The duties of directors and officers of a corporation are dictated by the Canada Business Corporations Act (CBCA) and the British Columbia Business Corporations Act (BCBCA). The courts have interpreted these laws in order to determine what is expected of directors and officers entrusted with the day-to-day operations of a corporation.
The biggest advantage of incorporation is limited liability for the directors and officers operating the company. However, limited liability can only protect you so long as you fulfill certain duties. If a director or officer fails to live up to their duties, the “corporate veil” of protection is lifted and the director or officer may be found personally liable.
In a startup or small company, the directors and officers may be the same people but as a company grows, the duties and responsibilities eventually need to be divided.
Directors are elected by shareholders to manage or supervise the management of the corporation’s business. The law requires directors to:
- act honestly and in good faith with a view to the best interests of the corporation; and
- exercise the care, diligence and skill that a reasonably prudent individual would exercise in comparable circumstances.
The duty of honesty and good faith is also known as the fiduciary duty. A director must act in the best interest of the corporation and may not be in an actual or potential conflict of interest with the corporation. For example, a director is not permitted to carry on another business that competes with the corporation’s business. This duty is designed to protect a corporation from the people who control it using the corporation to their personal benefit. Liability is not limited to personal benefit. Personally liable will be found if confidential information received in the capacity as director/officer is used to benefit either themselves personally or another entity he/she has an interest it. If a potential conflict arises, directors and officers must take steps to ensure the conflict is disclosed to the corporation.
It is important to note that a director’s fiduciary duty is to the corporation, NOT the nominating shareholders. The director will not be protected by the limited liability of a corporation if he or she acts in the best interest of a nominating shareholder over those of the corporation.
The care, diligence and skill requirement requires directors and officers to be able to show, at a minimum, that they were responsible in exercising their discretion. What determines a “reasonably prudent individual” is subjective and depends on \ qualifications of the director/officer, the significance of the action, the time available to make the decision, and the alternatives that were available to the corporation.
Directors and officers are not expected to be perfect but they must exercise reasonable business judgment. Courts will not penalize prudent business decision if they were made honestly and in good faith even if they turn out to be poor decisions. Directors and officers must only be diligent in collecting information and make business decisions in an impartial and informed manner.
If you have any further questions about the duties of directors and officers, please contact www.selkirklaw.ca