Let’s focus on the role of directors within a corporation

After having read our previous article on the role of the various actors in a corporation, Simon and Léa wanted to know more about the role of director.

Our two favorite young entrepreneurs now own a corporation called Troque tes fringues, which is an online clothing exchange platform. They are both directors of their corporation.

If, like them, you would like to find out more about the role of directors in a corporation, this article is for you!

What is a director?

First of all, directors are responsible for providing supervision and overall management of a company. Thanks to our previous article on the various actors of a corporation, Simon and Léa now know that to be directors of Troque tes fringues,  they have to have reached the legal age of majority, not be subject to a tutorship or a curatorship and not be bankrupt or subject to a court decision forbidding them to be a director.

Moreover, if their company was created under Canada’s Business Corporations Act (hereinafter “Canada’s law”), at least 25 % of their company’s directors would have had to be Canadian residents. Considering that their company has fewer than 4 directors, at least one of them would have to be a Canadian resident.

In addition, pursuant to Canadian law, companies working in air transportation, in telecommunications and in the publication and distribution of books, movies and videos have to establish a board of directors composed of a majority of Canadian residents.

However, Simon and Léa have no legal obligation in that regard, because they decided to incorporate their business under Quebec’s Business Corporations Act (hereinafter “Quebec’s law”), which has no residency requirement.

How are directors selected?

Quebec’s law as well as Canada’s law state that shareholders must elect directors. The term of a director's mandate, which are established by the by-laws of the company, shall not exceed three years.

If the company doesn’t have by-laws or if they don’t contain any provision about the directors’ term, their term is presumed to be one year.

According to Canada’s law, if the director is present at the shareholders meeting in which they are elected, they are presumed to have accepted the position, unless they decline it afterwards.

However, if they are absent, they must either consent to their election in writing within 10 days, or act as a director after the election. Simon and Léa will no longer be directors of Troque tes fringues if they quit their position, die or if the shareholders of the company remove them.  

Canada’s law requires that directors be elected by an ordinary resolution adopted at the annual meeting of shareholders. Quebec’s law is more flexible. Indeed, the type of resolution and the moment when the resolution has to be adopted are not specified and thus the company's by-laws can prescribe how directors are elected.

Finally, it is worth remembering that the powers directors are granted after their election can be restricted or even removed through a unanimous shareholders agreement.

The board of directors

Every corporation must have a board of directors.

However, companies under Quebec’s regime are allowed to not establish a board of directors, if they only have one shareholder who, in writing, has withdrawn the powers of the board of directors.

Moreover, Quebec companies composed of many shareholders may decide not to establish a board of directors if the shareholders have withdrawn the powers of directors through a unanimous shareholders agreement and have decided not to form a board of directors.

But what is the role of a board of directors? Subject to a unanimous shareholder agreement, the board of directors exercises all the powers necessary to the supervision and the management of company’s daily business, and define the corporation’s strategic orientations.

Except to the extent provided by the law, the board of directors doesn’t require the approval of shareholders to exercise its powers. Pursuant to Quebec’s Business Corporations Act, following the incorporation of the company, the board of directors must convene an organizational meeting, during which they will make the company’s by-laws, adopt forms of share certificates and corporate records, authorize the issuing of shares and appoint the corporation’s officers.

Quebec's law specifies that the company’s by-laws must be submitted to the shareholders. They can ratify, modify or even reject them. The board of directors of a company created under Canada’s law must also convene an organizational meeting during which they can do pretty much the same thing as companies created under Quebec law.

Furthermore, they can also appoint an auditor and make banking arrangements, among other powers.

What are the obligations of directors?

Directors are granted lots of power within a company. Thus, the law imposes obligations and responsibilities on them as well. Those are the result of Canada’s Business Corporations Act (for companies federally incorporated) or of Quebec’s Business Corporations Act (for companies under Quebec’s regime), but can also derive from other federal, provincial or territorial laws.

First and foremost, according to Canada’s law and Quebec’s law, directors are bound to be diligent and prudent in their post.

What does this mean concretely?

Firstly, it involves information. Indeed, directors have several decisions to make as part of the company’s management. They must, in order to meet their obligations, do research before making these decisions. While the law doesn’t require directors to be experts in all fields, the relevant case law usually recognizes that directors have fulfilled their duty of prudence and diligence as soon as they have consulted a professional and have followed his recommendations.

Furthermore, directors must personally play their part. In other words, a director can’t delegate his power, subject to the appointment of officers by the board of directors. For example, the directors must personally approved the financial statements and complete the income tax return of their company.

Finally, to fulfill their duty of prudence and diligence, the director must not impose financial obligations that can’t be undertaken on their company.

Secondly, the directors are subject to a duty of loyalty to the company. This obligation is set out in Quebec’s Civil Code, and essentially involves avoiding conflicts of interest with the company. The director has to act in the company’s best interest rather than theirs or the shareholders' interest.

For instance, let’s imagine that Simon, director of Troque tes fringues, is contacted by another company from Montréal, which has the same business model as Troque tes fringues, and decides to become one of their directors. This would be a conflict of interest, because he would be forced to represent the interest of a competitor.

What about liability?

In theory, directors of a corporation do not face any contractual liability regarding the obligations contracted by the company. Why? Because the corporation has a separate legal personality from its members.

Consequently, only the company is liable for its obligations, unless the directors have personally secured or guaranteed them. Thus, the directors have what is called limited liability.

The directors will incur civil liability only under certain conditions. For example, the directors of companies under Canada or Quebec’s laws can be liable for the infringement of labour, tax or environmental laws.

It is also important to note that Quebec’s law and Canada’s law provide that directors are personally liable for unpaid salaries to employees. Directors may be personally liable if they violate any of the duties and obligations previously mentioned.

That’s it for today folks! Lex Start hopes it has enlightened you about the role of directors. Please feel free to contact us by phone at (514) 621-2750 or by email at bonjour@lexstart.ca for any question related to our products.

Me Gilles de Saint Exupéry, L.L.M. and Rim Hervé

 

 

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