r has  - 126 -  guaranteed skill  t o perform  which  (Canada)  can  or a  appointment with  a  person  as  stricter  legal  diligence  and  one  And,  i s of  of a  i f i t will  may  be,  on  improving  Canada  and  Japan,  cannot  quality  have  of  that  we  prudent a  to play  a  directors' should of  influence,  quality  to  expect  standard  any  the  required  and s k i l l  proper  office  reasonably we  the opinion  accepts  take  i s  and  person  who  should  although  a  prudent  director  the  diligence  a person  or  and s k i l l  developing  skill,  since  a  improving  to  reasonably  of care, diligence  the writer  attention  the care,  office  that  manager.  in  a  takes  diligence  standard  role  activities,  slight  director  good  of  (Japan)  understanding  a  decisive  more  a  manager  the care,  or  expected  good  good  exercise  be  h i s duties with  of  pay care,  however  directors'  activities.  In  both  reluctance  t o judge,  decisions.  Gower  expresses  are  conscious  that  judges  attempting foresight. activities could in  have  to 3 0 5  with  substitute The  courts  the  courts  the benefit  have  of hindsight,  h i s sympathy of  their  the  with  possible  hindsight  should  judge  a  question.  when  Needless  he  entered  into  this  and  director's  in  directors' business  t h a t he knew  should  says  unfairness  the business  t o say, the courts  their  directors'  f o r the  by c o n s i d e r i n g the circumstances known  expressed  o r he  activities  n o t condemn  a  -  director became this  f o r h i s business  known  only  principle  negligence,  i s one  but also  Therefore,  the  directors,  they  Moreover,  the existence  courts  The  t o upgrade  standard  only  of  reason  t h e modern  to believe  comply w i t h  the  future.  Japanese  which  encourage  skill  i n performing  With widen  respect  causation  of  not  fiduciary seem  to  duty  in  duty. be  fiduciary  business  0  7  may  make  the  duties  of  by  many  courts  experience  seems  i teasier  courts  t o be  care,  and  and  3 0 6  f o r the  and  skill. applied  inadequate We  3 0 8  will  of care,  coverage  diligence  environment.  Canadian  standards  3  insurance  by Canadian  considered  their  require  have  in  every  directors  d i l i g e n c e and s k i l l i n  t o suggest p o s s i b l e the care,  ways  d i l i g e n c e and  duties.  liability a  only  light  of care,  t o t h e two o b s t a c l e s  between  applied  not  very  directors to increase  directors'  However,  a heavy  of directors*  developed  that  higher  does  which  directors.  d i r e c t o r s has been  terms  be  of facts  completed.  breach  a  the standard  of care  was  place  indemnification of d i r e c t o r s  courts  to  of  reluctance  place on  on t h e b a s i s  should  cases  Canadian  and s k i l l  to  which  to  diligence  the  conduct  h i s conduct  court's  r e a s o n why w h i l e on  after  127 -  t o upgrading  i n Canada,  director's  namely  laziness  or  the standard the question inactivity  and of and  -  damage need  t o t h e company; 309 to  identify  precedents  In  the courts  requiring  and  a  damage  that  director called proving  matter  by  The  and  liable which  meetings.  plaintiff,  a  prove  was  not  courts  the  have  concrete  the  there  causation  held causal  of  and d i l u t e d  the  by h o l d i n g  of observation  there  director's  intentional  or g r o s s l y negligent breach  the  should  the r e s p o n s i b i l i t y .  the  concept  although  of  foreseeable  foreseeability  negligence, plaintiffs.  there  i s no  observation  plaintiffs  o f damage  i s a  1  0  necessary  If a plaintiff  i s inside  a  Board to  between  a  the  of duty  With  on  a  need  and  under  l i m i t a t i o n of l i a b i l i t y  at  i s no  relationship  3  a  requirement  failure  bear  i t i s  be  director's  latter  of  he  for discussion that  a  will  of care  o f the duty  of  diligent  i s that the  of  inactivity  Moreover,  eased  up  or  t h e more  of the duty  i n h i s duty  legal  existence  laziness  that  o f adequate  brought  the  the unfairness  party.  have  f o r h i s breach  Japanese  recognized  third  courts  by  alternatives.  strictly  specificity  The  acknowledge  r e s t r i c t i o n imposed  e  possibility  the relationship  director  n  possible  to  more  court.  concreteness  t  i t i s unreasonable  i s the to  j  between a d i r e c t o r ' s  suffered  understood  (  seem t o h a v e  plaintiff  relationship  n  foreseeable  seem t o f u r n i s h  Japan,  causal  a  a  128 -  other when  respect  Japanese  to  law,  condition of to  foreseeable  the foreseeable  range  of  -  injury with  and  a  suffers  defendant  Therefore, victim or  of a  tort  special  probable  of by  the  of  all  the  3  is  of  a  defendant.  p a r t y , whatever  director  i s ,  i f  same  creditor,  his he  duty  status suffers  have  every  of  for  a  equal  the  director the  i t is  will  be  society  of  the  impossible  be  and  standard with  the  structure  to and  business  expected and  to  skill  experience  experience  required  size  and  company's  cannot  varies  the  i t i s impossible  knowledge,  knowledge,  example  the  rejected  diligence  director  Furthermore, of  care,  company,  aspect a  demands o f  Committee  care,  modern  because  plaintiffs  the  future,  mismanagements.  of  of  to  degree  expected  of  i n the  liability  foreseeable  Jenkins  large  to  3 1 2  circumstances,  courts w i l l ,  director's  Moreover,  1  matters.  which  a  director  1  and  duty  relation  activities. possess  relationship  shareholder,  widen d i r e c t o r s '  directors'  In  every in  duty  t o any  Canadian  U.K.  directors'  exhaustively.  skill  that  the  the  codification  expect  special  the  third  the  or  c o u r t ' s assessment  from  as  define  to  causation  protection  However,  abridge  other  s t a n d a r d and  influenced for  status  owes a d u t y  any  -  damage.  the  concepts  or  his  not  relation  i s very  upgrade  does  a director  foreseeable  It  loss,  129  skill of  to in care  specific of  the  -  corporation,  the type  the magnitude of the presented,  and  Therefore,  duty  of  care,  concepts,  explore  a  of  general  to  i t would  some  standards  view, concepts  multiplicity  impossible  be  to  impossible  and  skill  extent,  to  to  courts  flexibly  of d i f f e r e n t  are  in  define  directors' It  abstract  to  but  be  expected  to a  is  general or  However,  "good  although  desirable  to  a multiplicity  of  and  modern c o m p a n i e s . 3 1 4  standards.  general  prudent person"  j.t seems  i n deciding  problem  directors.  t o meet t h e c o m p l e x i t y  management o f the  the  deal  on  o b j e c t i v e standard i n order  business,  exhaustively.  rely  "reasonably  d i f f i c u l t i e s , 313  single  the business  point  immediacy of  " i n comparable c i r c u m s t a n c e s " .  many  not  different of  next  f o r example the  are  of the corporate  t r a n s a c t i o n , the  diligence  to  manager" and there  is  and  unavoidable,  complexity  t h e d i s t r i b u t i o n o f d u t i e s amongst  i t  propositions  and  -  130  interpret  fact,  and  variety  From  this  abstract explore  a  -  131  -  NOTES Iacobucci  et  a l , Canadian  Business  Corporations,  286.  