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Ontario Corporate Law: DIRECTOR Responsibilities and liabilities

In the last article, we discussed how the law views a corporated company as an independent virtual person. Such independency is a double edged sword. On the one edge, the independency contains liabilities arising from the business within the corporated company and prevents them from extending to owners in personal capacities. On the other edge, to properly establish such independency, the activities of the corporated company and those of the owners must be strictly separated. While a natural person can act with his own agencies, a corporated company can only act through natural persons. To ensure that the corporated company's actions, carried out through delegated natural persons, are executed in a way that reflects the independency of the corporated company, corporate law sets out procedural rules governing how the delegated natural persons must act. Think it this way, if owners of a corporation regularly carry out the corporation's business in individual capacities such as mixing banking accounts and signing contracts with personal names, ignoring the independent nature of the corporated company, then the corporated company is not really an independent entity but merely a puppet which the owners use to limit their liabilities. A corporated company can limit liabilities for its owners precisely because it is an independent entity. Without the independency, a corporated company loses its abilitiy to shield owners from liabilities. If owners of a corporation indeed violates such independency, courts might suspend the corporated company's ability to limit liabilties for the owners. Therefore, it is important to understand and follow the procedural rules that establish such independency. In this article, we will talk about some of the procedural rules related to the roles of directors.

Unlike a sole proprietorship or a partnership where owners are usually simultaneously the managers of the business, a corporation's owners (hereafter "shareholders") cannot directly participate in the management of the business. In a corporation, the major decisions are usually decided by a group of officers titled "directors" who serve primarily as governance figures in a corporation. The Ontario Business Corporation Act (hereafter "OBCA") section 115 grants these directors the general management power： "the directors shall manage or supervise the management of the business and affairs of a corporation."1 In addition, the OBCA grants specific powers to the directors, including making and amending the by-law, authorizing the issue of securities, appoint officers, make banking arrangements, and transact any other business.2 Though the OBCA does not explicitly prohibit the shareholders from participating in the management of corporations,its allocation of managament power to directors and non-managerial power to shareholders imply such a separation of power. This does not mean that shareholders have no means of influencing how the corporation is managed, that sounds terrifying. First, shareholders have the power to select and remove directors.3 Second, shareholders can elect themselves to be directors. Third, shareholders have other means of making corporate decisions over directors' opinions, such as unanimous shareholder agreement. We will discuss these in more details in future articles.

Directors are important figures for corporations. Their decisions can determine whether a corporation succeeds or fails. To hold directors reliable and accountable, the OCBA subjects directors to two types of duty, fiduciary duty of loyalty and duty of care.4 Duty of care requires directors to exercise "the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances." This duty essentially requires directors to do their job well. Even though the law does not provide a clear standard to determine whether a job is well done, case law has established a base line where directors will be protected from liabilities "the court ought not to substitute its opinion for that of the board even though subsequent events may have cast doubt on the board's determination. As long as the directors have seletected one of several reasonable alterantives, deference is accorded to the board's decision." Brant Investments v. KeepRite Inc. (1987), 60 O.R. (2d) 737 (Ont. H.C.); aff'd (1991), 3 O.R. (3d) 289 (Ont. C.A.). Such decisions must be made under informed and reasonable basis "that judgment must be an informed judgment; it must have a reasonable basis." Teck Corp. v. Millar (1972), 33 D.L.R. (3d) 288 (B.C. S.C.). This rule is known as business judgment rule. In simpler words it says that if a director makes a decision supported by reasonably informed basis and good faith, the court will respect the decision and protect the director from liabilities resulting from the decision. To meet the informed basis requirement, the director at least must attend all meetings and ask employees pertinent questions about the decision to be entered.

The other duty, fiduciary duty of loyalty, imposes different responsibilities on the directors. While the duty of care focuses on whether directors are doing a good job, the fiduciary duty of loyalty measures whether directors are aiming at the right objectives. It requires directors to always act in the best interests of the corporation. The Supreme Court of Canada has stated that the fiduciary duty of loyalty is owed to the corporation, and not shareholders particularly. This is in line with the understanding of the independent nature of corporated companies. In practice, that means, directors must always priortize the interests of the corporated company even if they conflict with the interests of shareholders, must use corporation resources to further corporation goals, must avoid personal conflicts of interests with the corporation, must not abuse positions for personal gains, etc. Further, the OBCA has a specific statute for transactions involving conflicted interests: a director with conflicted interests "shall not attend any part of a meeting of directors during which the contract is discussed and shal lnot vote on any resolution approve the contract..."5.

The above discussion draws merely a contour of the regulation related to director responsibilities and liabilities. There are much more detail in the weeds. Nevertheless, the spirit is simple - do not be lazy, be diligent, be careful, and be faithful to the company.




1 R.S.O. 1990, c. B.16, s. 115
2 R.S.O. 1990, c. B.16, ss. 116-117
3 R.S.O. 1990, c. B.16, ss. 119, 122
4 R.S.O. 1990, c. B.16, s. 134(1)
5 R.S.O. 1990, c. B.16, s. 132