A Quick Guide to Directors’ and Officers’ Duties and Liabilities in Ontario

By Mark D. Hazlett

Every corporation registered under the Ontario Business Corporations Act is required by law to have a board of directors and it is customary for them to have at least one officer (whether they be a President, a Secretary, or a Chief Executive). But what exactly do directors and officers do? And what should you think about if you are offered a seat on a board or a role as a corporate officer?

What is a Director and Who Can Be One?

A director is an individual who sits on the board of directors of a corporation. A corporation’s board of directors is the corporation’s governing body, elected by the shareholders to either directly manage the business and affairs of the corporation or, more commonly, oversee management.

Private corporations must have at least one director. A corporation’s articles of incorporation must specify whether the corporation will have a fixed number of directors or a minimum and maximum number of directors. When a corporation is first incorporated, the incorporators also serve as its first directors. After the corporation is organized, at the first shareholders’ meeting and at all subsequent annual meetings, the voting shareholders elect the corporation’s directors.

Any individual person can be a director so long as they are at least 18 years of age, not bankrupt, and not mentally incapable of managing property.

What is an Officer and Who Can Be One?

It is most common that a corporation’s officers – those individuals occupying roles like “President”, “Treasurer”, or “Secretary” – are directly in charge of managing the business of the corporation. They are appointed by the directors of the corporation. Each officer’s role is typically defined in the articles, by-laws, or corporate resolutions of the corporation. As such, there can be significant variation in the precise responsibilities of an officer’s role from corporation to corporation.

Any adult person can be an officer of a corporation, including directors or shareholders of the corporation. No other qualifications are required by law, but it is in the best interests of the corporation to have capable and qualified officers.

Duties of Both Directors and Officers

Duty of Loyalty

Directors and officers (together, “D&Os”) are required to act honestly, in good faith, and in the best interests of the corporation. This duty of loyalty requires D&Os to put the best interests of the corporation above their own interests, and act accordingly. Part of this duty is confidentiality – D&Os must also not disclose or misuse the corporation’s confidential information. Also, D&Os cannot, for example, use their positions with the corporation to develop a competing business or profit personally from the corporation’s dealings (e.g., by making sure a business deal goes to a related party).

This duty of loyalty continues for a reasonable period after a director or officer resigns their position. The more important the director or officer, and the longer they have served in that capacity, the longer this reasonable period will last.

Duty of Care

D&Os must exercise the same care, diligence, and skill that a reasonably prudent person would exercise in similar circumstances. It is not sufficient that a director or officer simply try their best. Rather, they will be held to the standard of a person with their particular skills, training, or accreditation that they possess. For example, an experienced CFO serving as a director on a corporation board would be held to the standard of a reasonably prudent experienced CFO in similar circumstances.

Directors are not required by the law to have any particular qualifications or expertise. However, it is generally in the best interests of the corporation to have a board of capable and qualified directors with diverse expertise.

Business Judgment Rule

Sometimes a business decision turns out to be a bad call, even after thorough due diligence and careful evaluation. Directors’ decisions are afforded a small degree of protection under the business judgment rule. Directors who act in good faith and on an informed basis (i.e., having exercised their duties of care and loyalty) are generally presumed to have acted in the best interests of the corporation and its shareholders.

When considering whether the decision of a director should be protected from liability by the business judgment rule, courts will consider whether the director applied an appropriate degree of diligence and prudence in reaching it. It is, therefore, important for directors to keep themselves well informed. Decisions made out of ignorance are not afforded the protection of the business judgment rule.

In addition, the business judgment rule is not a complete defence for directors. In order for directors to rely on it, some degree of sound business judgment must actually be shown.

Duties and Responsibilities Specific to Directors

Directors oversee the business and affairs of the corporation. They conduct business as a board, as opposed to acting as individuals. Boards of directors vote on major decisions and transactions for the corporation, such as share issuances, dividend declarations, and corporate reorganizations. Directors may also enact, amend, and repeal corporate by-laws.

Directors’ Duty of Loyalty

Directors have a particularly high bar as far as loyalty to the company is concerned. They are obligated to act in the best interests of the corporation above the interests of other stakeholders. This distinction can get complicated in closely-held private corporations, where the interests of stakeholders (particularly shareholders) may be closely aligned with the interests of the corporation, or where a director is also a shareholder. Determination of the best interests of the corporation as a whole may require directors to consider the best interests of stakeholders, such as shareholders or employees, but directors must be conscientious that at the end of the day, their duty is to the corporation itself as a whole.

