What Board Directors & Officers Need To Know
Whether you are new to the board or a seasoned board member, it is important to understand corporate board director and officer requirements and duties. Failure to do so can attract personal liability despite the limited liability protection offered by the corporate structure. The duties of directors and officers of a corporation are governed by the legislation under which the company is incorporated. In the discussion below, you learn about some of the most significant duties of directors and officers including their fiduciary duty, duty of care, and duty to manage. Kahane Law Office has corporate lawyers who have real experience sitting on boards and want to help others. Also read about Directors Duties To A Corporation.
What Statutes Govern Corporations?
In Canada, businesses may be incorporated under either the federal or provincial legislation. Larger organizations who conduct businesses in several Canadian provinces will often incorporate under the federal Business Corporations Act (Canada), however, a federally incorporated company must still register in each province in which it conducts business. It is also common for businesses of any and all sizes to incorporate under provincial or territorial legislation. For example, if a business operates strictly in Alberta, it will typically incorporate under the Alberta Business Corporations Act (the “ABCA”).
Once incorporated, and so long as the corporation’s annual returns are filed with the appropriate corporate registry, a corporation can exist perpetually until it is wound-up, dissolved, or struck from the register. A corporation is a creature of statute and shields its shareholders from personal liability arising from the operation of its business in a manner similar to that of directors and officers.
There are certain exceptions to the limited liability of directors and officer. These include when a director or officer breaches their duties to the corporation, when a shareholder personally guarantees the debts of the corporation, when the court “lifts the corporate veil” and when a loss occurs as a result of a shareholder’s act or negligence.Thus you must understand corporate board director and officer requirements and duties.
Difference Between Federal And Provincial Incorporation
For the most part, there is little to no difference as to whether a corporation is incorporated provincially or federally because most provincial and territorial legislation governing corporations are quite similar. Regardless of whether a corporation is incorporated federally or provincially, it is able to operate in other provinces or territories provided it is extra-provincially registered in each province or territory in which it intends to carry on business. Corporate board director and officer requirements come from both these two governing laws and the common law.
An Extra Step For Federal Corporations
Notwithstanding the above, with federal incorporation, prior to commencing business, it must first extra-provincially register in the jurisdiction(s) in which it operates. In contrast, when provincially incorporated, a corporation can carry on business in it’s home jurisdiction immediately upon incorporation. Extra-provincial registrations is only required in all additional provinces or territories in which it will carry on business.
Federal Is More Recognized??
Some businesses choose to incorporate federally due to the belief that a federal corporation will be viewed with more “prestige” than a provincial corporation and may therefore be more desirable by an expansion-oriented corporation. Overseas, some people view federal corporations this way. Additionally, the corporate legislation in each province and territory contains varying requirements as to the number of directors who must be Canadian residents, if any, which can influence under which legislation a business may choose (or is able) to incorporate .
A Federal Company Advantage
Finally, upon incorporation, the name of a federal corporation becomes protected for use by the corporation in each province or territory Canada-wide whereas a provincial corporation’s name is protected/reserved for use by the corporation in that province or territory only. Prior to extra-provincially registering a provincially incorporated company, a name search must be conducted and should the name not be available in that province or territory, the corporation must use a different name for registration and operation in that particular province or territory.
Duties As Corporate Director Or Officer Of A Corporation
Regardless of which legislation your company is incorporated under, all business corporation legislation imposes the same basic duties and obligations on directors and officers of a corporation. Additionally, such legislation offers similar protections and requirements for indemnification. The chief corporate board director and officer requirements include:
- fiduciary duty;
- duty to manage; and
- duty of care.
Colloquially known as the duty of loyalty, all business corporation legislation imposes a legal obligation for directors and officers to act in the best interests of the corporation with honesty and good faith, even if doing so conflicts with their own personal interests. Section 122 of the ABCA reflects the fiduciary duty. Pursuant to each business corporation act, a director or an officer’s loyalty to the corporation does not entail loyalty to other individuals. This includes stakeholders such as shareholders, employees or creditors, however, directors and officers must treat other stakeholders fairly.
In certain instances, and especially in tort law, directors do owe a fiduciary duty to creditors. Ascertaining how fulfilling one’s fiduciary duty to a corporation differs depending on the context of the situation and thus, it is best to seek legal advice prior to acting.
