SK Accounting and Tax Services

Organizing Your Corporation: The Directors

Directors are responsible for supervising the activities of the corporation and for making decisions regarding those activities.

Your Corporation's Board of Directors

Your corporation must have at least one director. The number of directors is specified in your Articles of Incorporation. Shareholders elect directors at the shareholders’ meeting by a majority of votes. An individual may be the only shareholder, the only director and the only officer.

Who Can Be a Director?

A Director must be:

  • at least 18 years old;
  • of sound mind; (i.e., not a person a court has determined to be of unsound mind);
  • an individual (a corporation cannot be a director); and
  • not in bankrupt status.

Ordinarily, at least 25 percent of the directors of a corporation must be resident Canadians. However, if a corporation has fewer than four directors, then at least one of them must be a resident Canadian. In addition, corporations operating in sectors subject to ownership restrictions (such as airlines and telecommunications) or corporations in certain cultural sectors (such as book retailing, video or film distribution) must have a majority of resident canadian directors.

Directors may hold shares of a corporation where they are directors. However, the directors of a corporation are not required to hold shares in the corporation unless the Articles of Incorporation make this a requirement for the directors.

Mandate of the Directors and vacancy on the Board of Directors

The directors may be elected for terms of up to three years. The length of the mandate of the directors can be set out in the by-laws. If no term is stated, directors hold office until the next meeting of shareholders. Directors need not all be elected at the same time or for the same length of time. A director whose term has expired can be re-elected as a director.

Persons who have been nominated as directors, and who are present at the shareholders’ meeting are deemed to have consented to serve as directors, unless they refuse. However, if they are not present at the meeting, they must either: 1) consent to their election, in writing, within 10 days of their election, or 2) act as a director after the election.

Also, a director’s term ends when he or she:

  • resigns;
  • dies; or
  • is disqualified/removed by the shareholders.

If a vacancy occurs, the members of the board of directors may continue to exercise all the powers of directors as long as the number of remaining elected directors constitutes a quorum (the minimum number of directors required at a meeting, as specified in your corporation’s by-laws).

It is also possible for the remaining directors to name one or more additional directors between shareholder meetings unless the Articles of Incorporation stipulate that vacancies can only be filled following a vote by shareholders.

Shareholders may remove a director they had previously elected, for a variety of reasons. Removing a director is a simple procedure that generally requires the approval of a majority of votes represented at a meeting of shareholders called for the purpose of removing the director.

Meetings of the Board of Directors

Most boards of directors meet on a regular basis to oversee the business operations of the corporation. Such meetings may be held monthly, quarterly or annually, depending on the needs of the corporation. Directors may also need to meet occasionally to conduct special business.

Meetings of the board can be held whenever and wherever the board wishes, unless the corporation’s by-laws or Articles say otherwise. In all cases, however, a quorum of directors must be present.

Directors may conduct business through signed resolutions instead of meetings. Note, however, that in such situations the signatures of all directors are required. These signed resolutions have the same value as they would have if they were adopted at a meeting of the board of directors. This way of conducting the business of the corporation can be very useful for small companies with only one or a few directors.

Note that it is also possible for one or more directors to participate in a meeting by telephone or electronically, as long as the corporation’s by-laws permit it and as long as all participants in the meeting can communicate fully.

Duties of Directors

The shareholders expect and trust the directors to conduct the corporation’s business in a way that will preserve and enhance the shareholders’ investment.

Directors are responsible for supervising the activities of the corporation and for making decisions regarding those activities. Although some decisions made by the directors require the approval of shareholders, other important decisions can be made without such approval. Here are some examples of these decisions and the level of approval they require:

Decision

Requires shareholder approval?

Approval of financial statements

NO

Creating, changing and revoking by-laws at a shareholders’ meeting

YES

Authority to issue shares

NO

Calling board of directors’ meetings

NO

Calling shareholders’ meetings

NO

Nominating directors

NO

Amending the Articles of Incorporation

YES

Making By-Laws

Unless your corporation’s by-laws state otherwise, the directors have the power to make, repeal and amend the by-laws. Every new by-law and any by-law change (including the repeal of a by-law) requires shareholder approval at the first regular meeting of shareholders after the directors have passed the new or amended by-law. The effective date of a by-law is the date it is passed by the directors, not the date of approval by shareholders.

Appointing Officers

The officers of a corporation are responsible for the day-to-day operation of the corporation. Officers are appointed by the directors and, together with the directors, form the management of the corporation. Officers can fill any position in the corporation that directors want them to fill (president, secretary or any other position).

Any individual can be an officer of your corporation. Officers may or may not be shareholders, and they may or may not also be directors of the corporation. One person could act as a director, officer and shareholder simultaneously. For many small businesses, one individual is the sole director, the sole officer and the sole shareholder.

Duties and Liabilities of Directors and Officers

Because the scope of authority of the corporation’s management (the directors and officers) is so broad, the law imposes a wide range of duties and liabilities on them. In general, these duties and liabilities reflect the position of trust that directors and officers hold in relation to the corporation and its owners, the shareholders. While many of the duties and liabilities of directors and officers are prescribed under the , others are set out in other federal and provincial/territorial statutes, and still others result from court decisions.

Duty of care

One of the most important duties set out for directors and officers of a corporation in the     is the duty of care. Duty of care requires that, in carrying out their functions, the directors and officers must exercise at least the level of care and diligence that a reasonable person would exercise in similar circumstances; and they must at all times act honestly, in good faith and in the best interests of the corporation as opposed to their own personal interests.

Remaining informed

A corporation’s directors and officers cannot avoid liability on the grounds that they did not know what the corporation was doing. In fact, under the   , within the scope of their authority, each director and officer has, at all times, an obligation to remain informed about the corporation’s activities and to ensure that the corporation’s activities are legal and in the best interests of the corporation.

Directors may rely on expert reports, such as financial statements or legal opinions, in certain circumstances. Directors are not liable if they exercise the same degree of care, diligence and skill that a reasonable, prudent person would exercise in comparable circumstances.

Preventing conflicts of interest

The     tries to prevent conflicts between the interests of the corporation and those of the directors or officers. For example, directors and officers must disclose in writing any personal interest they may have in a contract with the corporation. Failure to make such a disclosure could result in a court setting aside the contract upon application by the corporation or a shareholder.

Specific liabilities

The     also imposes certain specific liabilities on directors and officers of a corporation. In certain circumstances, directors are liable for up to six months’ worth of unpaid wages to employees of the corporation, as well as for any unpaid source deductions.

Protection from liability

With this in mind, you may want to consider putting in place some of the following methods that have been developed to protect directors and officers of corporations from certain liabilities that could be imposed upon them. For example, your corporation could:

  • purchase insurance to protect directors and officers against liabilities incurred in the exercise of their duties;
  • agree to compensate directors and officers for losses they may suffer or costs they may incur while carrying out their duties — except where the director or officer has failed to act honestly and in the corporation’s best interests; or
  • in certain circumstances, advance funds to directors and officers to help them pay the costs of defending themselves in legal actions brought against them. Note, however, that in cases where directors or officers fail to defend themselves successfully, they are required to repay the corporation for these advances.

Directors must at all times remain free to assess the best interests of the corporation and to act on this assessment. For this reason, directors may not agree among themselves in advance how they will act in a given situation.

However, shareholders may enter into unanimous shareholder agreements that transfer some or all of a specific director’s responsibilities and powers to the shareholders. In such cases, since the power or powers have been transferred away from the director, that director cannot be held responsible for not exercising that power.

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