19 JulyWhat do the bosses of your company do?
As you know, Simon and Léa founded an enterprise named Troque tes fringues, an enterprise enabling people to thrift clothes online. Our two favorite entrepreneurs have decided to run a corporation and have incorporated their business pursuant to Quebec’s Business Corporations Act.
In a previous blog post, we presented to you the different actors working within a corporation: the shareholders, the directors, and the officers. It seems, however, that the role of officers is often misunderstood or confused with the role of directors.
Today, Lex Start sets the record straight and explains to you the ins and outs of what officers do within a corporation.
Officers are nominated, not elected
As we were saying, the role of officers is often confused with the role of directors. This is understandable since entrepreneurs who run start-ups often cumulate the roles of the shareholder, director, and officer. That being said, the role of directors varies from the role of officers in many regards.
First, the way officers are appointed to office is different from the way directors are brought to power. Keep in mind that shareholders entitled to vote during a shareholder meeting elect directors.
Once they are elected, directors are responsible for the management of the corporation. Even if they are not obliged to do so, the directors can nominate officers. Thus, officers are designated at the discretion of the board of directors. Unless a unanimous shareholder agreement exists, the shareholders have no say over the nomination of officers.
Once they are appointed, the work of officers is different from the work of directors. Directors are not involved in the company’s daily management. Directors will define the general and strategic orientations of the corporation.
Officers will be responsible for the execution of the orientations defined by the directors. Amongst officers, we often find a Chief Executive Officer, a Vice-president, a Secretary, a Chief Financial Officer, a Chief Technology Officer and a Chief Compliance Officer, but can have any other title the board of directors has agreed on. Officers are usually employees of the corporation.
However, the law doesn’t consider them as ordinary employees. Indeed, since they are involved in the upper reaches of the corporation, Quebec’s Civil Code. Quebec’s Business Corporations Act and Canada’s Business Corporations Act bestow more important responsibilities and duties.
The board of directors determines the salary given to the officers of a corporation. Just like regarding the nomination of officers, shareholders have no say over the salary given to the officers, provided that there is no unanimous shareholder agreement to the contrary effect.
Mandataries of the corporation
Officers of a corporation are considered as its mandataries. What is a mandatary?
Mandatary is someone to which we give a power of representation to third parties. Thus, officers have the power to act on behalf of the corporation with third parties. Subject to their job description, officers can also conclude legal acts on behalf of the corporation. As mandataries, officers must, pursuant to section 2138 of Quebec’s Civil Code, carry out their mandate with prudence and diligence. If the words “prudence” and “diligence” ring any bell, it is totally normal.
Indeed, directors are also subject to a duty of prudence and diligence in the exercise of their functions. The duty of prudence and diligence to which officers are subjected is also mentioned in section 321 of Quebec’s Civil Code.
The persons appointed to occupy the functions of officers within the corporation must comply with certain ethics rules. In the same vein, officers have a duty of honesty and loyalty towards the corporation and must act in its best interest. Thus, they must avoid putting themselves in a conflict of interest.
The notion of “interest” is defined in Quebec’s Business Corporations Act as « any financial stake in a contract or transaction that may reasonably be considered likely to influence decision-making ». If the officers find themselves in a conflict of interest, the law stipulates that they must disclose their conflict of interest to the board of directors.
Let’s illustrate this by an example. Let’s imagine that Simon and Léa, directors of Troque tes fringues, appointed Julie, their friend, and an accountant, as the treasurer of Troque tes fringues. Let’s also imagine that Julie was also a shareholder of a competing company of Montreal. If the Troque tes fringues' board of directors had to discuss a potential partnership with this company, Julie would have to notify the board in writing that she possesses shares within that company. She would also have to notify the board of the number of shares she was and whether or not she is entitled to dividends.
Moreover, officers can’t use the information they obtained in the context of their function for their own benefit or the benefit of third parties.
Finally, just like directors, officers must execute their duties and do so in compliance with the Law.
The liability officers face
Officers face a liability that is similar from the liability that directors face. Indeed, generally speaking, officers are not personally responsible for the debts and other obligations contracted by the corporation.
Thus, in the unfortunate event that the corporation becomes insolvent, its creditors won’t be able to turn themselves to officers in order to recover their debt, unless the officers have cautioned or personally granted the obligation in question.
Just like directors, officers can be held liable for their non-compliance with certain laws, such as tax and environmental laws. As for the civil liability of officers, let’s underline that it differs according to whether or not the officers are employees of the corporation.
In the hypothesis that they are, their civil liability can’t be incurred for a fault committed in the execution of their functions. However, if the corporation doesn’t employ the officer in question, it will be able to defend itself by proving that it could not have been able to prevent the damage caused by the fault committed by the officer in the exercise of its functions.
Me Gilles de Saint-Exupéry, LL.M