Introduction to Directors’ Duties in Ontario

Introduction to Directors’ Duties in Ontario

When we talk about corporate governance, the responsibilities of directors of large public companies often come to mind. However, it is important to remember that directors of small, privately held companies have many of the same duties and responsibilities under corporate and common law as their public company counterparts.

This post will provide a high-level overview of some of the fundamental duties applicable to directors of corporations governed by the Ontario Business Corporations Act (the “OBCA”). This post contains general information, is not exhaustive, and does not constitute legal advice. Directors, and anyone considering becoming a director, should consult a lawyer for further information on their duties as a director of a particular corporation and the standards they must meet in discharging those duties. It is also important to note that some of duties described below are applicable to corporate officers.

Should you require further information on this topic please contact one of the lawyers in our business law group (http://www.smithvaleriote.com/services/details/business-law).

Duty to Manage

One of the most fundamental duties of a director is the duty to manage the corporation. Section 115(1) of the OBCA provides that “subject to any unanimous shareholder agreement, the directors shall manage or supervise the management of the business and affairs of a corporation”. Directors have primary responsibility for ensuring the company is compliance with corporate statutes and other legal obligations. Directors may be directly engaged in the management of a corporation or, more typically, may delegate powers and responsibility for day-to-day management to corporate officers and professional managers, in which case their duty is to supervise and oversee the management of the corporation (OBCA, s.133). Note, however, that the OBCA prohibits delegation of certain powers and duties of the board of directors (OBCA, s.127(3)).

            Directors may be relieved of certain duties to manage or supervise the management of the corporation by unanimous agreement of the shareholders of the corporation. A unanimous shareholder agreement (a “Shareholder Agreement”) may restrict the powers of the directors and instead place power in the hands of shareholders – where this is the case, directors may be relieved of certain duties to manage, but only to the extent that the shareholders assume such duties (OBCA, s.108(5)). On a related note, shareholders of privately held corporations should be mindful of the assumption of duties and liabilities when restricting the powers of directors by way of Shareholder Agreement.

Fiduciary Duty

In the course of managing or supervising the management of the corporation, directors must “act honestly and in good faith with a view to the best interests of the corporation” (OCBA, s.134(1)). The “best interests of the corporation” is a context-specific determination, but it implies that directors must observe a fiduciary duty to the corporation. Generally speaking, a fiduciary duty is a duty of loyalty to act in the best interests of another person (in this case, a corporation) above your own interests.  A director must manage or supervise the management of the corporation with the objective of taking actions and decisions that are best for the corporation and without regard for their own personal interests. One concrete example is that directors have a statutory obligation to disclose if they are a party to or have a personal interest in a material contract or transaction of the corporation and, if that contract or transaction needs to be approved by the corporation, the director is not entitled to vote or approve (OBCA, s.132).

Directors owe their duty to the corporation itself rather than to stakeholders such as shareholders or employees. In closely-held private corporations, the interests of stakeholders (particularly shareholders) may be closely aligned with the interests of the corporation; however, directors must be mindful of the distinction because when the interests are not aligned directors must act with a view to the best interests of the corporation above the interests of stakeholders. Note, however, that the determination of the best interests of the corporation may require the directors to consider the best interests of stakeholders. In Peoples Department Stores v. Wise, the Supreme Court of Canada provided some concrete guidance for directors. Among other things, directors must:

• -respect the trust and confidence placed in them to manage the assets of the corporation in pursuit of the goals of the corporation;
• -avoid conflicts of interest with the corporation;
• -avoid abusing their power to gain personal benefit;
• -maintain the confidentiality of information they acquire through their position as directors; and
• -serve the corporation selflessly, honestly and loyally.

In exercising their duties to the corporation, directors must “exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances” (OBCA, s.134(1)). This obligation includes an objective standard of the “reasonably prudent person”, yet is also context-specific in that courts will look to the particular circumstances, including, for instance, the size and structure of the corporation and the nature and type of business. Generally speaking, directors should devote a reasonable amount of time and attention to the business and affairs of the corporation and ensure they are well-informed when making decisions on behalf of the corporation.

Liability

Directors may be liable for failure to exercise the care, diligence and skill expected of them. This liability arises under statute and at common law. A key example of statutory liability is director liability for unpaid employee wages (up to 6 months) and vacation pay (up to 12 months) in certain circumstances, such as if a corporation goes into liquidation or bankruptcy. Directors are also exposed to liability related to dividends, share redemption and related party transactions. Directors are also exposed to liability under environmental, tax and bankruptcy and insolvency legislation. In fulfilling their duties to the corporation, directors are well advised to utilize professional advisors to ensure they are meeting standards of due diligence. It is also important to have good corporate record keeping practices and ensure meeting minutes and resolutions are documented.

If you are currently, or are planning to become, a corporate director one of our business law lawyers would be pleased to discuss this topic with you in further detail and can assist you in mitigating some of the potential risks.