Commercial Code, A r t i c l e 2 5 4 ( 3 ) . A mandate c o n t r a c t i s concerned with the performance of a j u r i s t i c act and t a k e s e f f e c t when one p a r t y c o m m i s s i o n s a n o t h e r p a r t y t o perform a j u r i s t i c act (Civil Code A r t i c l e 643). A mandate c o n t r a c t d i f f e r s from employment i n terms of the e m p l o y e r ' s c o n t r o l and d i r e c t i o n , and i n these regards the mandatary has discretion. I t a l s o d i f f e r s from a c o n t r a c t f o r work i n t h a t i t has as i t s subject the performance of j u r i s t i c acts or n o n j u r i s t i c acts, but not the completion of s p e c i f i c work. (Kitagawa, Doing Business i n Japan I I 1-75). W h i l e a mandate c o n t r a c t i s not necessarily required, an agency relationship is usually created by means of a mandate contract. A l t h o u g h d i r e c t o r s a r e n o t r e g a r d e d as b e i n g a g e n t s o f the companies ( s i n c e they are indispensable organs of t h e c o m p a n i e s and t h e i r i n t e n t i o n s a r e t h u s i d e n t i c a l t o those of the companies), i t is provided that the r e l a t i o n s h i p b e t w e e n a company and i t s directors is governed by the provisions of the law relating to mandates. C i v i l Code, A r t i c l e 644. Under Japanese law, t h e r e are two standards of care. One i s the duty of care of a good manager, eg. a d i r e c t o r , a mandatory, a b a i l e e f o r reward, a person having a r i g h t of r e t e n t i o n , a pledgee, and a g u a r d i a n . The o t h e r i s t h e same c a r e a s h e uses i n r e s p e c t o f h i s own p r o p e r t y , e g . a g r a t u i t o u s b a i l e e , a p e r s o n who e x e r c i s e s p a r e n t a l p o w e r , a n d a successor. A r t i c l e 254-3 ( e m p h a s i s a d d e d ) . Many s c h o l a r s i n t e r p r e t t h a t t h i s a r t i c l e i s the general p r o v i s i o n r e l a t i n g to fiduciary duty. See Akabori, "Torishimariyaku no C h u j i t s u Gimu ( F i d u c i a r y Duty of Directors) 1-4", 85 Hogaku Kyokai Zasshi 1-4, Tanaka, Kaishaho (Company Law), Osakadani, "Torishimariyaku no Chujitsu Gimu (Fiduciary Duty of Directors) lb Shiho, Hoshikawa, Torishimariyaku Chujitsu Gimu Ron (Discussion on D i r e c t o r s ' F i d u c i a r y Duty), Totsuka, "Eibeiho n i okeru Torishimariyaku no C h u j i t s u G i m u ( D i r e c t o r s ' F i d u c i a r y Duty under A n g l o - A m e r i c a n Law)" 34 H a n d a i H o g a k u . However, the Japanese Supreme Court has d i s t i n g u i s h e d the f i d u c i a r y duty from the duty of o f a good manager and h e l d t h a t :  not care  -  132  -  "The f i d u c i a r y d u t y p r o v i d e d i n A r t i c l e 254-2 of the Commercial Code i s but one of the p h a s e s o f t h e d u t y o f c a r e o f a good manager p r o v i d e d i n A r t i c l e 644 o f t h e C i v i l Code, and A r t i c l e 254-2 o f t h e C o m m e r c i a l Code p r o v i d e s for the fiduciary d u t y i n o r d e r t o c l a r i f y and t o make c o n c r e t e t h e d u t y o f c a r e o f a g o o d manager." (Arita v . K o j i m a e t a l . 24 Supreme C o u r t , J u n e 24, 1970) Therefore,  i t has  been  argued  Minshu  6  625,  that:  "Under J a p a n e s e law, t h e l e g a l principle of fiduciary duty has not been positively developed, but the necessity for such d e v e l o p m e n t i s b e c o m i n g more a p p a r e n t . " (Akabori, " T o r i s h i m a r i y a k u no c h u j i t s u gimu ( F i d u c i a r y D u t y o f D i r e c t o r s ) " , 32 S h i h o 1 5 3 (1970)) 5  Beck  6  See  7  8 9  et a l . , Business Associations supra note  Commercial 261(1) Ibid.,  211  4  Code  Article  Casebook,  (before  the  1950  amendments)  Article  260  Kawamoto, G e n d a i K a i s h a - H o r e v i s e d e d i t i o n 1980) 313  (Modern  Company  Law)  (new  Company  Law)  10  Suzuki, (second  11  Commercial  12  phba v. Toyota Motor K.K. 22 Kakyu Saibansho Minji S a i b a n r e i - s h u ( h e r e i n a f t e r r e f e r r e d t o as Kaminshu) 3.4 549 N a g o y a D i s t r i c t C o u r t , A p r i l 3 0 , 1971  13  Commercial  1  4  Ibid.,  1  5  Ibid., 653  Shinpan Kaisha-Ho e d i t i o n 1 9 8 2 ) 38 Code, A r t i c l e  Code, A r t i c l e  Article Article  (Newly-Edited  255  254(1)  256(1) 254(3),  Civil  Code  Articles  651(1)  and  -  133 -  1 6  Ibid.,  Article  257(1)(2)  1 7  Ibid.,  Article  257(3)  1 8  Ibid.,  Article  270(1)  1 9  f o r example, Commercial Code, A r t i c l e s a n d 43(1) p r e s c r i b e a s f o l l o w s : Article  38(1)(2),  42(1)  38  (1) A manager i s a u t h o r i z e d t o do on b e h a l f o f t h e proprietor of the business a l l judicial and extra-judicial acts relating to his business. (2) A m a n a g e r may a p p o i n t and d i s m i s s c l e r k s , j u n i o r c l e r k s and o t h e r employees. Article  senior  42  (1) An employee i n v e s t e d w i t h a t i t l e indicating t h a t he i s t h e p r i n c i p a l person i n charge o f t h e business of the principal office or o f a branch o f f i c e s h a l l b e d e e m e d t o h a v e t h e same a u t h o r i t y as t h a t o f a manager o f t h e p r i n c i p a l o f f i c e o r o f a branch o f f i c e . This s h a l l not, however, apply i n respect of judicial acts. Article  43  (1) A s e n i o r o r j u n i o r c l e r k o r any o t h e r employee who has been e n t r u s t e d w i t h c e r t a i n o r s p e c i f i e d matters relating t o the business i s authorized to do a l l e x t r a - j u d i c i a l a c t s . 2 0  Commercial  Code, A r t i c l e  261(1)  2 1  Ohsumi, Zentei Kaishaho Ron (Treatise on Business C o r p o r a t i o n L a w l ( c h u ) 113 ( r e v i s e d e d i t i o n 1959); N o z u , Daihyo Torishimariyaku (Representative Director) i n 3 Kabushiki-Kaishaho Koza, 1092 (Tanaka ecU 1956); H a t t o r i , Yakuzuki Torishimariyaku n i tsuite (Directors w i t h S p e c i a l T i t l e ) i n 47 M i n s h o N o . 6.10 Cl964) . See a l s o C h u s h a k u K a i s h a h o (Company Law A n n o t a t i o n ) N o . 4,  360.  2 2  Circular Ministry  2 3  Suzuki,  from t h e C h i e f o f t h e C i v i l o f J u s t i c e , O c t o b e r 12, 1951 Supra  note  10,  179  Affairs  Bureau,  -  134  -  Commercial Code, A r t i c l e s A r t i c l e 54  261(3)  2 5  Commercial  261(2)(3)  2 6  Ibid.,  Article 188(2)ix  27  Ibid.,  Article  28  Ibid.,  Article  2  4  Code,  Articles  260(2) and  specifies  Disposition  (2)  Loan o f a b i g  (3)  Appointment and dismissal s u c h as a manager;  (4)  Establishment, important organ  taking  Article  259  3 0  Ibid.,  Article  260-2(1)  3 1  K a w a m o t o S u p r a n o t e 9, i s e l e c t e d on p e r s o n a l  3  2  Suzuki Supra  3  3  N a k a y a m a v . K i t a g a m i , 23 November 27, 1969  note  Kawamoto S u p r a  3 6  Commercial  3 7  Ibid.,  38 3 9  Commercial 263  10,  note  Civil  Code,  39(2)  matters:  important property;  of  important  employee  and discontinuance branch.  reason  that  a  of  director  177  9,  Minshu  11  2301,  260-2(2) and  Supreme  Court,  239(5)  324  Code, A r t i c l e  Article  of  323. The trust,.  Code, A r t i c l e s  Kawamoto Supra  and  following  over  change s u c h as a  Ibid.,  3 5  and  amount;  2 9  Commercial  78,  260  (1)  3 4  and  260-3  260-4 note  Code  9,  316  (before  the  1982  amendments),  Article  Under p r e s e n t law, a s h a r e h o l d e r or c r e d i t o r i s e n t i t l e d to inspect minutes o n l y t o the extent necessary to exercise his rights. A c r e d i t o r o f t h e c o m p a n y may ask for such inspection only when i t i s necessary to determine the p e r s o n a l l i a b i l i t y of d i r e c t o r s .  -  135 -  H o w e v e r , s u c h i n s p e c t i o n may c a u s e l e a k a g e o f b u s i n e s s s e c r e t s a n d damage b u s i n e s s a c t i v i t i e s a n d t h e c o m p a n y ' s financial position. When s u c h a p o s s i b i l i t y i s f e a r e d , t h e c o m p a n y may r e f u s e t o a l l o w t h e i n s p e c t i o n o f t h e minutes. U n d e r t h e new C o d e , w h e n a s h a r e h o l d e r or creditor of the company s e e k s i n s p e c t i o n , h e must a s k p e r m i s s i o n from t h e Court by showing that i n s p e c t i o n i s necessary for the exercise of h i s rights. Before giving permission, t h e C o u r t must h e a r a n y o b j e c t i o n s o ft h e shareholders, c r e d i t o r s o r t h e company i t s e l f . I f the company c a n n o t show t h a t i n s p e c t i o n i s l i k e l y t o c a u s e leakage o f business secrets, permission shall be granted. Once p e r m i s s i o n i s granted by the Court, the company must a l l o w t h e s h a r e h o l d e r or debtor t o inspect o r make e x t r a c t s f r o m t h e m i n u t e s . (Commercial  Code, A r t i c l e  260-4)  The lowest i s that of the ordinary director ( h i r a - t o r i s h i m a r i y a k u ) who m i g h t b e a d e p a r t m e n t h e a d o r t h e s e c o n d i n command o f a d i v i s i o n . The n e x t rank i s t h a t o f m a n a g i n g d i r e c t o r ( j o m u t o r i s h i m a r i y a k u ) , who i s usually responsible f o r two o r three departments o r a small division. Above h i m a r e t h e s e n i o r managing directors ( s enmu torishimariyaku) and the vice-presidents (f ukushacho), I n charge o f large u n i t s of t h e company, with the president (shacho) and t h e chairman (kaicho) at the top. Clark, The Japanese Company a t 100 118 o f 4 1 4 o f J a p a n e s e s t o c k c o r p o r a t i o n s ( 2 8 . 5 % ) a l l o f w h i c h were l i s t e d o n one o r more o f t h e n i n e securities e x c h a n g e s do n o t h a v e o u t s i d e d i r e c t o r s a t a l l . Twenty c o r p o r a t i o n s (4.8%) h a v e b o a r d s composed o f more o u t s i d e than inside d i r e c t o r s . B u t most o f t h e s e a r e s m a l l e r subsidiary corporations whose stated capital i s less than 2 b i l l i o n yen. K y o t o D a i g a k u Shoho K e n k y u k a i ( R e s e a r c h A s s o c i a t i o n on Commercial Law, K y o t o University), Kabushiki gaisha k e i e i k i k o no j i t t a i (Actual features of managerial structure o f stock corporation), SHOJI HOMU K E N K Y U No. 2 8 9 7-20 K y o t o D a i g a k u Shoho K e n k y u k a i ( R e s e a r c h A s s o c i a t i o n o n Commercial Law, K y o t o University), Kabushiki gaisha keiei kiko no j i t t a i (Actual features o f managerial s t r u c t u r e o f - s t o c k c o r p o r a t i o n ) , S H O J I HOMU K E N K Y U N o . 2 8 9 7-20  - 136 43  ibid.  44  ibid.  45  ibid.  46  Ibid.  47  ibid.  48  See  49  Civil  50  See  supra note  2,  Code , A r t i c l e  supra  -  644  note 3  5 1  C o m m e r c i a l Code, A r t i c l e s Code, A r t i c l e 644  5 2  C o m m e r c i a l Code, A r t i c l e s C o d e , A r t i c l e 644  5 3  Civil  5 4  S e n b i K o z a i K.K. v. M u t o , C o u r t , November 26, 1969  Code , A r t i c l e  2 6 6 ( l ) v and  254(3),  and  Civil  2 6 6 - 3 ( 1 ) and 2 5 4 ( 3 ) ,  and  Civil  709 23  Minshu  11 . 2150,  Supreme  The r e q u i r e d c o n d i t i o n s f o r t h i s s u i g e n e r i s s t a t u t o r y l i a b i l i t y i s an i n t e n t i o n or gross negligence i n the default of director's duty. On the c o n t r a r y , the required conditions for a l i a b i l i t y for tort i s an intention or negligence i n the v i o l a t i o n of a t h i r d party's right. 55  S u z u k i s u p r a , n o t e 10,  5 6  Supra,  5 7  C o m m e r c i a l Code, A r t i c l e s  5 8  Ibid.,  Articles  5 9  Ibid.,  Article  6  H a n r e i J i h o No. 4 9 8 ,  0  61  6 2  193  note 5 3  All translation author. Kinyu Shoji No. 4 4 8 , 2  2 6 6 ( 3 ) and  2 6 6 ( 2 ) and  266-3(2)  266-3(2)  266(5)  of  Hanrei  64 judicial (Financial  decisions  are  Commercial  those  of  Precedents)  Ibid., Kinyu  No. 5 6 2 , 36 Homu N o . 8 8 4 , 2 7 , S u p r e m e  Court,  December  12, 1978  J o k o k u a p p e a l t o t h e S u p r e m e C o u r t may b e f i l e d o n l y o n the ground t h a t there e x i s t s m i s i n t e r p r e t a t i o n o f t h e Constitution or any other contravention of the C o n s t i t u t i o n i n t h e judgment o r t h a t t h e r e e x i s t s any c o n t r a v e n t i o n o f laws and o r d e r s as c l e a r l y a f f e c t t h e judgment ( C i v i l P r o c e d u r e Code A r t i c l e 3 9 4 ) . When t h e Supreme Court reverses a lower court judgment on t h e ground t h a t there exists a contravention o f laws o r orders as a f f e c t clearly t h e judgment, i t commonly refers t o t h e d e c i s i o n as being "illegal" whereas a Canadian court i s more likely to avoid calling a decision illegal and s i m p l y r e f e r s t o i t as "wrong". T e c h n i c a l l y , t h e C a n a d i a n l o w e r c o u r t d e c i s i o n w i l l be c o n t r a r y t o t h e law expounded by t h e h i g h e r c o u r t , and so " i l l e g a l " . Unknown v. Unknown, Hanrei Jiho No. 769 8 9 , T o k y o D i s t r i c t C o u r t , S e p t e m b e r 1 2 , 1 9 7 4 ; Unknown v . Unknown, H a n r e i J i h o N o . 7 9 5 9 3 , T o k y o D i s t r i c t C o u r t , May 2 7 , 1975; Unknown v . Unknown, H a n r e i J i h o No. 843 107, Kobe D i s t r i c t C o u r t , J u n e 1 8 , 1 9 7 6 ; O h t a K i k a i S e i z o K.K. v . K i s h i e t a l . , H a n r e i J i h o No. 928 106, Tokyo H i g h C o u r t , March 27,1979. H o w e v e r , t h e r e a r e some r e c e n t j u d g m e n t s w h i c h c o n d e m n e d the d i r e c t o r s from t h e judge's h i n d s i g h t : Unknown v . Unknown, H a n r e i J i h o No. 8 7 4 8 5 , T o k y o High Court, O c t o b e r 2 7 , 1 9 7 7 ; T a k a j i K o h g u K.K. e t a l . v . Y o s h i i , H a n r e i J i h o No. 9 3 1 1 1 9 , O s a k a H i g h C o u r t , March 23, 1979. In the United States, i n questions i n v o l v i n g duty o f care, t h e courts concede t h a t a duty e x i s t s b u t w i l l not f i n d i n favour o f a breach i f , i n t h e absence o f fraud o r d i s h o n e s t y , t h e m a t t e r was w i t h i n what t h e y p e r c e i v e as t h e s p h e r e o f p r o p e r b u s i n e s s discretion. Osakadani, Liability), 3 (1957)  Torishimariyaku no Sekinin (Director's K a i s h a h o K o z o ( L e c t u r e s o n Company Law) No.  Honma, C h u s h a k u K a i s h a h o 444  (Company  Law A n n o t a t i o n )  K a n z a k i , T o r i s h i m a r i y a k u no C h u i Gimu o f C a r e ) , 82 M i n s h o h o Z a s s h i 6 722  N o . 4,  ( D i r e c t o r ' s Duty  Homu No.  -  7 2  Kinyu  7 3  Ibid.,  7  4  T a k a g i v . Y o s h i o k a e t a l . , H a n r e i J i h o No. 9 5 4 9 1 , O s a k a D i s t r i c t C o u r t , S e p t e m b e r 30, 1979; Saotome S h o k a i v. M a k i t a , H a n r e i J i h o No.- 9 6 1 1 1 3 , T o k y o D i s t r i c t Court, D e c e m b e r 2 1 , 1 9 7 9 ; T e r a j i v . S a i t o , H a n r e i J i h o No. 973 120, Tokyo H i g h C o u r t , J u n e 30, 1980.  