Ways Of Breaching A Director Fiduciary Duty
Directors may be in breach their fiduciary duty if they:
- put their personal interests before the interests of the corporation;
- take corporate opportunities unless the directors and officers personally gain from a decision made through a good process and in good faith;
- self deal – such as when a director directs the corporation to purchase products or services from a business owned by him or her; and
- are directors on the board of two or more corporations that are in direct competition with each other.
Duty to Manage
One of the board director and officer requirements includes a directors legal obligation to manage the internal business affairs of the corporation. Typically, board members focus on high-level decisions and oversight rather than the day-to-day decisions of the business, namely:
- appointing and supervising the chief executive officer and other senior officers;
- directing and evaluating strategy to improve corporate performance;
- representing shareholders and maintaining shareholder relations;
- managing the company’s assets, especially during major events such as acquisitions and insolvencies; and
- fulfilling other requirements mandated by law such as preparing and maintaining minute books and filing necessary documents.
The board of directors may delegate management powers to others, however, each business corporation act differs. Directors must research and determine the legality of directing someone else to perform specific board director and officer responsibilities. Prior to delegating tasks, you should always first seek legal advice.
Duty of Care: Board Director And Officer Requirements
Corporate board director and officer requirements and duties fall under a concept known as “duty of care”. All business corporation legislation in Canada calls on directors to exercise the care and skill that a reasonably prudent person would exercise under similar circumstances. In other words, board members must diligently ensure that they make decisions rationally and on an informed basis. Section 122(1) of the ABCA reflects the duty of care principal. If challenged, board members must provide evidence showing that they acted prudently. Consequently, board members absolutely must ensure the keeping of proper records at all times. This protects themselves and their company from liability.
The Business Judgement Rule
Notwithstanding the above, the courts do not expect the board to always make perfect decisions, which is why the business judgement rule (the “BJR”) operates as a defence to breaches of fiduciary duty or duty of care. The BJR refers to the notion that the courts will defer to business decisions made by directors and officers. they do this so long as they lie within a range of reasonable alternatives. If challenged, board members must prove that there was: (1) a good decision making process in place; and (2) that the directors made a reasonable decision taking into consideration the expertise of the directors.
Specifically, the BJR will likely not shield directors from liability if they fail to:
- conduct proper due diligence;
- examine reports adequately;
- take sufficient time to contemplate an offer (short of an emergency situation); and
- obtain advice from a professional.
Board members may make decisions in areas of special expertise such as engineering, law, or accounting. That said, it is not mandatory for them to hold professional qualifications. Generally, protection exists for directors and officers from liability, provided that they make decisions in good faith, when:
- signing financial statements or auditor’s reports;
- signing reports by professionals (such as property appraisers, engineers or lawyers); and
- signing reports when they may reasonably rely on such reports in the given circumstances.
Notably, while it is not necessary for board members to have an in depth understanding of the professional reports that the corporation receives, they should still be reasonably familiar with the subject area of the report such that they are able to comprehend what the report’s findings.
Defences To Breaches Of Duties
Each business corporation act sets out certain defences for directors who have allegedly breached their duties. In general, legislated defences predicate on whether the directors have exercised good faith and due diligence. As reflected in section 124(1) of the ABCA, there are also instances where a corporation may indemnify a director. This occurs provided that they acted honestly, in good faith, and believed that their conduct was lawful. Not knowing corporate board director and officer requirements is not a valid defence.
Legal Help With Board Director And Officer Requirements & Duties?
Whether you require legal guidance on fulfilling your duties as an officer or director or you face a lawsuit for failing to comply with the duties of directors and officers, our team is available. Our experienced corporate law and litigation team help reduce your risk of liability. They also assist you in lawfully managing the affairs of your business. We can even set up a consultation to review all corporate board director and officer requirements and duties.
For expert legal advice, Call today at 403-225-8810 in Calgary, Alberta or if you live in Edmonton and surrounding area (780) 571-8463, or toll-free at 1-877-225-8817. We find email to be the best way to reach out as it lets you give us details of what you need to do, allowing us to connect you to the correct lawyer at the firm directly: email us directly here.