Hiring a board member after firing an employee on board’s recommendation

Is the employer open to any liabilities or conflict of interest complaints if it hires a board member to fill the position of an employee fired on the board's recommendation?

Tim Mitchell
Question: A general manager fires an employee on the advice of the board of directors, then one of the directors steps into the position while remaining on the board. The position is advertised locally and the director formally applies for the position without resigning from the board. Is the employer open to any liabilities or conflict of interest complaints?

Answer: The board of directors of a company is obliged to act in good faith and in the best interests of the company and its shareholders with due care, diligence and skill. The duty of due care requires directors to act on an informed and reasoned basis when making decisions that have the potential to affect shareholder interests. Individual directors are not permitted to favour their own interests at the expense of the company. They must disclose any interest they have in a transaction before the board and would normally be expected to withdraw from the decision-making process to avoid the appearance of impropriety. Provided the director accepting the employment has acted honestly and in good faith with a view to the best interests of the corporation, there is nothing necessarily untoward in that director accepting a paid position with the company. Accordingly, the availability of a cause of action against the company would depend on how and why the employee was terminated, whether that action was taken for the benefit of the company or for the personal benefit of the director who ultimately ended up in the position and who is seeking to hold the company liable for the directors’ conduct. If the employer terminated the employee without cause and without notice on the advice of the board of directors, there is certainly the possibility the employer could be sued for wrongful dismissal.

If the corporate directors acted in a way that was contrary to reasonable shareholder expectations in awarding the position to a director, the shareholders might have a statutory remedy for rescission of the employment contract. The statutory shareholder oppression remedy is designed to protect shareholders from conduct that is oppressive or unfairly prejudicial or unfairly disregards their interests. The remedy may be available even though the acts themselves may be lawful.

Tim Mitchell is a partner with Laird Armstrong in Calgary who practices employment and labour law. He can be reached at t.mitchell@lairdarmstrong.com or (403) 233-0050.

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