7  5  H a n r e i J i h o No.  7  6  Unknown v. Unknown, 5 K a m i n s h u 6 899, Tokyo District C o u r t , J u n e 2 2 , 1 9 5 4 ; U n k n o w n v . U n k n o w n , 12 K a m i n s h u 8 2116, H i r o s h i m a D i s t r i c t C o u r t , A u g u s t 30, 1 9 6 1 ; Unknown v . U n k n o w n , H a n r e i J i h o No. 384 50, T o k y o H i g h Court, J u l y 31, 1964; U n k n o w n v . U n k n o w n , H a n r e i J i h o No. 385 64, O s a k a H i g h C o u r t , J u l y 16, 1964; Unknown v . Unknown, H a n r e i J i h o No. 1 8 8 1 5 9 , T o k y o D i s t r i c t C o u r t , D e c e m b e r 16, 1965; U n k n o w n v . U n k n o w n , H a n r e i J i h o No. 476 53, O s a k a D i s t r i c t C o u r t , D e c e m b e r 7, 1966.  7  7  Supreme C o u r t ,  7  8  Commercial Code, A r t i c l e s  7  9  Commercial Code, A r t i c l e 261(2) p r o v i d e s t h a t p r o v i d e d f o r t h a t two o r more r e p r e s e n t i n g s h a l l j o i n t l y r e p r e s e n t t h e company.  8  0  Commercial Code, A r t i c l e  8  1  Sakamaki, Meimokuteki Torishimariyaku taisuru Sekinin (Responsibility of Director to the Third Party) Law S e p t e m b e r 21  No.  801  813  138  40  29  965  23  108  Minshu  11  2150,  November 26,  261(3) and  1969  78 i t may be directors  260(1) no Daisansha ni the Figurehead School No. 12,  8 2  S h i o d a and Y o s h i k a w a , T o r i s h i m a r i y a k u no D a i s a n s h a ni t a i s u r u S e k i n i n ( R e s p o n s i b i l i t y of D i r e c t o r to the Third P a r t y ) Sogo H a n r e i Kenkyu Sosho ( S y n t h e t i c S t u d y S e r i e s o f P r e c e d e n t s ) No. 11  8  Commercial Code, A r t i c l e 260(1). The present Code, w h i c h was e n f o r c e d O c t o b e r 1, 1 9 8 2 , expressly provides that the Board of Directors shall supervise the performance o f each d i r e c t o r ' s d u t i e s . Before the 1982 amendment, there was no article which provided the supervisory duty. However, even under the former Code, i t was i n t e r p r e t e d t h a t the Board o f D i r e c t o r s has the authority to supervise the performance of the  3  - 139 r e p r e s e n t a t i v e d i r e c t o r s ' d u t i e s because t h e Board of D i r e c t o r s had t h e a u t h o r i t y to elect representative directors and release representative directors from their office. ( f o r m e r C o m m e r c i a l Code, A r t i c l e 2 6 1 ( 1 ) ; S u z u k i and T a k e u c h i , K a i s h a h o ( C o m m e r c i a l Code) a t 204) 84  Sakamaki Supra,  85  Honma, T o r i s h i m a r i y a k u no D a i s a n s h a n i T a i s u r u S e k i n i n ( R e s p o n s i b i l i t y of Director t o the Third Party) Law S c h o o l No. 12 S e p t e m b e r 17  8  6  Unknown v. Unknown, H a n r e i J i h o No. 385 64, Osaka C o u r t , J u l y 16, 1964; Unknown v . Unknown, H a n r e i No. 384 50, T o k y o H i g h C o u r t , J u l y 3 1 , 1964.  8  7  Unknown v. Unknown, H a n r e i J i h o No. 476 53, Osaka D i s t r i c t C o u r t , December 7, 1966; T a k i i v . S u g i n a k a e t al., 12 K a m i n s h u 8 2116, H i r o s h i m a District Court, A u g u s t 30, 1961.  n o t e 80  24  High Jiho  8 8  S e n b i K o z a i K.K. v . M u t o , 14 K a m i n s h u 1 Unknown v . Unknown, H a n r e i T i m e s No. 205 D i s t r i c t C o u r t , November 1 5 , 1966.  8 9  Honma, C h u s h a k u K a i s h a h o (Company Law A n n o t a t i o n ) No. 4 at 445; Sugawara, Gendai Kaishaho ni okeru T o r i s h i m a r i y a k u no C h i i t o s o n o K a n s h i Gimu ( S t a t u s and D u t y o f O b s e r v a t i o n o f a D i r e c t o r u n d e r Modern Company L a w ) ; K i g y o h o K e n k y u S o k a n 10 Shunen K i n e n Ronbun-shu (Essays Contributed in Celebration of the 10th A n n i v e r s a r y o f the Study o f Business A s s o c i a t i o n Law) 1 2 0 ; A o t a k e , M e i m o k u t e k i T o r i s h i m a r i y a k u no D a i s a n s h a n i t a i s u r u S e k i n i n (Nominal D i r e c t o r ' s L i a b i l i t y to" t h e T h i r d P a r t y ) M i n s h o h o Z a s s i 78 346  9  0  T o k y o H i g h C o u r t , H a n r e i J i h o No. 900  9  1  S h o j i Honmu No. 962 a t 9 ,  9  2  Number of listed corporations E x c h a n g e a t t h e end o f 1980:  93 (1963); 152, T o k y o  103, J u l y 19,  at  each  1978  Securities  Tokyo  Osaka  Nagoya  Others  1,417  998  478  1,209  9 3  S a k a m a k i s u p r a , n o t e 80 a t 21  9  Of c o u r s e , p r o v i s i o n s f o r s t o c k c o r p o r a t i o n s w i l l f i t small family-type corporations.  4  not  -  140 -  Before 1982 amendment, t h e minimum requirement f o r stated capital was 3,500 yen (approximately Cdn. $17.50) . Between 1961 a n d 1 9 6 2 , t h e S t u d y Group on C o r p o r a t e S i z e (Kaisha kibo kenkyukai), o f t h e F a c u l t y o f Law, Kobe University, surveyed stock corporations which had a s t a t e d c a p i t a l o f n o t more t h a n 100 m i l l i o n y e n l o c a t e d i n Kobe C i t y and i t s v i c i n i t y . A f t e r they found that nearly one-half of the stock corporations surveyed had been converted from s o l e p r o p r i e t o r s h i p s , t h e y went on to survey the motives f o r using the stock corporation form. The r e s u l t s a r e shown i n t h e f o l l o w i n g t a b l e : Motives  i n Forming  Stock  Corporations Kobe City  Vicinity  Total  1.  E x p e c t a t i o n o f more a d v a n t a g e i n terms o f t r a n s a c t i o n s  207  42  249  2.  Clearer  113  35  148  3.  Expectation burden  102  29  131  4. N e e d o f l a r g e r a m o u n t o f c a p i t a l  48  18  66  5.  44  19  63  42  10  52  2  9  155  718  accounting of lighter tax  Others  6. E x p e c t a t i o n o f e a s i e r to get financing 7.  Favour  of limited  chance  liability  7 563  Total  Source: Kaisha Kibo Kenkyukai (Study Group on Corporate Scale), Shokibo kabushiki-gaisha no hoteki jittai (Actual features i n legal aspect of small stock c o r p o r a t i o n s ) , 13 KOBE HOGAKU Z A S S H I , T a b l e 19 a t 5 5 3 (1964) Commercial Code, A r t i c l e  255  In g e n e r a l , Japanese c o n t r a c t n e g o t i a t i o n i s a method o f reaching a true understanding between t h e p a r t i e s . Each party w i l l t r y to learn the personality of the other. In t h e case of contract negotiations with a tiny corporation, the process involves not only ascertaining  the credit corporation director. 9 9  100  standing but a l s o  141  and the  the b u s i n e s s p o l i c y of r e p u t a t i o n and means o f  Article 266-3(1) I f d i r e c t o r s have been g u i l t y w r o n g f u l i n t e n t or of g r o s s n e g l i g e n c e i n r e s p e c t of a s s u m p t i o n o f t h e i r d u t i e s , t h e y s h a l l be j o i n t l y s e v e r a l l y l i a b l e i n damages t o t h i r d p e r s o n s a l s o .  the the of the and  The f u n c t i o n i n g o f t h e p r o v i s i o n t h e r e f o r e o p e r a t e s t o disregard the separate entity of an insolvent corporation. See T a t s u t a , H i j i n k a k u H i n i n no H o r i no S a i k i n no T e n k a i ( R e c e n t D v e l o p m e n t o f t h e D o c t r i n e of t h e C o r p o r a t e E n t i t y ) , i n SHOJI HOMU KENKYU ( S t u d y o f C o m m e r c i a l Law) No. 534 a t 6. M o r e o v e r , i t may be s a i d t h a t the p r o v i s i o n goes f a r beyond m e r e l y d i s r e g a r d i n g t h e s e p a r a t e e n t i t y o f an i n s o l v e n t c o r p o r a t i o n , since c o u r t s a l s o acknowledge the l i a b i l i t y o f the nominal representative director. See S h i b u y a , Yugen G a i s h a no Torishimariyaku no Daisansha ni Taisuru Sekinin (Liability of the D i r e c t o r of the L i m i t e d Liability Company t o t h e T h i r d P a r t y ) , i n J U R I S T No. 482 92  1 0 1  Supra, note  76  102  The g e n e r a l p r o v i s i o n r e l a t i n g t o t h e u n l a w f u l A r t i c l e 709 o f t h e C i v i l Code w h i c h p r o v i d e s :  act  is  "A person who violates intentionally or n e g l i g e n t l y t h e r i g h t o f a n o t h e r i s bound t o make compensation for damage arising therefrom." 