We are often asked by individuals starting a business what is the role of the director(s). The following is a general overview of the duties, responsibilities and potential liabilities of acting as a director of a corporation.
Directors of corporations are responsible for making decisions regarding the affairs of the business and for supervising and/or managing these activities. Corporations must have at least one director and a director must: (i) be at least 18 years old, (ii) be an individual (not a corporation), (iii) be of sound mind, and (iv) not be bankrupt. Additionally, depending on the number of directors and on the sector in which the business is operating, there may be a requirement that a certain percentage of the directors are Canadian residents. Directors may hold shares of the corporation but it is not required unless specified by the Articles of Incorporation.
Responsibilities
While some decisions of corporations require shareholder approval, other decisions can be made solely by the director(s). Most of the day-to-day decisions of the corporation will be made by the directors, while larger decisions will require the approval of the shareholders. Some decisions that will likely require shareholder consent are: issuing shares, calling board of directors’ and/or shareholders’ meetings, nominating new directors and appointing officers, approving financial statements, amending the Articles of Incorporation, and creating and modifying the corporation’s by-laws. Most other decisions fall under the purview of the directors.
Duties
In addition to directors’ daily duties and responsibilities, they are also required to fulfill specific duties: a fiduciary duty, a duty of care, and a duty to disclose any potential or existing conflicts of interest. Failure to satisfy any of these duties may expose a director to personal liability.
Fiduciary Duty
Directors have a fiduciary duty to act honestly, loyally, and in good faith. A director must also act with a view to the corporation’s best interests and prefer these interests over any others, including, for example, those of a specific shareholder. The implementation of this duty is intended to protect corporations from director decisions made out of self-interest or in bad faith. If a director fails to meet this duty, he or she may be held financially liable.
Duty of Care
The duty of care requires that directors must exercise at all times the level of care, skill and diligence that a reasonable and prudent person would exercise in a comparable circumstance. Directors are not likely to be held in breach of this duty if the business decisions were made prudently and reasonably. Implementing decision-making procedures and documenting these processes, for example through meeting minutes, can reduce the likelihood that a court will find the director(s) to be in breach of the duty of care. This is because they can help to validate that the directors’ judgement was exercised in an impartial, logical and well-informed manner.
Disclosure of Conflicts of Interest
Directors are required to disclose any personal interest they may have in an existing or proposed contract or transaction with the corporation and the nature and extent of that interest. Disclosure may be made in writing or by requesting that it be entered into the minutes of a meeting. Failure to make such a disclosure can result in the contract being set aside by a court. Additionally, a director that becomes party to confidential information related to a transaction made or considered by the corporation can face personal liability if it is established that this information was disclosed to another corporation or entity in which that director has an interest or was otherwise used for the benefit or another entity and/or the damage of the corporation.
Potential Liabilities
While there is a general rule that directors are not held liable for the liabilities of the corporation, there are a few specific instances where they may be financially responsible. Directors of corporations may face personal liability if they fail to fulfill certain duties. Liabilities may be imposed under provincial and/or federal legislation, including: the Canada Business Corporations Act (CBCA), Business Corporations Act (Ontario) (OBCA), employment and environmental legislation.
Liability under the Business Corporations Statutes
Directors may be liable for reimbursement to the corporation any amount of money that may have been lost as a result of their actions in certain situations. For example, if a share is issued for consideration other than money and the amount of consideration received is less than the fair equivalent of the money, the directors that voted for, or consented to, the authorization of this share are liable to make good the amount by which the consideration is less than that the corporation would have received if the share had been issued for money on the date of the resolution. However, the directors are not likely to be held liable if they can prove that they did not know, and could not reasonably have known, that the share was issued for less than the fair equivalent of money.
Liability for Employee Wages and Related Payments
Directors may be held personally liable for up to six months’ worth of unpaid wages to employees and, under the OBCA and the Employment Standards Act, for up to twelve months’ accrued vacation pay over their time acting as director. Directors may also face personal liability under provincial employment standards legislation and other federal legislation in Canada if the corporation fails to remit source deductions for employee income taxes, Employment Insurance, and Canadian Pension Plan contributions.
Liability under Environmental Legislation
Directors may also face liability under applicable environmental legislation. Based on the corporation’s ownership or control of a property, officials may issue remediation orders directly against directors to rectify environmental contamination, even without proof of causation.
Protection from Liability
Directors of corporations should always remain aware of the common law and statutory duties that are applicable to them in order to mitigate potential liabilities. One possible method for corporations to protect its directors against any liabilities imposed upon them over the course of their duties is to purchase insurance. Corporations may indemnify and purchase insurance to protect directors only if they acted consistent with their duties and had reasonable grounds for believing that their conduct was lawful. Indemnity provisions are commonly included in a corporation’s by-laws.
This area of the law can be complex and liabilities faced by a corporation’s directors vary in different situations. Professional consultation is therefore recommended in order to ensure that directors are complying with their duties and avoiding potential liability.