DUTIES OF DIRECTORS
A corporation consists of directors, officers and shareholders. Shareholders are owners of the corporation, while directors have various managerial responsibilities and statutory roles.
The two principal duties of directors consist of:
- A fiduciary duty; and,
- A duty of care.
These duties are outlined in the Canadian Business Corporations Act (the “CBCA”) and are owed to the corporation.
A director is a fiduciary of the corporation and this fiduciary duty employs a “standard of care” that directors must abide by in dealings and interactions to put the best interests of the corporation first, pursuant to the CBCA.
To uphold this standard, directors must “act honestly and in good faith”, and cannot place personal interests ahead of the corporation (CBCA, s. 122(1)). Further, directors must not disclose confidential information of the corporation, or share significant information effecting the corporation acquired.
This duty is often breached when a director derives a benefit at the expense of the corporation, for example:
- Transacting with the corporation (unless the director discloses his or her interest and abstains from voting);
- Taking opportunities that belong to the corporation (and/or failing to bring to the attention such opportunities when the director becomes aware); or,
- Competing with the corporation.
Directors will be held strictly liable for breach of this fiduciary duty and must account for their profits by remunerating the corporation.
DUTY OF CARE
A duty of care requires all directors to act with “the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances” (CBCA, s. 122(1)).
To abide by this duty, directors must take appropriate steps, including obtaining information needed to make decisions, assessing the information critically and seeking input and recommendations from the appropriate advisors.
This duty is breached through action or inaction by the director, such as:
- Illegal acts (i.e. breach of fiduciary or statutory duties);
- Permitting the corporation to act outside its authority; or,
- Torts committed individually, or on behalf of the corporation.
Directors will be held personally liable for damages that arise as a result.
The fiduciary duty and duty of care owed by a director to a corporation cannot be contracted out of; however, indemnification of directors by corporations is permitted pursuant to the CBCA for actions taken in the individual’s role as director. However, the director must have acted consistently with the statutory fiduciary duty and reasonably believed the conduct was lawful.
The fulfillment of a director’s fiduciary duty and duty of care is at the crux of the relationship between a director and corporation. Hence, it is pivotal to know the requirements under each of these duties to ensure that a director acts consistently, avoids liability and advances the interests of the corporation effectively.
If you wish to learn more about the duties of directors and ensure that a director’s actions fall within the legal limits under the CBCA, contact our office today.
We look forward to hearing from you.
Disclaimer: This article is for informational purposes only and does not provide legal advice, nor does it create a solicitor-client relationship with you or any other reader.