1 0 3  C i v i l Code, A r t i c l e  44:  "A j u r i s t i c p e r s o n i s l i a b l e t o make c o m p e n s a t i o n f o r any damage done t o o t h e r p e r s o n s by i t s d i r e c t o r s or o t h e r r e p r e s e n t a t i v e s i n the performance of t h e i r d u t i e s . " 1 0 4  Unknown v. Unknown, Supreme C o u r t , H a n r e i J i h o No. 590 75, M a r c h 26, 1979; K.K. Nihon Studio v. Nakamura, Supreme C o u r t , 26 M i n s h u 5 984, J u n e 15, 1972; Kobayashi e t a l v. H a s h i m o t o e t a l , Supreme C o u r t , 27 M i n s h u 5 655, May 22, 1973; S a t o v. K u r e y a m a, Supreme C o u r t , 28 M i n s h u 10 2059, December 17, 1974  1 0 5  Unknown v. Unknown, O s a k a H i g h C o u r t , H a n r e i J i h o No. 757 113, April 17, 1974; Unknown v. Unknown, T o k y o D i s t r i c t C o u r t , H a n r e i J i h o No. 747 102, November 13,  -  142  -  1973; Unknown v. Unknown, T o k y o H i g h C o u r t , H a n r e i Jiho No. 732 9 4 , O c t o b e r 3 1 , 1 9 7 3 ; U n k n o w n v . U n k n o w n , S e n d a i D i s t r i c t Court, H a n r e i J i h o No. 783 125, September 30, 1974. 106  B o t h c o u r t s and p r e v a i l i n g t h e o r y h a v e a s s e r t e d t h a t a p l a i n t i f f i s r e q u i r e d to prove the e x i s t e n c e of adequate c a u s a t i o n b e t w e e n t h e d a m a g i n g a c t and t h e damage i n order to claim compensation. This concept of "adequate c a u s a t i o n " was a s s e r t e d o r i g i n a l l y t o r e s t r i c t t h e s c o p e o f damages. In order t o f u l f i l l the adequate c a u s a t i o n requirement, a damaging a c t must have a conditional r e l a t i o n t o a s p e c i f i c r e s u l t b a s e d on predictability. T h a t i s , t h e a c t m u s t be causally linking objectively a n d d i r e c t l y t o t h e r e s u l t i n g d a m a g e i n s u c h a way that i t i s p r o b a b l e and g e n e r a l l y foreseeable. I t i s a s s u m e d t h a t A r t i c l e 416 o f t h e C i v i l Code , w h i c h s e t s out the scope of compensation f o r nonperformance of an obligation-duty, has adopted the principle of a d e q u a t e c a u s a t i o n and t h i s has b e e n a p p l i e d analogously t o d e t e r m i n e damage f o r t o r t s . A r t i c l e 709 o f t h e C i v i l Code r e q u i r e s t h e e x i s t e n c e of damage c a u s a t i o n b e t w e e n a d a m a g i n g a c t and v i o l a t i o n o f rights. The p r e v a i l i n g v i e w t h i n k s t h a t t h i s causation is determined f i r s t by conditional relationships. A conditional relation i s a s i t u a t i o n where "without a d a m a g i n g a c t t h e r e w o u l d b e no i n j u r y " . A damaging act i s t h e c a u s e , and i n j u r y i s t h e r e s u l t . See K i t a g a w a ( e d . ) Doing Business i n Japan X I I I I k u y o Fuho K o o i ( T o r t s ) 111, K a t o Fuho K o o i ( T o r t s ) Court,  1 0 7  Nagoya H i g h 20, 1979.  108  i e . , caused by f i n a n c i a l d i s t r e s s of the corporation b r o u g h t about by t h e d i r e c t o r ' s m a l a d m i n i s t r a t i o n 24  Hanrei  Minshu  7  Jiho  1061,  No.  July  951  16,  111,  1-23, 152.  September  1 0 9  Supreme C o u r t ,  1970  11°  Japanese courts sometimes rely upon jori (natural reason) in reaching a desirable conclusion. This f l e x i b l e a t t i t u d e of courts i n i n t e r p r e t i n g the s t a t u t e s i s e x p l a i n e d b y some s c h o l a r s t h a t j o r i i s o n e of the soures of law in Japan. They sometimes cite the following proclamation (fukoku) of the Great Council of S t a t e (Dajokan) as a s t a t u t o r y p r o v i s i o n t o t h a t e f f e c t .  Hints f o r Conduct Kokoroe), A r t i c l e  143 of 3:  Judicial  Affairs  (Saiban  Jimu  "In civil trials, cases where there is no [ a p p l i c a b l e ] w r i t t e n l a w s h a l l be a d j u d i c a t e d by a p p l y i n g custom, and c a s e s where t h e r e i s no [ a p p l i c a b l e ] c u s t o m , b y way of deduction from j o r i ( n a t u r a l r e a s o n ) . " (Tanaka,  The  Japanese L e g a l System  125)  1 1 1  S h i b u y a , Y u g e n G a i s h a no T o r i s h i m a r i y a k u no D a i s a n s h a n i taisuru Sekinin (Disability of the director of the L i m i t e d L i a b i l i t y Company t o t h e T h i r d P a r t y ) , i n J U R I S T No. 4 8 2 a t 9 2  112  Tokyo High  1  1  3  Commercial Code, A r t i c l e  260(1)  1  1  4  Supreme C o u r t ,  5 655,  1  1  5  Here the term "executive director" "directors who are i n charge of a c o r p o r a t e management"  1  1  6  Sakamaki,  1  1  7  Tokyo D i s t r i c t  1  1  8  See a l s o Kawakami v. I s o n o e t a l T o k y o D i s t r i c t C o u r t , 9 K a m i n s h u 11, November 28, 1958; T a k i i v. S u g i n a k a e t a l , H i r o s h i m a D i s t r i c t C o u r t 12, K a m i n s h u 8 2116, A u g u s t 30, 1961; Unknown v. Unknown, T o k y o D i s t r i c t C o u r t , Hanrei J i h o No. 3 9 4 7 8 , J u l y 3 0 , 1 9 6 4 ; U n k n o w n v . U n k n o w n T o k y o D i s t r i c t C o u r t , H a n r e i J i h o No. 6 0 6 8 3 , M a r c h 2 8 , 1970  Court,  supra  27  H a n r e i J i h o No.  Minshu  note Court,  8  May  103,  22,  July  19,  1978  1973 i s used specific  to mean part of  27 Kaminshu  1 2 1  Shioda  1 2 2  S h i o d a a n d Y o s h i k a w a s u p r a n o t e 82 6 6 , Honma s u p r a n o t e 9 444, Kawamoto s u p r a n o t e 9 354, S a k a m a k i s u p r a note 80 29 Yazawa, Shin Shoho Enshu (New Exercise on 6  82  606  82,  1957  T a k e u c h i , H a n r e i H i h y o ( C a s e N o t e s ) i n 91 H o g a k u K y o k a i Zassi (Journal of the Jurisprudence Association) 12 1765, Tatsuta, Hanrei Hihyo ( C a s e N o t e s ) i n 66 Hogaku R o n s o 3 98 note  No.  13,  120  supra,  Jiho  May  Tokyo D i s t r i c t 1970  Yoshikawa  Hanrei  5 923,  1 1 9  and  Court,  81  900  March  28,  272  -  144  -  Commercial Code) 2 130, Tanaka, ( D e t a i l e d D i s c u s s i o n on Company Law 3  1 2  1  2  Supreme C o u r t ,  4  2  Shoron  Jo  K.K, K o f u k u S o g o G i n k o v . O t a n i e t a l , O s a k a H i g h C o u r t , Hanrei Jiho No. 897 97, April 27, 1978; Unknown v. U n k n o w n T o k y o D i s t r i c t C o u r t , H a n r e i J i h o No. 230 274, A u g u s t 21, 1968; Unknown v. Unknown, T o k y o H i g h Court, Hanrei Jiho No. 643 87, April 30, 1971; Unknown v. Unknown, Tokyo D i s t r i c t C o u r t , K i n y u S h o j i H a n r e i No. 4 5 5 1 1 , May 8, 1 9 7 5 ; U n k n o w n v . U n k n o w n , T o k y o D i s t r i c t C o u r t , K i n y u S h o j i H a n r e i No. 5 6 1 3 8 , M a r c h 1 6 , 1978  125  1  Kaishaho T) 497  6  27  Minshu  5 655,  May  22,  1973  Tanaka, Company Revised Kaishaho (Company  Kaishaho Shoron Jo (Detailed Discussion on Law 1) 4 5 3 ; O s u m i , Z e n t e i K a i s h o h o r o n J o ( A l l Discussion on Company Law 1) 104, ishii, J o ( C o m p a n y L a w T l 322 Honma, C h u s h a k u K a i s h a h o L a w A n n o t a t i o n ) N o . 