Who are the various actors of a corporation?

Simon and Léa, who share the same passion for fashion, have always wanted to run their own enterprise. Both fresh graduates, they concluded that it was the right time to take on a new adventure and make their dreams come true by creating their clothes sharing online platform.

After having thought about it long and hard, they decided to incorporate their business (read To incorporate or not to incorporate: that is THE question), thus making their business a separate legal entity. However, they still have some questions regarding the roles of the various actors of their corporation Troque tes fringues. Once again, Lex Start address their concerns.

There are three types of actors with different roles within a corporation: the shareholders, the directors, and the officers. In start-ups, founders very often occupy all of the different roles.

In our case, Simon and Léa both wear the hats of shareholders, directors, and officers. Nevertheless, it’s still crucial to understand and distinguish those three designations.

 

What’s a shareholder?

Simon and Léa are the founders of Troque tes fringues, but there is more! Like lots of start-ups, they also are shareholders of their company.

That means that when it was created, Troque tes fringues issued a certain amount of shares from one or several classes. Shares are securities acquired by natural or legal persons in a corporation. For a company like Troque tes fringues, to issue shares enables it to obtain funding. For shareholders, to possess shares allows them to be granted rights. The rights to which they are entitled to depend on the class of shares they possess.

Amongst those rights, there is the right to vote during the shareholders meeting, the right to receive a part of the company’s gains if the company declares dividends and the right to receive a part of the company’s remaining assets if the company is liquidated.

When Troque tes fringues expands, it might be approached by third parties wanting to acquire shares, parties such as relatives of Simon or Léa or even qualified investors.

If the company decides to issue shares to these third parties, they will become shareholders alongside Simon and Léa. If Simon and Léa previously signed a shareholder agreement, the issuance of shares should be in accordance with the agreement to which new shareholders can be bound.

What’s a director?

Firstly, a director has to be a natural person and has to fulfill the requirements of Article 327 of Quebec’s Civil Code.  In other words, he or she has to have reached the legal age of majority, to not be subject to a tutorship or a curatorship and to not be bankrupt or having been subject to a court decision forbidding him or her to be a director.

As we already know, Simon and Léa are both directors and shareholders of their company, like many other start-ups. However, the function of a director is totally different the shareholder's function. It is worth remembering that shareholders invest in the company and pronounce themselves on some of the decisions taken by the board of directors.

Thus, it is directors’ job, alone or reunited in a board, to deal with the company’s management. Note that the shareholders of a corporation can restraint or remove the powers conferred to directors by signing a unanimous shareholder agreement.

The involvement of the directors in the management of the company is undeniably a source of liability. Indeed, as we will see later on, directors carry a greater liability than shareholders. Although they are responsible for the management of the company, directors can decide to delegate a part of their tasks to officers, which will execute the general guidelines set by the board of directors.

Pursuant to Canada’s Business Corporation Act, Quebec’s Business Corporation Act and Quebec’s Civil Code, the directors are subject to two general duties: the duty of diligence and the duty of loyalty.

What is the difference between the two duties?

The duty of diligence means that a director has to attend meetings, get informed about company’s activities, monitor and control its management and ensure a positive and active contribution to the company.

Concerning the duty of loyalty, it includes three points: acting honestly, in good faith, and in accordance with the best interests of the legal person. Thus, in the decision-making process, the director must ensure that the corporation's interests prevail over the shareholders’ concerns.

Nevertheless, case law has clarified this duty over time, highlighting that directors must consider all the stakeholders that may be affected by their decision. Moreover, even though they are not responsible for company’s obligations, directors bear a double personal liability: a civil and a statutory liability.

For example, if Simon is the director of Troque tes fringues and he pays dividends while the corporation is not solvent, he is personally liable, pursuant to Quebec’s Business Corporation Act or Canada’s Business Corporation Act. Furthermore, if Simon and Léa take wrongful decisions when performing their duties, they might be held liable non-contractually as well.

What’s an officer?

As already mentioned above, an officer is a natural person appointed by directors in order to be in charge of the company’s daily management. Sometimes called “internal directors”, officers have various duties, including the duty to execute their tasks, respect the law and perform their duties with honesty and loyalty. Exercising a day-to-day control, officers are not responsible for the company's contractual obligations.

However, if the manager is not an employee of the company and takes a wrongful decision when performing his duties, his personal liability may be incurred. Just like directors, officers are subject to several laws that can incur their statutory liability if they are transgressed.

Here are the various hats that actors of a corporation can wear. Now that roles are well defined, you wish to transform your business into a corporation? Contact us by e-mail at bonjour@lexstart.ca or by phone at (514) 378-6703.

See you later for new adventures with Simon and Léa!

 

 

Me Gilles de Saint-Exupéry, L.L.M. et Rim Hervé

 

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