Learn about appointing directors to your corporation.
Collectively referred to as the board of directors, directors are appointed by the corporation’s shareholders and are responsible for the management and key decisions of the corporation.
- Rules For Appointing Directors
- Canadian Resident Requirement
- What Do Directors Do?
- Overview of Director Liability
- Directors and Officers Insurance
1. Rules For Appointing Directors
Legally, your corporation must have at least one director. Directors are appointed by the shareholder(s) of the corporation and:
- Must be at least 18 years old
- Must not have been declared mentally incapable by a court in any country
- Must be an individual (a director cannot be a company)
- Must not be bankrupt
2. Canadian Resident Requirement
Federal corporations are required to have at least 25% of its board of directors and the individual incorporating the company be “Resident Canadian”. A Resident Canadian refers to an individual who is a Canadian citizen or a Canadian permanent resident who ordinarily lives in Canada.
This specific rule for federal incorporations makes incorporating provincially in AB, BC, or ON attractive for entrepreneurs that are new to Canada or intending to operate a Canadian corporation from outside of Canada.
3. What Do Directors Do?
The board of directors oversees the management and provides stewardship over the corporation’s affairs. The board’s primary goal is to act in the best interests of the corporation to enhance its long-term value while considering the interests of the corporation’s various stakeholders, including shareholders, employees, customers, suppliers and the community. The board is required by law to act honestly and in good faith with a view to the best interests of the corporation.
The Board is also responsible for the approval of the corporation’s annual financial statements, the hiring and firing of key personnel, and compensation policies.
4. Overview of Director Liability
In Canada, the duties and liabilities of directors and officers are dictated by various federal and provincial statutes, as well as precedent judicial decisions (otherwise known as the "common law"). There are additional statutes in more specialized areas of law, such as taxation, employment, environmental protection and securities regulation, that also affect the duties and liabilities of directors and officers.
Corporate statutes set out two general duties of directors: a fiduciary duty, and a duty of care, diligence and skill.
A director’s fiduciary duty is a legal duty to act honestly and in good faith with a view to the best interests of the corporation. This statutory fiduciary duty is owed exclusively to the corporation. Directors and officers do not owe fiduciary duties directly to shareholders, creditors or other stakeholders.
The statutory fiduciary duty requires directors and officers to:
- Act honestly and in good faith
- Avoid conflicts of interest with the corporation
- Not abuse their position to gain personal benefit
- Maintain the confidentiality of information they acquire by virtue of their position
- Serve the corporation selflessly, honestly and with loyalty
The two most common claims for a breach of fiduciary duty are “self-dealing” and “seizing corporate opportunities”. A self-dealing transaction is one that occurs between a director or officer, either directly or indirectly, and the corporation itself. An example being if your corporation were to lease office space directly from one of your directors or from a real estate company owned by a director of your corporation. Seizing a corporate opportunity occurs when a director chooses to pursue a business opportunity for themselves rather than have the corporation pursue it. Certain transactions between a director and their corporation are permitted — talk to a Good Lawyer for advice.
A director’s duty of care, diligence and skill is the standard by which directors and officers are expected to perform their duties. It provides that every director and officer of a corporation in exercising their powers and discharging their duties shall “exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances”.
Directors’ duty of care does not mean directors are expected to make perfect decisions. The “business judgment rule” protects the actions of directors as long as their decisions lie within a range of reasonable alternatives. Further, directors are protected from liabilities where they rely on a report or advice from a professional person, like a lawyer or accountant, before making a business decision.
If you’re nervous about your new role as a director, protect yourself with some advice from one of our Good Lawyers.
5. Directors and Officers Insurance
Directors and Officers Liability Insurance (or D&O insurance) protects directors and officers from liability associated with their duties to the corporation.
Generally, D&O insurance protects directors and officers against personal losses for claims made against them for:
- Breaches of duty
- Errors and omissions
- Misstatements or misleading statements.
D&O insurance typically does not cover claims against directors and officers for:
- Intentionally dishonest, fraudulent, or criminal acts or omissions
- Willful violations of any statute, rule, or law
- Directors’ and officers’ illegal profits
D&O insurance is not legally required, but is strongly recommended. Talk to a Good Lawyer in our network to assess whether or not your corporation needs D&O insurance.