4 446  Article  259(2) and  (3)  127  Honma s u p r a n o t e 69 445, S a k a m a k i s u p r a n o t e 80 28, S h i o d a a n d Y o s h i k a w a s u p r a n o t e 82 6 6 , S u g a w a r a , Gendai K a i s h a h o n i o k e r u T o r i s h i m a r i y a k u no C h i i t o s o n o K a n s h i Gimu ( S t a t u s and Duty o f O b s e r v a t i o n o f a D i r e c t o r under M o d e r n Company L a w ) ; K o g y o h o K e n k y u S o k a n 10 Shunen K i n e n Ronbun-shu (Essays C o n t r i b u t e d i n C e l e b r a t i o n o f the 10th Anniversary of the Study of Business A s s o c i a t i o n Law) 121  128  Tokyo 1958  1  Tatsuta, 491  2  9  130  1  133  Court,  Chushaku  9  Kaminshu  Kaishaho  11  (Company  2225, Law  November Annotation)  13, 4  Osakadani, Torishimariyaku no Sekinin (Director's Responsibility! Kabu sh i k i k a i shaho Koza (Lectures on C o m p a n y Law) 3 1 1 2 1  31  !32  District  Commercial 644 S  e  e  n  o  te  Code,  Article  254(3)  and  Civil  Code,  Article  49  T a k i i v. S u g i n a k a e t a l . , H i r o s h i m a D i s t r i c t C o u r t , 12 K a m i n s h u 8 2116, A u g u s t 30, 1961; Unknown v. Unknown, T o k y o H i g h C o u r t , H a n r e i J i h o No. 3 8 4 5 0 , J u l y 3 1 , 1964; K o b a y a s h i e t a l v. H a s h i m o t o e t a l , Supreme C o u r t , 27  - 145  -  M i n s h u 5 655, May 22, 1973; Unknown v. Unknown, T o k y o H i g h C o u r t , H a n r e i J i h o No. 818 88, December 25, 1975 1 3 4  K a n z a k i , T o r i s h i m a r i y a k u no C h u i Gimu ( D i r e c t o r ' s o f C a r e ) 82 M i n s h o h o Z a s s h i 6 727, May 8, 1975  135  Tokyo D i s t r i c t C o u r t , K i n y u S h o j i H a n r e i C o m m e r c i a l C a s e R e p o r t e r ) No. 455 11  1 3 6  Osaka 1979  1 3 7  Honma, T o r i s h i m a r i y a k u no D a i s a n s h a n i t a i s u r u S e k i n i n ( D i r e c t o r ' s R e s p o n s i b i l i t y t o t h e T h i r d P e r s o n ) In 12 Law S c h o o l 19  1 3 8  S h i o d a and Y o s h i k a w a , s u p r a n o t e 82 72; Yazawa I h o H a i t o ( I l l e g a l D i v i d e n d ) 2; S h i n Shoho E n s h u (New E x e r c i s e on C o m m e r c i a l Code) 130. Note t h a t Japanese Commercial Code provides only that the directors who have p a r t i c i p a t e d i n t h e r e s o l u t i o n and h a v e n o t expressed t h e i r d i s s e n t i n t h e m i n u t e s s h a l l be p r e s u m e d t o h a v e a s s e n t e d t o s u c h r e s o l u t i o n ( A r t i c l e 2 6 6 ( 3 ) ) , and t h e r e i s no p r o v i s i o n e q u i v a l e n t f o r BCCA S e c t i o n 1 5 1 ( 6 ) o r CBCA S e c t i o n 1 1 8 ( 3 ) .  High  Court,  Hanrei  931  directors  1 4 1  Osaka D i s t r i c t 1980  March  1 4 2  See a l s o Unknown v. Unknown, T o k y o H a n r e i J i h o No. 606 82, M a r c h 28, 1970 43  Unknown v. Unknown, T o k y o D i s t r i c t H a n r e i No. 561 38, M a r c h 16, 1978  963  43,  23,  C o m m e r c i a l Code, A r t i c l e 255 p r o v i d e s t h a t t h e s h a l l be a t l e a s t t h r e e i n number. H a n r e i J i h o No.  854  March  1 4 0  1  J i h o No.  119,  and  Tokyo D i s t r i c t 1977  Court,  Hanrei  No.  (Financial  1 3 9  --  Court,  Jiho  Duty  96,  District  Court,  4 4  Unknown v . Unknown, T a k a s a k i B r a n c h M a e b a s h i C o u r t , H a n r e i J i h o No. 780, December 26, 1974  1  4 5  Unknown v. Unknown, T o k y o D i s t r i c t No. 849 114, A u g u s t 23, 1976  Court,  T a k a j i Kogu K.K. e t a l v. Y o s h i i , Osaka H a n r e i J i h o No. 931 119, M a r c h 23, 1979  28,  Shoji  District  Hanrei High  1,  Court,  Kinyu  1  1 4 6  July  Jiho  Court,  -  1  4  146  -  K.K. Kofuku Sogo G i n k o v. O h t a n i , Osaka H a n r e i J i h o No. 8 9 7 9 7 , A p r i l 2 7 , 1978  7  1 4 8  Kanzaki, of Care)  T o r i s h i m a r i y a k u no C h u i 82 M i n s h o h o Z a s s h i 6 15  149  Unknown v. Unknown, O s a k a 385 6 4 , J u l y 1 6 , 1964  150  Unknown No. 4 7 6  151  Unknown v. Unknown, Osaka D i s t r i c t No. 232 2 0 8 , D e c e m b e r 2 4 , 1968  152  Kanzaki  153  C o m m e r c i a l Code, A r t i c l e  154  Suge e t J i h o No.  155  Article follows:  High  Gimu  supra,  note  148  of  the  Hanrei  Court,  Court,  Duty  Jiho  No.  Hanrei  Jiho  Hanrei  Times  14 259  a l v. Daido Sanso 971 101, M a r c h 18, 266-3  Court,  (Director's  Court,  v. Unknown, Osaka D i s t r i c t 5 4 , D e c e m b e r 7, 1966  High  ( 1 ) , (2) K.K., 1980  and  Supreme  Commercial  Code  (3) Court,  Hanrei  provides  as  "If d i r e c t o r s have been g u i l t y of wrongful intent or of gross negligence i n respect of the assumption of t h e i r d u t i e s , they s h a l l be jointly and severally liable i n damages to t h i r d persons a l s o . " 156  T a t s u t a , H o j i n k a k u H i n i n no H o r i no S a i k i n no Tenkai (Recent Development o f the D o c t r i n e of the Corporate E n t i t y ) S H O J I HOMU K E N K Y U ( S t u d y o f C o m m e r c i a l L a w ) No. 534 6  15  S h i b u y a , Y a g e n G a i s h o no T o r i s h i m a r i y a k u no D a i s a n s h a n i Taisuru Sekinin (Liability of the Director of the L i m i t e d L i a b i l i t y Company t o t h e T h i r d P a r t y ) JURIST No. 4 8 2 92  7  158  Unknown No. 8 4 2  v. Unknown, Tokyo 32, A p r i l 28, 1977  High  Court,  Kinyu  Homu  Jijo  155  I n Unknown v. Unknown, i t i s h e l d t h a t t h e c o u r t c a n n o t find a c a u s a l r e l a t i o n s h i p between the f a c t t h a t the director d i d not supervise the other representative d i r e c t o r ' s i l l e g a l a c t a n d t h e t h i r d p a r t y ' s damage f r o m o n l y t h e f a c t t h a t t h e d i r e c t o r was unconcerned about business (eigyo).  -  147  Kobe D i s t r i c t C o u r t I t a m i 210, J a n u a r y 30, 1969 160  Takeuchi, C o d e ) No.  Hanrei 1 310  Branch,  (Legal  Hanrei  Precedents  Times  on  No.  6  1  1  6  2  Sakamaki  1  6  3  Commercial  1  6  4  Ibid.,  1  6  5  s u p r a , n o t e 80  Commercial 644 Senbi 2150,  266(1)  266-3(1)  Code,  Article  254(3)  K o z a i K.K. v. Muto, November 26, 1969  1  6  7  T a t s u t a , Chushaku 4 487  1  6  8  Shioda  and  27, v.  32  Code, A r t i c l e  Article  232  Commercial  K o b a y a s h i e t a l v. H a s h i m o t o e t a l , Supreme C o u r t Minshu 5 6 5 5 , May 22, 1973; M a r u y o s h i K o z a i K.K. S a t o , S u p r e m e C o u r t , 24 M i n s h u 7 1 0 6 1 , J u l y 1 6 , 1970  1  166  Shoho  -  Kaishaho  Yoshikawa,  supra  and  Supreme  Civil  Code,  Court,  (Company  Law  note  78  82  23  Article  Minshu  Annotation)  11  No.  1 6 9  I b i d . 7 9 , T a t s u t a , s u p r a n o t e 167 4 8 9 ; Honma, n o t e 69 443 and Kobayashi, Torishimariyaku no T a i - D a i s a n s h a - S e k i n i n n i k a n s u r u J a k k a n n o M o n d a i (Some Problems with Respect t o D i r e c t o r ' s R e s p o n s i b i l i t y to T h i r d P a r t i e s ) H a n r e i T i m e s No. 370 21  170  Th d f t p l a n f o r amendments ( k i k a n k a i s e i s h i a n ) 2(3)  1  1  7  1  7 2  e  r  a  Inaba,  Kaisei  Kaishaho  to  the  ( A m e n d e d C o m p a n y Law)  Kitazawa, Torishimariyaku oyobi ( D i r e c t o r a n d B o a r d o f D i r e c t o r s ) 747  Torishimariyakukai Jurist 116  Inaba  1  A l l t r a n s l a t i o n s o f t h e C o m m e r c i a l Code a r e t h o s e law b u l l e t i n series unless otherwise indicated.  