Corporate Giving – Are Corporate Donations Always the Responsible Thing To Do?

July 1, 2010

A glance at the website of any major corporation, big bank or industry player will show a page (if not many) dedicated to setting out that company’s commitment to community involvement and, often, highlighting its various corporate donations.  The recent trend towards corporate social responsibility and the focus on corporate giving seems to present a win-win situation:  charities and community initiatives get the benefit of large donations, while companies benefit from the positive press and a boost to their public image.  While it would appear that corporate donations are a positive thing – minority shareholders may not always think so.

A recent case in the United States has brought to light an interesting issue in respect of corporate donations.  When the minority shareholders of American Assets Inc. learned of the $60 million donation that majority shareholder CEO and President, Ernest Rady, had committed to the San Diego Rady Children’s Hospital, they launched a suit asking the court to block the $21 million promised by American Assets (a total of $60 million was donated – $33 million in total by American Assets, though the shareholders were not seeking return of the $12 million already delivered by the company).  The minority shareholders claimed they were not willing to support this gift with American Assets’ money.  While it is important to point out that, in this case, the minority shareholders also happened to be Rady’s nieces and nephews (thus raising the question whether the shareholders’ objection stems from a family issue), the question remains – are there limits on corporate giving?  After all, the corporate assets of a company ultimately belong to the shareholders, so an argument can be made that the money is not management’s to give.

While shareholders do have a vote in certain major decisions involving the corporation, the general day to day business decisions are usually left to management.  Under corporate law, the directors of a corporation owe a fiduciary duty to the shareholders to “act honestly and in good faith with a view to the best interests of the corporation”, and decisions made by the board are expected to maximize share value.  In this context, it could be easily argued that charitable donations improve the public image of a corporation, and thus improve the profitability as well.  So then, what if donations are made without the support of all of the shareholders?
 
The Federal statue governing corporate law (the Canada Business Corporations Act), includes provisions to protect shareholders in the form of various remedies, the most powerful of which is the oppression remedy.  Originally introduced to address difficulties faced by minority shareholders in a ‘majority rules’ environment, the oppression remedy gives the Court broad discretion to rectify matters where it finds conduct that qualifies as oppressive.  However, practically speaking, Courts are reluctant to second guess management, particularly where the alleged breach of duty of care relates to business decisions (rather than failing to detect and address wrongdoing).  On the one hand, a minority shareholder must be protected from unfair treatment.  However, on the other hand, it is generally held that the Court should not assume the function of the board of directors in managing the company, nor should it usurp the legitimate exercise of control by the majority.  Thus, it is rare that a Court would interfere simply because a decision is unpopular with the minority.  Where business decisions are made by directors acting honestly and in good faith, it is unlikely that the Court will intervene.

It is important to note that it is always open to the shareholders to use a shareholder’s agreement to limit the discretion of directors, or to require shareholder approval for certain matters such as the spending of company funds.  However, short of such an agreement and assuming that the directors are acting within their rights, minority shareholders have little say with respect to the use of corporate funds.

Miller Thomson LLP’s lawyers in the Corporate group and Charities and Not-for-Profit group can assist with corporate donation issues.

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