Understanding Your Role as a Director

In setting up numerous companies for entrepreneurs, I've discovered that many people do not understand the duties and responsibilities that are incurred when one becomes a director.  This post will outline some of the basic laws in Alberta concerning directors and their obligations to a corporation.

In Alberta, a corporation needs at least one director (except for a distributing corporation which must have at least three directors, two of whom are not officers or employees of the corporation or its affiliates).  A director can be anyone who is 18 years of age or over with the legal capacity to manage their own affairs.  Dependent adults and individuals who are of unsound mind, or mentally incompetent, or individuals who are bankrupt cannot be directors.  Also, entities other than individuals (such as corporations) cannot be directors.  Unless the articles or constating documents otherwise provide, a director does not have to be a shareholder of the corporation.  Further, at least one-quarter of the directors of a corporation must be ordinarily resident Canadians.  However, the Business Corporations Act (Alberta) provides that an act of the directors is valid notwithstanding non-compliance with this residency requirement.  Subject to the articles, the bylaws or any unanimous shareholder agreement, the directors of a corporation can fix the remuneration of the directors, officers and employees.  However, a director does not have the inherent right to compensation for acting as a director, and may be paid only if the shareholders, or the articles, bylaws or a unanimous shareholders agreement so authorize. 

The first directors of a corporation are named in a notice of directors filed with the articles of incorporation.  Thereafter directors are elected by ordinary resolution at annual meetings.  If the articles or a unanimous shareholders' agreement of a corporation so provides, directors can hold office for terms of up to three years and it is not necessary that all directors elected at a meeting hold office for the same term.  If a term is not expressly stated, a director holds office until the close of the next annual meeting at which directors are elected.   If directors are not elected at a shareholders' meeting, the incumbent directors continue in office until their successors are elected.  Also, if a meeting of shareholders fails to elect the minimum number of directors required, by reason of disqualification or death of a candidate, the directors elected at that meeting might exercise all the powers of the directors if those directors so elected constitute a quorum.  A corporation, shareholder or director may apply to the Court to settle any controversy over the election or appointment of directors.  The Court has the power to declare the result, to order a new election or appointment, to determine voting rights of shareholders and of persons claiming to own shares and to restrain a director whose election is challenged from acting pending determination of the dispute.  A person elected or appointed a director who was not present at the meeting when he or she was elected or appointed, must consent in writing before election or appointment or within ten days after the election or appointment unless the person has acted as a director. 

Subject to any unanimous shareholders agreement, the directors manage the business and affairs of the corporation.  However, they will be relieved of their duty to manage a corporation's affairs to the extent that any unanimous shareholders agreement restricts their powers.  In exercising and discharging their duties, every director is in a fiduciary relationship with the corporation and must act honestly and in good faith with a view to the corporation's best interests.  Further, directors must exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.  

Pursuant to the fiduciary relationship, a director must disclose any material interest that the director has in a contract of the corporation.  A director with a material interest may not vote on any resolution to approve the contract unless the contract is one relating to security for money lent to or obligations undertaken by him or her or by a body corporate in which he or she has an interest, for the benefits of the corporation or its affiliate; a contract relating primarily to his or her remuneration as a director, officer employee or agent of the corporation or an affiliate; indemnity or insurance given by the corporation to a director; or a contract with an affiliate.  If a director or officer fails to disclose a material interest, a court may set set aside the contract on application of the corporation or a shareholder.

Being a fiduciary is also important because it can give rise to personal liability for the director in certain circumstances.  Liability can be imposed on directors who take part in specified acts that are contrary to the Business Corporations Act (Alberta) such as issuing shares for a deficient consideration other than money, the payment of more than a reasonable commission on the sale of shares and the approval of various payments when a relevant liquidity or solvency test is not satisfied, including the payment of dividends, the repurchase of shares, the making of loans to shareholders, directors or officers and the indemnification of directors.  Directors are also jointly and severally liable to employees of the corporation for all debts not exceeding six months wages payable to each employee for services performed for the corporation while they are directors, although a director is not liable for debts for wages if either the director believes on reasonable grounds that the corporation can pay its debts as they become due or if services of employees were performed while the corporation was in receivership or in liquidation.    However, a director is not liable for wages unless the corporation has been sued for the debt within six months and execution has been returned unsatisfied in full or in part; the corporation is being or has been dissolved and a claim for the debt has been proved within six months of the commencement of proceedings; bankruptcy proceedings have been commenced and the debt has been proven within six months after the date of the assignment or receiving order. 

In addition to statutory liabilities from business and employment legislation, a director can also incur personal liability for the non-payment of corporation income tax and can also be liable for breaches of environmental legislation.  Further, as a director, an individual is deemed to be an insider of the corporation and therefore is subject to the insider trading laws in the securities legislation and also, in the case of a corporation that is a reporting issuer, a director can attract personal liability for misrepresentations in disclosure documents.  

A director present at a director's meeting is deemed to have consented to resolutions passed or actions taken unless, the director requests that an abstention or dissent be entered in the minutes; the director sends written dissent to the secretary of the meeting before the meeting is adjourned; the director sends a dissent by registered mail or delivers it to the registered office of the corporation immediately after the meeting is adjourned; or the director otherwise proves that he or she did not consent to the resolution or action.  A director who votes for or consents to a resolution or action is not entitled to dissent.  A director is not liable however (except in respect of liability for wages) for relying on financial statements of the corporation represented to the director by an officer of the corporation or in a written report of the auditor of the corporation to fairly reflect the financial condition of the corporation; or an opinion or report of a lawyer, accountant, engineer, appraiser or other person whose profession lends credibility to a statement made by him or her.  

As stated, generally speaking, a director can have significant power concerning the direction and affairs of a corporation.  As such, this power gives rise to a unique and fiduciary relationship between the individual director and the corporation.  This relationship can lead to liability under certain circumstances.  Therefore, it is important to keep your legal adviser apprised of any corporate circumstances that can expose you, as a director, to personal liability.