4  175  171  224  d a f t p l a n f o r amendments t o (kikan k a i s e i shian) 2 ( 5 ) ( a ) ( i i )  rjr^g  r  organs  224  1 7 3  7  supra, note  corporation  the  corporate  of  EHS  organs  -  1  7 6  1  7  7  1  7  8  1 1  Civil  Code, A r t i c l e  Inaba  supra, note  Ibid.,  227  0  Ibid.,  228  181  -  A minor i s required to obtain the consent of h i s legal r e p r e s e n t a t i v e f o r d o i n g any j u r i s t i c a c t , u n l e s s i t i s an a c t m e r e l y t o a c q u i r e a r i g h t o r t o be r e l i e v e d f r o m a duty. ( A r t i c l e 4(1))  7 9  8  148  6(1)  171  202  Motoki, Kaisei Shoho Chikujo Kaisetsu (Article by A r t i c l e C o m m e n t a r y o n t h e A m e n d e d C o m m e r c i a l C o d e ) 113 Ibid.  1  8  2  1  8  3  Inaba  1  8  4  Ibid.,  235  1  8  5  Motoki  supra, note  1  8  6  Inaba  1  8  7  Article  supra, note  supra, note  171  230  181 171  115 236  259(1)  188  Motoki  supra, note  189  Supra,  note  181  109  124  1  9  0  Commercial  Code, A r t i c l e  1  9  1  Ibid.,  1  9  2  Old Commercial  Article  259(2)  259(3) Code, A r t i c l e  263(2)  193  I n a b a s u p r a , n o t e 171 2 4 2 , M o t o k i s u p r a , n o t e 181 121 and T a k e u c h i , K a i s e i K a i s h a h o K a i s e t s u (Commentary on A m e n d e d C o m p a n y Law) 153  194  commercial  1  ibid.,  9 5  Code, A r t i c l e  Article  196  BCCA s .  141(1)  197  CBCA s .  97(1)  260-4(5)  260-4(4)  -  149  -  198  Re Re  199  Lindley  200  I t w o u l d a l s o seem t h a t t h e c o u r t s a r e c o n s c i o u s o f the possible unfairness of attempting to substitute their h i n d s i g h t f o r t h e d i r e c t o r s ' f o r e s i g h t and a r e therefore reluctant to judge d i r e c t o r s ' business judgement with the c o u r t ' s wisdom o f h i n d s i g h t . See Gower P r i n c i p l e s o f M o d e r n C o m p a n y Law, 4 t h Ed., 603  201  Feltham, "Directors' and Officers' Liabilities C a n a d a " , The C a n a d i a n B u s i n e s s Law J o u r n a l V o l . 1, 1, 3 2 1 ( 1 9 7 5 ) a t p . 326  202  [ 1 9 2 5 ] Ch.  203  Ibid.  204  L i t w i n v . A l l e n , 25 N.Y. 2d 6 6 7 ( 1 9 4 0 , Sup. Ct.) 678. However, b o t h BCCA s . 138 and CBCA s. 100 provide minimum q u a l i f i c a t i o n s o f d i r e c t o r s .  205  Supra,  206  The same s t a t e m e n t i s f o u n d i n Re N a t i o n a l B a n k o f W a l e s [ 1 8 9 9 ] 2 Ch. 629. Note t h a t the p r o p o s i t i o n a p p l i e s not only to d i r e c t o r s , but also to o f f i c e r s . See Lewtas " D i r e c t o r s ' , O f f i c e r s * and I n s i d e r s ' L i a b i l i t y " , S p e c i a l Lectures o f t h e Law S o c i e t y o f Upper Canada (1972) 183 at p. 186; Feltham, "Directors' and Officers' Liabilities in Canada", The Canadian Business Law J o u r n a l V o l . 1, No. 1 321 (1975) a t p. 326.  207  [ 1 8 8 4 ] 25  208  [ 1 9 1 1 ] 1 Ch.  425  209  Ibid.,  437  210  Lister v. A.C. 555  211  [ 1 8 6 9 ] L.R.  4  212  Grimwade v.  Mutual Society  213  ( 1 8 7 5 ) L.R.  20  F o r e s t o f Dean Lands A l l o t m e n t on  Companies,  6th  Ed.,  (1878) 616  10  Ch.  D  450,  519  in No.  407  note  at  C o a l M i n i n g Co. Co. ( 1 8 9 4 ) 1 Ch.  202  Ch.  p.  D.  752  Romford  Ch.  Eq.  Ice  App.  225  and  Cold  Storage  Ltd.,  376 (1885)  52  L.T.  409  [1957]  (1870)  150 -  L.R. 5 C h . App. 763  P a t e r s o n , " R e f o r m u l a t i n g t h e S t a n d a r d o f C a r e o f Company D i r e c t o r s " 8 V i c t . U. o f W e l l i n g t o n L . R . 1 ( 1 9 7 5 ) a t p . 12 Supra,  n o t e 202  Gower, The P r i n c i p l e s o f M o d e r n Company Law, 4 t h E d . , 605; Lewtas, "Directors', Officers' and Insiders' L i a b i l i t y " S p e c i a l L e c t u r e s o f t h e Law S o c i e t y o f Upper Canada (1972) 183 a t p. 1 8 6 ; F e l t h a m , "Directors' and Officers' Liabilities i n Canada" The Canadian Business L a w J o u r n a l V o l . 1, N o . 1 3 2 1 a t p . 3 2 6 Supra,  n o t e 207  (1892)  2 Ch. 100  Cullerne Building Supra,  v . The London & Suburban G e n e r a l , S o c i e t y ( 1 8 9 0 ) 25 Q.B.D. 4 8 5  Permanent  n o t e 219  A l s o see S e l a n g o r U n i t e d Rubber E s t a t e s L t d . v. Cradock ( N o . 3) [ 1 9 6 8 ] 1 W.L.R. 1 5 5 5 a t 1 6 1 4 . A d i r e c t o r w h o attends Board meetings and rubber-stamps t h e chairman's recommendations runs a f a r g r e a t e r r i s k t h a n o n e who does not a t t e n d a t a l l . Trebilcock, Negligence" Gower, 606 Gould  The P r i n c i p l e s v. Mt. Oxide  (1901) This City 407  "The L i a b i l i t y o f Company Directors 32 M o d e r n L. R e v . 4 9 9 a t p . 506 o f Modern  Mines  Ltd.  Company  (1916)  for  Law, 4 t h  Ed.,  22 C . L . R . 4 9 0  A.C. 477  s t a t e m e n t w a s c i t e d a n d f o l l o w e d b y R o m e r , j l i n Re E q u i t a b l e F i r e I n s u r a n c e Company L t d . (1925) C h .  eg.  Re Owen S o u n d T i m b e r  See Ch.  Re C i t y E q u i t a b l e 407 a t p. 429  Co. L t d . (1917)  Fire  33 D.L.R. 4 8 7  I n s u r a n c e Company L t d .  [1925]  -  151  -  S e e e g . Re D e n h a m & C o . ( 1 8 8 4 ) 25 C h . D 7 5 ; S h e f f i e l d & S o u t h Y o r k s h i r e B u i l d i n g S o c i e t y v . A i z l e w o o d ( 1 8 9 0 ) 40 C h . D. 4 1 2 ; Re N a t i o n a l B a n k o f W a l e s ( 1 8 9 9 ) 2 C h . 6 2 9 ; Dovey v . C o r y ( 1 9 0 1 ) A.C. 477 Lucas v. F i t z g e r a l d ( 1 9 0 3 ) 20 T r u s t C o . ( 1 9 1 7 ) 32 D.L.R. 6 3  T.L.R.  16;  Re  Dominion  Re K i n g s t o n C o t t o n M i l l C o m p a n y L t d . ( 1 8 9 6 ) 1 C h . 3 3 1 ; Re N a t i o n a l Bank o f W a l e s ( 1 8 9 9 ) 2 C h . 6 2 9 ; Re City E q u i t a b l e F i r e I n s u r a n c e Company L t d . (1925) Ch. 407 Re C a r d i f f S a v i n g s B a n k (1892) 2 v . G r e n i e r ( 1 9 0 7 ) A.C. 1 0 1 ( P . C . ) Gower,  supra  (1925) Ch. note  Gower,  supra  605  p.  605  Prefontaine  226 n o t e 224, supra  n o t e 223  Third party's loss when t h e company's for the l o s s . See Gower,  p.  100;  407  Supra,  Trebilcock,  n o t e 224,  Ch.  supra  a t p.  508  may come i n t o q u e s t i o n , funds i s i n s u f f i c i e n t to  n o t e 224,  p.  especially compensate  605  Lewtas, " D i r e c t o r s ' , O f f i c e r s ' and I n s i d e r s ' Liability", L a w S o c i e t y o f U p p e r C a n a d a S p e c i a l L e c t u r e s ( 1 9 7 2 ) 183 a t p . 186 BCCA S e c t i o n s CBCA S e c t i o n s  1 4 2 ( l ) ( b ) , 1 5 1 , 159 1 1 7 ( 1 ) ( b ) and 118  Interim Report (Ontario) 1967 provision:  and  226  o f the S e l e c t Committee at p. 53 recommended  o n C o m p a n y Law the following  Every director o f a company s h a l l exercise the powers and discharge the duties of h i s office h o n e s t l y , i n good f a i t h and i n t h e b e s t interests o f t h e c o m p a n y , and. i n c o n n e c t i o n t h e r e w i t h shall e x e r c i s e t h a t d e g r e e o f c a r e , d i l i g e n c e and skill which a reasonably prudent d i r e c t o r would e x e r c i s e i n comparable circumstances.  - 152 244  s l u t s k y , " D i r e c t o r s a n d O f f i c e r s U n d e r t h e New B.C. C o m p a n i e s A c t " , The A d v o c a t e V o l . 3 1 , P a r t 4 211 a t p . 214  245  s e c t i o n 142(2)  246  s e c t i o n 117(1)(b)  247  F e l t h a m , s u p r a n o t e 24 a t p . 3 2 8 ; W a i n b e r g , D u t i e s a n d R e s p o n s i b i l i t i e s o f D i r e c t o r s i n C a n a d a , p . 27  248  i a c o b u c c i e t a l . , supra  249  Re N o r t h w e s t F o r e s t P r o d u c t s  250  S e c t i o n 143.  251  A l s o s e e BCCA S e c t i o n  252  Iacobucci  253  ibid.  254  ibid.  note 1 a t p. 290 L t d . , [ 1 9 7 5 ] 4 W.W.R. 7 2 4  See a l s o CBCA S e c t i o n  117(3)  115(6)  e t a l . , supra  n o t e 1 a t p., 293  255  2 8 3 F. Supp. 6 4 3 (S.D.N.Y. 1968) See F o l k , "Civil L i a b i l i t i e s Under t h e F e d e r a l S e c u r i t i e s A c t s : The B a r c h r i s C a s e " , 55 V a . L. Rev. 1, 29 (1969)  256  See S e c t i o n  257  c o m m e r c i a l Code, A r t i c l e 266  258  Ibid., Article  259  P e r c i v a l v . W r i g h t , [1902] 2 Ch. 421; B e l l B r o t h e r s L t d . , [ 1 9 3 2 ] A.C. 161  260  Linden,  261  Nova M i n k v. T.C.A. [ 1 9 5 1 ] 2 D.L.R. 241 a t p. 2 5 4  262  Fleming,  263  M i n i s t r y o f H o u s i n g v . S h a r p , [ 1 9 7 0 ] 2 Q.B. 2 3 3 , a t p . 