Board Governance Amid Trade Uncertainty: Strategic Considerations For Directors In Canada

Overview and Key Takeaways

Rapidly evolving and momentous shifts in North American and global trade dynamics triggered by the new U.S. administration are pressuring Canadian boards of directors ("boards") to respond in a timely and strategic manner. The unprecedented circumstances may also result in enhanced market and stakeholder scrutiny of a board's actions and decision-making.

To assist, we provide a concise (but non-exhaustive) overview of material legal issues for Canadian boards to consider. These include:

• Procedural matters: Ordinary course governance procedures and practices will likely be insufficient. The board's approach should be appropriately and prudently adapted to the company's particular circumstances and risk profile.
• Substantive matters: The importance of the strategic role played by the board significantly increases amid abrupt economic uncertainty. Key legal concerns may include (1) material contractual issues and disputes, (2) compliance with continuous disclosure requirements under securities law, (3) a need for increased or more targeted stakeholder engagement, and (4) pursuing strategic acquisitions or dispositions.
• Directors' duties and business judgment: Weighing potential stakeholders interests will be particularly important in connection with any possible response plan anticipated to be controversial or unpopular with one or more corporate stakeholder groups, such as (1) material layoffs, or (2) a material relocation of production outside Canada. The process by which the board considers potential stakeholder concerns will be key.

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Board Procedural Considerations and Best Practices

Rigorous and responsive board action are essential given the significance of the apparent shift in North American trade and investment dynamics. From a procedural perspective, best practices for the board may include:

• establishing one or more special purpose committees (e.g. a crisis management committee) tasked with a particular aspect of the company's response plan;
• implementing more frequent board meetings, whether in person or virtual;
• requiring more frequent and detailed reports from and discussions with management to ensure all material information is communicated to the board in a timely manner;
• ensuring the engagement of specialized external experts where appropriate, whether by the board or management;
• stress-testing potential alternative strategies and ensuring the reasonableness of assumptions relied on by management;
• incorporating new metrics into the risk management dashboard considered by the board;
• identifying and mapping stakeholder interests; and/or
• requiring closer board supervision of management decision-making generally.

The board should ensure proper documentation of all material decision-making related to the company's response plan, including in the minutes of meetings. These minutes should reflect the factors the board evaluated in making its decision. The board should also ensure all procedural, practical and organizational lessons related to crisis management and response learned during the pandemic are effectively applied. In total, the board's approach should be appropriately and prudently adapted to the company's particular circumstances and risk profile.

The Board's Heightened Strategic Role

The importance of the strategic role played by the board significantly increases amid abrupt economic uncertainty. Key substantive considerations, in no particular order and depending on the circumstances, may include:

1. Corporate Governance: The board's fiduciary duties demand a proactive, informed and diligent response to any crisis or other significant disruption to the ordinary course of business. Direct, indirect and non-ordinary course risks to the company must be identified, evaluated and prioritized. So too must potential short-term, mid-term and long-term risk mitigation strategies. Given the unpredictability being demonstrated by the new U.S. administration, the board should also consider contingency plans in the event a material pivot in strategy is needed. The end result should be a comprehensive, coordinated and well-considered response plan reached in compliance with the procedural best practices outlined above.
2. Contractual Issues: Tariffs can materially disrupt supply chains and cross-border commercial arrangements. Shifting financial dynamics may compel a Canadian company or its counterparty to re-evaluate, renegotiate and/or exit existing agreements. Key contractual clauses to scrutinize include those regarding (1) pricing and price adjustment, (2) responsibility for payment of taxes, duties or tariffs, (3) changes in law, (4) force majeure, (5) termination (i.e., for convenience, upon cause, and/or upon specified events), and (6) notice. The board should ensure management promptly elevates material contractual issues, decisions or disputes to the board level.
3. Public Disclosure under Securities Laws: Reporting issuers must ensure they comply with Canadian securities laws as may be triggered by evolving trade and investment issues. This includes the timely disclosure of any "material change" in the issuer's business, operations or capital that would reasonably be expected to have a significant effect on the value of any of the issuer's securities. Determining whether the impact of a sudden external event on the business or certain unexpected developments constitute "material changes" can be a particularly challenging decision to make. Directors and officers frequently consult the corporation's lawyers or external counsel to ascertain the appropriate timing and content for disclosure. In addition, any material adjustments to business strategy in response to tariffs should be clearly communicated in quarterly or annual filings. Maintaining transparency and ensuring timely and accurate disclosure will both mitigate legal risks and regulatory scrutiny and help avoid potential reputational damage.
4. Stakeholder Engagement: As boards owe their fiduciary duties only to the company, the financial resilience of the corporation is paramount. However, in certain circumstances, the company's best interests may be informed by the interests of corporate stakeholders such as shareholders, employees, customers, suppliers, creditors and government. Increased or more targeted stakeholder engagement may therefore be appropriate or prudent. That said, stakeholder engagement that could produce "reasonable expectations" (discussed below) of a particular stakeholder group (e.g., shareholders or creditors) in connection with the company's tariff response plan should be approached with caution. Where the company's strategic response plan could give rise to significant controversy, the possibility of an increased likelihood of shareholder activism should be weighed. Activist shareholders often seek to hold boards accountable for lost share value resulting from inadequate responses to crises. To mitigate risks that could escalate into a crisis, the board should stay informed about the company's on-the-ground culture and ensure that any complaints are taken seriously and addressed promptly.
5. Pursuing Strategic Transactions: Some boards may deem it prudent to avoid material transactions during the persistence of elevated trade uncertainty. Others may see opportunity or be compelled by their particular circumstances to transact, such as (1) divesting non-core assets or those most vulnerable to adverse impacts from tariffs, and/or (2) acquiring strategic assets available at discounted values or in pursuit of supply chain diversification, cost efficiency and/or market expansion. When transacting, boards should ensure management (A) maximizes available deal tools (e.g., earnouts and other deferred compensation arrangements), and (B) gives special attention to such deal terms as (i) "ordinary course of business" covenants, (ii) "material adverse effect" clauses, (iii) closing conditions and termination,¹ and (iv) potential remedies in the event of any counterparty breach.
6. Additional Fundraising: Boards may find it opportunistic to tap capital markets and raise new equity or debt before a deterioration in market conditions amid evolving trade uncertainty. This could allow the company to build a cushion to better weather disruptions in business stemming from tariffs or to amass additional financial resources to facilitate seizing on acquisition opportunities that may arise in a changing economic environment.