Directors may find themselves in a conflict of interest with the corporation. If a director is a party to a material contract or transaction, whether already in play or simply proposed, they must disclose the nature and extent of the conflict to the board in writing as soon as the conflict is known. The conflicted director may not attend any board meeting during which the contract or transaction is discussed. Where the contract or transaction requires a vote by the board, the conflicted director must abstain from voting.

Failure by a director to disclose a conflict of interest could result in the corporation or its shareholders applying to a court to request that the contract or transaction be cancelled and that the director be forced to repay any profits or gains they realized from it.

Directors may not serve on the boards of corporations with competing interests, lest they be in breach of their duty of loyalty to the companies.

Duty to Manage or Supervise the Management of the Corporation

Directors are statutorily mandated to manage or supervise the management of the business and affairs of a corporation. It is very common for directors to delegate their managerial duties to officers of the corporation. Where managerial duties have been delegated, directors typically focus on broader strategic objectives while supervising and overseeing management.

Certain duties, however, cannot be delegated, including the issuance of shares, the declaration of dividends, and the approval of annual financial statements.

Sometimes shareholders of a corporation adopt a unanimous shareholder agreement (a “USA”). USAs can restrict, in whole or in part, the managerial and supervisory powers of the directors, but only to the extent that the shareholders then assume those duties, and only to the extent that is permitted by the Act, so some duties must always remain with the directors.

Duty to Comply with the Law

Directors must ensure that a corporation is compliant with all applicable laws and regulations. This includes compliance with the OBCA, but also extends to other legal obligations, such as compliance with tax, environmental, and employment legislation.

Officers’ Duties and Responsibilities

The duty to manage the day-to-day business and affairs of a corporation is often delegated by the corporation’s directors to its officers. The titles of a corporation’s officers vary, but generally companies have at least President and a Secretary.

Officers are often also employees with a written employment agreement – for example, the President of a corporation may also be employed as the Chief Executive Officer of the corporation. Employees are rarely paid separately for their role as officers.

The powers of any particular officer are typically described broadly in the corporation’s by-laws or as otherwise delegated to them by the board. Officers have the power to act and conclude legal acts on behalf of a corporation. For example, the President of a corporation may negotiate a transaction or sign a contract on behalf of the corporation.

D&O Liability

A corporation is its own legal person and can be held legally responsible for its own actions, torts, and contracts. Directors and officers, therefore, are not usually personally responsible for these failures by the corporation. However, the OBCA does impose some personal liability on D&Os in certain circumstances.

Breaches of the Duties of Loyalty and Care

Directors and officers can be personally liable to the corporation for any loss the corporation incurred that can be directly attributed to that director or officer’s breach of their duty of loyalty or duty of care. To protect themselves from liability, directors should always consider whether they are making decisions in the best interests of the corporation rather than one of its groups of stakeholders.

Actions in the Face of Insolvency

Directors may be personally liable if they approve certain transactions while the corporation is insolvent or if such action would result in the corporation becoming insolvent. These transactions include paying dividends, redeeming shares, and repaying loans. Any director who voted for the transaction will be held jointly and severally liable for any amounts paid and not otherwise recovered by the corporation.

Judgments for Employees

Directors are jointly and severally liable for up to six months’ unpaid wages and vacation pay up to twelve months for employees of the corporation if the corporation cannot satisfy a legal judgment for such amounts, such as in the face of bankruptcy or a winding-up.

Tax Liability

Directors can be held personally liable if the corporation does not properly deduct and pay employment insurance, income tax, or CPP contributions, or if the corporation fails to pay HST. This potential liability can be rebutted with proof of due diligence by the director; however, this may be a difficult showing where the taxes were not actually paid.

Actions Outside the Scope of Duty

Whether an officer of a corporation will be subject to personal liability depends on whether the officer acted within the scope of their duties in regards to the corporation. If they had the authority to engage in an act, the officer will not incur personal liability. However, if the officer acted outside of the scope of their duties – for example, if a CFO dabbled in the affairs of the R&D department – they likely cannot hide behind the corporation and may be held liable for their actions or omissions.

Mitigating Liability

Directors and officers can protect themselves against liability by staying well-informed about any decisions they make or approve for the corporation. They should understand the articles and by-laws of their corporation, seek legal and accounting advice when necessary, and ensure that effective management is in place for the corporation. Directors and officers should have personal indemnification agreements with the corporation and ensure that the corporation maintains sufficient insurance to protect them.

If you have any questions about your role as a director or officer of a private corporation, contact Mark Hazlett at Mhazlett@sorbaralaw.com or 365-509-2029 x 101.