268 (C.A.). Se^also Cari-Van H o t e l L t d . v. G l o v e E s t a t e s L t d . [ 1 9 7 4 ] 6 W.W.R. 7 0 7 ; Toromon I n d u s t r i a l Holdings v T ~ T h o m e , Gunn, H e l l i w e l l and Christenson ( 1 9 7 5 ) 10 O.R. ( 2 d ) 65  II.B.l  266-3  Canadian Negligence  v. Lever  Law, 2 1 3  The Law o f T o r t s , 3 r d E d . , 1 4 3  -  153 -  264  [ 1 9 7 6 ] 3 W.W.R. 331 (S.C.C.)  265  X977 ( 2 ) N.Z.L.R. 225  266  [1977] 324  267  [ 1 9 1 4 ] 30 T.L.R. 444 ( P . C . )  268  See a l s o R e g i n a v . L i t t l e r Gadsden v. Bennetto (1913),  269  Anns 1024  270  Linden,  1  (1959)  2 7  2 7 2  2 N.Z.L.R.  v.  Merton  225  London  Canadian Tort 15 D.L.R.  (N.Z.C.A.) P e r Woodhouse,  J . at  ( 1 9 7 5 ) , 65 D.L.R. ( 3 d ) 4 6 7 ; 9 D.L.R. 7 1 9 ( M a n . C A . )  Borough  Council  [1977]  2 W.L.R.  Law, 3 r d E d . , 444  ( 2 n d ) 67  (1843) 2 Hare 461  2 7 3  I n N o r t h - W e s t T r a n s p o r t a t i o n C o m p a n y v . B e a t t 1 8 8 7 , 12 App^ C a s . 589 (P. C . ) , I t was h e l d t h a t a n i n t e r e s t e d d i r e c t o r , absent fraud o r oppressive conduct, could use h i s v o t e s a s a s h a r e h o l d e r t o r a t i f y h i s own conduct. H o w e v e r , a s h a r e h o l d e r may n o t e x e r c i s e h i s v o t i n g p o w e r t o i n v a d e c o r p o r a t e p r o p e r t y t o h i s own a d v a n t a g e : C o o k v . P e e k s , [ 1 9 1 6 ] 1 A.C. 5 5 4 , o r t o o p p r e s s minority sharehodlers: Brown v. British Abrasive Wheel Co., [1919] 1 Ch. 29.  274  rp p r e v e n t t h i s k i n d o f i n e q u i t y , c e r t a i n e x c e p t i o n s t o t h e r u l e i n Foss v. H a r b o t t l e have been worked o u t and w e r e l i s t e d i n E d w a r d s v . H a l l i w e l l [ 1 9 5 0 ] 2 A l l E.R. 1064 (CA.). Also see Beck, "The Shareholders' P e r i v a t i v e A c t i o n " , 52 C a n . B a r R e v . 1 5 9 ( 1 9 7 4 ) a t p . 167 Q  2  7  5  Sections  232, 233 and 235  2  7  6  S e c t i o n 225  2  7  7  See I a c o b u c c i  2  7  8  S e e a l s o BCCA S e c t i o n 2 2 4  2  7  9  Iacobucci  2  8  0  See I b i d .  et a l . , supra  e t a l . , supra  note  note  1 p p . 1 9 5 - 200  1, 2 0 8  -  2 8 1  Sections  232,  2 8 2  Section  225  283  See pp.  284  Lewtas,  233  Iacobucci 195 201 supra  and  et  note  154  -  235  a l . , Canadian  241,  p.  Business  Corporations  187  Ibid.  2 8 5  2 8 6  Section  128  287  See Simmonds, "Directors' Negligent Mis-statement Liability in a Scheme o f Securities Regulation", II O t t a w a Law R e v i e w 6 3 3 a t 640  2 8 8  Section  289  See 184  290  Tamura, "Torishimariyaku R e s p o n s i b i l i t y ) , 500 J u r i s t  2 9 1  See  2 9 2  Senbi 2150,  141  Johnston,  supra  [ 1 9 1 4 ] 30  2  9  4  British  2  9  5  no Sekinin at 288  pp.  181  -  (Directors'  263  T.L.R. 444  Supreme  Court,  23  Minshu  11  (P.C.)  Columbia S e c u r i t i e s Act  Section  141  D e l i v a t i v e C o u n c i l on L e g a l System (Hosei Shingi-kai) h a s b e g u n t o e x a m i n e how t o d i s t i n g u i s h a l a r g e company from a small company in the Commercial Code. In addition to the present distinction relating to the a u d i t o r ' s a u t h o r i t y and t h e a u d i t by a c c o u n t i n g a u d i t o r , t h e y i n t e n d t o d i s t i n g u i s h a s m a l l company f r o m a l a r g e company i n i t s e n t i r e t y ( J a p a n Economic J o u r n a l , O c t o b e r 5, 1 9 8 2 ) .  296  Re C i t y Ch. 407  2 9 7  See  2  Re  8  Securities Regulation,  K o z a i K.K. v. Muto, November 26, 1969  293  9  note  Canadian  supra  Equitable  note  Fire  Insurance  Company  Ltd.  (1925)  3  Northwest Forest  Products  Ltd.  [ 1 9 7 5 ] 4 W.W.R.  724  -  2  9  9  Honma, s u p r a  note  155  -  70  300  Per Ch.  301  p e x a m p l e , a n y t i m e when an a i r l i n e a c c i d e n t c a u s e s a death, t h e i r p r e s i d e n t ' s r e s i g n a t i o n becomes a s u b j e c t of discussion. Also, quite r e c e n t l y , two managing d i r e c t o r s o f o n e o f t h e l a r g e s t J a p a n e s e b a n k s , who w e r e i n charge of i n t e r n a t i o n a l department, were c a l l e d to a c c o u n t by t h e bank f o r t h e f a i l u r e o f a s p e c u l a t i o n i n f o r e i g n exchange c o m m i t t e d , i n s e c r e t t o t h e bank, by a chief of a s e c t i o n of t h e i r f o r e i g n branch. (Japan E c o n o m i c J o u r n a l , O c t o b e r 14, 1982)  302  See P a t e r s o n , s u p r a n o t e 223 a t 5 1 3  303  See  304  See K a w a m o t o , " T o r i s h i m a r i y a k u no M i n j i S e k i n i n T s u i k y u no Hoteki Shikumi to Kino" (The Legal System and Function of Pursuing Directors' C i v i l Liability), 847 S h o j i Homu 2 7 8  3 0 5  Gower,  306  S e v e r a l u n d e r w r i t e r s - L l o y d s o f L o n d o n , A m e r i c a n Home, H a r b o u r I n s u r a n c e Company, U n i t e d S t a t e s F i r e , Canadian Indemnity - o f f e r d i r e c t o r s coverage i n Canada. See Howard, " D i r e c t o r s and O f f i c e r s i n t h e c o n t e x t o f the Canada Business Corporations Act", Canada Business C o r p o r a t i o n s A c t , M e r e d i t h L e c t u r e s 282 a t 3 0 5 . On the contrary, so f a r as the author knows, no Japanese i n s u r a n c e company o f f e r s d i r e c t o r s i n s u r a n c e coverage.  307  BCCA S e c t i o n 152 a n d C B C A S e c t i o n 1 1 9 . A director is e l i g i b l e f o r i n d e m n i f i c a t i o n i f he has acted honestly and i n good f a i t h w i t h a v i e w t o t h e b e s t i n t e r e s t s o f the corporation of w h i c h he was a director. Thus d i r e c t o r s c a n be i n d e m n i f i e d f o r b r e a c h e s o f d u t i e s o f c a r e , d i l i g e n c e and s k i l l , p r o v i d e d t h a t t h e y h a v e not breached the general f i d u c i a r y standards. (Iacobucci et al, supra note 1, 336). There is no equivalent provision which provides for indemnification of d i r e c t o r s i n t h e J a p a n e s e Commercial Code.  308  Feltham, "Directors' and Officers' Liabilities C a n a d a " , The C a n a d i a n B u s i n e s s Law J o u r n a l V o l . 1, 1, 3 2 1 ( 1 9 7 5 ) a t p . 326  Hatherley App. 376,  L.C. 386  i n Turquand  v.  Marshall  ( 1 8 6 9 ) L.R.  4  o r  Lewtas,  supra  supra  note  note  note  224  241  215  at  at  192  15,  Trebilcock,  supra  604  in No.  - 156 309 3 1 0  3  H  See  supra note  -  142  See Gower, s u p r a n o t e 224,  605  See T r e b i l c o c k , s u p r a n o t e 223 p p . e t a l . , s u p r a n o t e 1 pp. 235 - 237 s u p r a n o t e 223,  509  - 510;  Iacobucci  3 1 2  See T r e b i l c o c k ,  510  3 1 3  F o r e x a m p l e , how t o d i s t i n g u i s h an o u t s i d e d i r e c t o r f r o m an inside director, a part-time director from a full-time director, a professional advisor from an ordinary director, a specialist director from an un-specialist director, whether or not a director r e s i d e n t i n a f o r e i g n c o u n t r y s h o u l d be d i s t i n g u i s h e d , how t o a s s i g n a r o l e t o a B o a r d o f D i r e c t o r s and an E x e c u t i v e Committee (jomukai o r k e i e i i i n k a i ) , e t c .  3 1 4  See T r e b i l c o c k , s u p r a n o t e 223, 511; I a c o b u c c i e t a l . , s u p r a n o t e 1, 237; P a t e r s o n , s u p r a n o t e 215, pp. 17 - 21  -  157 -  BIBLIOGRAPHY 1.  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