Directors' Duties and Business Judgment Amid Trade Uncertainty

Every Canadian company's individual exposure to tariffs and trade uncertainty is unique. How a company may wish to respond to tariffs and trade uncertainty may be equally unique. Potential options, depending on the company's circumstances, could include (1) cost-passing to consumers, (2) cost-sharing with customers or suppliers, (3) terminating or renegotiating supply chain contracts, (4) accelerating domestic or foreign expansion plans, (5) accelerating the pursuit of strategic partnerships, (6) layoffs, and/or (7) relocating production currently in Canada to the U.S. or elsewhere.

In evaluating and deciding amongst these or other potential tariff response strategies, the board must appreciate several key legal considerations:

• Duty of Care: Directors have a duty to exercise the care, skill and diligence a reasonably prudent person would exercise in comparable circumstances. This standard is objective and requires that the board (1) is fully familiarized with the company's circumstances, (2) engages in active, critical and careful deliberations, (3) ensures it has sufficient opportunity to investigate and analyze alternatives, and (4) makes its ultimate decision on an objective and informed basis, meaning that it considered all material information reasonably available in the circumstances, including professional advice.
• Business Judgment Rule: The business judgement rule protects a board from a court second-guessing the board's business judgment even where hindsight suggests a different decision may have been optimal. Perfection is not required to secure the rule's protection. However, the board's ultimate decision must fall within a range of reasonable alternatives and be made in good faith and careful compliance with the board's fiduciary duties.
• Oppression Remedy: Oppression claims protect shareholders (and certain other stakeholders, e.g., creditors) from having any "reasonable expectation" breached by conduct that is oppressive or unfairly prejudicial or that unfairly disregards the stakeholder's interests. Whether any "reasonable expectation" has arisen is situation-specific and can result from, among other things, (1) general commercial practice, or (2) specific representations previously made by the company to the stakeholder.

While the board owes its duties only to the company, in certain circumstances the corporation's best interests may be informed by the interests of corporate stakeholders such as employees, customers, suppliers, creditors and government. It may also be prudent to consider the interests of one or more corporate stakeholders in light of the oppression remedy.

During times of crisis, directors may find it more challenging to fulfill their fiduciary duties, as certain decisions must be made promptly, while the interests of various stakeholders evolve rapidly and may conflict. Weighing potential stakeholders' interests will be particularly important in connection with any potential tariff response plan anticipated to be highly controversial or unpopular with one or more corporate stakeholders, such as (1) material layoffs or (2) a material relocation of production outside Canada. To guard against potential risks arising from such circumstances, adopting a fulsome board process is again key. As part of its decision-making the board should:

• identify all stakeholders reasonably anticipated to be affected by a potential tariff response plan and how their interests would be impacted;
• consider what related reasonable expectations, if any, these stakeholders might have in connection with the potential tariff response plan;
• ensure the board's ultimate tariff response plan is in the best interests of the company and falls within a range of reasonable alternatives.

If the board has undertaken a robust and rigorous process in full compliance with its fiduciary duties, and has not acted in a manner oppressive of any stakeholder's reasonable expectations, the probability of any board liability should be very low. Stated differently, the interests of stakeholders other than shareholders do not prevent the board from acting in the company's best financial interests so long as the decision is the result of a fulsome and good faith deliberative process. That said, in challenging times, boards should be particularly careful to demonstrate that stakeholder expectations were considered within a decision-making framework that prioritizes the corporation's interests, including over the long term.²

Concluding Comments

While corporate decision-making is already inherently complex, the unprecedented trade war threatened by the U.S. against Canada introduces substantial additional uncertainty and urgency. This instability is also aggravated by the unpredictability demonstrated by the new U.S. administration to date. Navigating this turbulence will require rigorous and responsive board action, and the board's governance procedures and practices should be appropriately and prudently adapted to the company's particular circumstances and risk profile. By maintaining vigilant oversight and a fulsome deliberative process, boards will help their company withstand the challenges posed by this volatile trade environment and adapt to this new reality.

The authors thank Luka Bozic, an Articling Student in the Montréal office, for his work on an earlier draft of this article.

Footnotes

1. https://www.fasken.com/en/knowledge/capital-markets-mergers-acquisitions/private-mergers-and-acquisitions-in-canada

2. See also BCE Inc. v. 1976 Debentureholders, 2008 SCC 69 (CanLII), [2008] 3 SCR 560 at para. 81: "[C]onflicts may arise between the interests of corporate stakeholders inter se and between stakeholders and the corporation. Where the conflict involves the interests of the corporation, it falls to the directors of the corporation to resolve them in accordance with their fiduciary duty to act in the best interests of the corporation, viewed as a good corporate citizen.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.