Directors and officers
Directors are responsible for supervising the activities of the corporation and for making decisions regarding those activities. Officers are responsible for the day-to-day operation of the corporation.
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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 can be the sole shareholder, director and officer of a corporation.
If you want to increase or decrease the number of directors of your corporation permitted by your articles, you must amend your articles. Fees may apply (see Services, fees and processing times – CBCA).
A director must:
- be at least 18 years old
- not have been declared incapable under the laws of a Canadian province or territory, or by a court in a jurisdiction outside Canada
- be an individual (a corporation cannot be a director)
- not be in bankrupt status.
Ordinarily, at least 25 percent of the directors of a corporation must be resident Canadians. If a corporation has fewer than four directors, however, 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 as shareholders
Directors are allowed to 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 its articles make this a requirement for the directors.
Mandate of the directors
The directors can be elected for terms of up to three years. The length of the director's mandate can be set out in the by-laws. If no term is stated, directors hold office until the next meeting of shareholders. Directors do not all need to 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. The articles or by-laws can also limit the number of terms that an individual can be elected to.
Individuals 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:
- consent to their election, in writing, within 10 days of their election or
- act as a director after the election.
Directors' terms ends upon their:
- death or
- disqualification or removal by the shareholders.
Vacancy on the board of directors
If a vacancy occurs on the board of directors, the remaining members of the board can 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 your articles of incorporation stipulate that vacancies can be filled only after a vote by the shareholders.
Shareholders can 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 special meeting of shareholders called for the purpose of removing the director.
If your corporation has no directors at all, including if all the directors of a corporation have resigned or have been removed without replacement, subsection 212(1) of the Canada Business Corporations Act (CBCA) allows the Director of Corporations Canada to dissolve the corporation.
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 CBCA, other duties and liabilities:
- are set out in other federal, and provincial or territorial statutes or
- result from court decisions.
Directors can 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.
Duty of care
One of the most important duties set out for directors and officers of a corporation in the CBCA 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
- act honestly at all times, in good faith and in the best interests of the corporation, as opposed to their own personal interests.
A corporation's directors and officers cannot avoid liability on the grounds that they did not know what the corporation was doing. The CBCA specifies that directors and officers, within the scope of their authority, must always:
- remain informed about the corporation's activities
- ensure that the corporation's activities are legal and in the best interests of the corporation.
Preventing conflicts of interest
The CBCA 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 can 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.
The CBCA 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
Consider adopting 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 suffer or costs they 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
- advance funds, in certain circumstances, 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 are not allowed to agree among themselves in advance how they will act in a given situation.
However, shareholders can enter into unanimous shareholder agreements that transfer some or all of a specific director's responsibilities and powers to the shareholders. In such cases, that director cannot be held responsible for not exercising a power or powers since they have been transferred away from 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. These meetings can be held monthly, quarterly or annually, depending on the needs of the corporation. Directors might 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, meetings must have a quorum of directors (the minimum number of directors required at a meeting, as specified in your corporation's by-laws).
Directors can 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 corporations 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.
Making, repealing and amending by-laws
Making corporate by-laws to govern internal organization was one of the first activities you undertook after creating your corporation. 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) require shareholder approval at the first shareholders' meeting that takes place after the directors have passed the new or amended by-law. The effective date of a by-law is the date on which it is passed by the directors, not the date of approval by the shareholders.
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 can be shareholders or directors of the corporation, or both, but they do not have to be. 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.
Decisions requiring director approval
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?|
|Approving financial statements||No|
|Creating, changing and revoking by-laws at a shareholders' meeting||Yes|
|Calling board of directors' meetings||No|
|Calling shareholders' meetings||No|
|Amending the articles||Yes|
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