Internal Affairs

Role of Directors

The shareholders of a corporation elect a board of directors to manage the affairs and business of a corporation. The most important powers conferred on directors by the CBCA are set out in Figure.

Figure : The Role of Directors

Role of Officers

The officers exercise authority (as delegated by directors) for managing the day-to-day operations of the company. It is up to the directors to define and designate the responsibilities of each officer (e.g., president, vice-president, treasurer).

Duties of Directors and Officers

Section 122 of the CBCA imposes two main duties on directors and officers:

1. Fiduciary duty – This is a duty to “act honesty and in good faith with a view to the best interests of the corporation.”

2. Duty of care – The directors are required to “exercise the care, diligence, and skill that a reasonably prudent person would exercise in comparable circumstances.”

These duties are also imposed at common law. The fiduciary duty includes a duty to avoid any conflict of interest with the corporation.

Traditionally, in British and Canadian common law, these duties are owed to the corporation (not the individual shareholders, other stakeholders, or the public). However, the Supreme Court recently extended the duty of care and skill to other stakeholders, including shareholders, creditors, and employees, but refused to extend the fiduciary duty beyond the corporation. However, the court also stated, “We accept as an accurate statement of the law that in determining whether they are acting with a view to the best interests of the corporation it may be legitimate…for the board of directors to consider inter alia the interests of shareholders, employees, suppliers, creditors, consumers, governments, and the environment.”

Potential Liability of Directors and Officers

Directors and officers may be liable for their actions in relation to the corporation under tort law, contract law, regulatory law, and criminal law.

While some courts have held that directors and officers are not personally liable for tortious actions as long as they were acting in “furtherance of their duties to the corporation and their conduct was justifiable,” recent Ontario case law seems “to suggest that directors and officers will almost always be responsible for their own tortious conduct even if they were acting in the best interests of the corporation.

Contract law generally puts directors and officers in the position of agents and makes the corporation liable to the third party.

Directors may also face statutory penalties (including imprisonment) and fines for unpaid taxes as well as under environmental protection and other regulatory schemes. This and criminal liability will be discussed later.

Rights of Shareholders

Shareholder rights derive from two main sources: the articles of incorporation and securities legislation. At least one class of shares must have three basic rights: 1) to vote at any meeting of shareholders; 2) to receive any dividend declared; 3) to receive the remaining property, after payment of debts, on dissolution of the corporation.

Shareholders also have a right to access certain information, including articles, by-laws, minutes of shareholder meetings and shareholder resolutions, the share register, and financial statements. In small corporations, shareholders may have a right of first refusal that requires existing shareholders to be offered a chance to buy shares from another shareholder before those shares are offered to non-shareholders.

Shareholder Remedies

There are several shareholder remedies to assist shareholders whose interests have been injured by the acts of the corporation or its directors and officers. These are summarized in Figure.

Figure : Shareholder Remedies

The “Business”: External Relations

The external obligations of corporations, pursuant to corporate governance, can be broken down into three broad categories:

1. Ordinary civil liability in contract and tort, including the large areas of service contracts and employment law that apply to individuals, partnerships, and corporations.

2. Statutes and regulations to protect creditors, investors, and the public in general, which apply especially to corporations.

3. Criminal and quasi-criminal liability of corporations for the acts of their officers, and the potential liability of officers and directors for their own acts and omissions committed in the course of performing their duties.