Spotlight On: So You Want to be a Director
November 30, 2020
A chance to join a board can be an honour. Here’s what to consider.
“With great power comes great responsibility” is an axiom sometimes attributed to the Spider-Man comic books, but it might be the perfect metaphor for the complicated web of considerations involved in serving as a corporate director.
Being a director can carry great social prestige and can offer privileges, but also involves significant responsibility and the risk of personal liability. In addition to seeking independent legal advice, here are some considerations to keep in mind:
What Directors Do
The concept of a “board” originated centuries ago as the word for the table around which a household would gather. Today, a board of directors is the body that governs and oversees the management and affairs of a corporation. Directors play a crucial role in corporate governance and are responsible for extremely important aspects of corporate oversight, many of which cannot be delegated to anyone else, including voting on mergers and acquisitions, approving financial statements and bylaws, issuing securities, and declaring dividends.
Boards typically meet periodically, and can either approve matters by a majority vote at a meeting, or alternatively by way of a written resolution signed by all of the directors of the corporation. Directors are also responsible for monitoring and approving the actions of management, and often provide advice to executives.
How Directors are Elected
Directors are elected by the shareholders. It is common for management to put forward nominees for election to the board and for directors to recommend that the shareholders vote for these nominees. There may also be a nominating committee on the board of directors, the role of which is to seek out qualified candidates and recommend nominations to management.
While shareholders may also nominate directors, many corporations have adopted advance notice by-laws or policies that prevent shareholders from making nominations from the floor of a shareholder meeting without prior notice.
What to Consider if You’re Invited to Become a Director
- Time Commitment: Make sure you understand the time commitment that is involved. You might want to request a copy of the previous year’s board calendar and consider how much time and attention the company may need (how often are board meetings held? How much substantive material and issues have there typically been to consider? How organized is management when it comes to getting materials together in advance of meetings?). A great resource for other practical considerations, can be found on Deborah Rosati’s blog through Women Get on Board (a SkyLaw client and one we love to support!).
- The Other Board Members: How well do you know other current and proposed members of the board, and what do you think of their judgment? Consider going for coffee or having a call with some of them to get a better sense of their experience and character.
- Onboarding Materials: You might also request information from the company about why it is recruiting new board members, and ask for its onboarding materials.
- The Corporation Itself: How well do you know the company? Consider reviewing the minute books to see how many shareholders it has and which corporate actions it has taken to date. Are there resolutions to match the major things you know the company has done? Publicly-available search results can help you determine information such as which liens the company has on its records and whether it is involved in any litigation. You might ask to review its recent tax returns to ensure they are up to date.
- Advisory Board: Consider serving on an advisory board to get a better feel for the corporation and its management before formally joining the board. Since many companies disclose the members of their advisory board in corporate materials like pitch decks and in communications with shareholders, make sure you understand and are comfortable with any statements that will be made about you.
- Board Committees:
- You might also consider on which committees you might be interested in serving.
- Public companies generally must have at minimum an audit committee that oversees the audit of the financial statements of the company. There are specific eligibility requirements to serving on this committee.
- Other common board committees include compensation committees and nomination committees.
- Special or independent committees may also be formed to carry out specific mandates, and can be required by securities laws in certain circumstances. These might be established in part to permit a smaller group of independent directors to focus more closely and to move more nimbly than the whole board could, and are often formed in order to review potential significant transactions, particularly if these transactions might raise questions of minority shareholder protection.
- Because of the time commitment and responsibility that goes along with sitting on a board, you may also want to consider the compensation being offered before taking on this role. Director compensation can be complex. Certain directorships might be purely voluntary; other directorships might involve compensation primarily in the form of securities like options which may gain value in relation to the company’s success; others still might offer a mix of cash and securities.
- A community of specialized advisory firms exists to help suggest appropriate compensation arrangements for directors. Organizations like Global Governance Advisors and Mercer are some names we see often. Spencer Stuart prepares an annual board index which includes information about compensation for board members by industry for the FP 500 (here’s the 2019 report). Along with reviewing relevant commentary, consider looking up how other companies of comparable maturity within the industry compensate their directors, and perhaps also consider researching other public boards on which the current directors serve and how they are compensated by those companies. (Remember that your personal liability remains the same regardless of how much you are compensated.)
Key Director Responsibilities
Directors of Canadian companies must, in exercising their powers and discharging their duties, act honestly and in good faith with a view to the best interests of the corporation.
- Acting in the Best Interest of the Corporation: This fiduciary duty is at all times to the corporation itself and not to shareholders or other stakeholders, regardless of whether a director is also a member of management or is a shareholder. Even a person who is nominated to the board by a shareholder must do what is in the best interest of the corporation, whether or not this aligns with the interests of the nominating shareholder (see below for more detail about nominee-directors). However, in fulfilling this duty, directors are encouraged by common law to consider the interests of various stakeholders.
The federal corporate statute, the Canada Business Corporations Act (the “CBCA”) has codified this stakeholder corporate governance model (originally put forward in the influential Supreme Court case BCE Inc. v. 1976 Debentureholders) where no other corporate statute has. This year a provision was added to the CBCA which provides that while acting with a view to the best interests of the corporation, directors may consider, but are not limited to, a list of factors which includes the interests of shareholders, employees, creditors, the environment, and the long-term interests of the corporation. It is not clear if this addition makes any substantive difference to directors’ duties or if it will alter their behaviour at all, nor is it clear if any of the provinces will follow suit and amend their corporate statutes in a similar way (see SkyLaw’s blog about these amendments for more information).
- Corporate Opportunities: As a director you may be restricted from personally taking advantage of corporate opportunities if they properly belong to the corporation. For example, if an opportunity arises to purchase assets or to acquire another company, a director must first inform the corporation and allow it an opportunity to purchase the assets or acquire the other company before personally taking advantage of the opportunity.
- Conflicts of Interest: If a director is a party to a transaction the corporation is involved in, has a material interest in an action the corporation is taking, or is a director or officer of a party to a transaction, the director may have a conflict of interest and should disclose the nature and extent of his or her interest to the corporation, and (with certain exceptions) refrain from voting on the matter.
- Confidentiality: Directors must keep information about the corporation confidential. There may also be confidentiality provisions in the corporation’s shareholders’ agreement, independent contractor agreements and other kinds of contracts.
Standard of Care
Directors must exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. The standard of care requires each director to:
- devote reasonable time and attention to the affairs of the company; and
- take appropriate steps to make informed decisions.
Directors must ensure they have the information needed in order to make informed decisions, assess the information critically and seek input from and test the recommendations of management and the company’s advisors.
Being a director involves the risk of personal liability. Below are some examples of instances in which directors may be held personally liable.
- Corporate Law Generally: Directors should be sure that they are carrying out their duties according to the relevant governing statute and the corporation’s bylaws. Directors might face personal liability for approving the issuance of securities for consideration that is less than fair value (see SkyLaw’s blog about issuing shares for services), paying dividends when the corporation is insolvent, or voting to approve of a transaction if they have a conflict of interest and did not disclose this conflict.
- Oppression Remedy and Derivative Actions: Dissatisfied corporate stakeholders can seek a broad range of relief under the oppression remedy or derivative action pursuant to corporate statutes. The oppression remedy is available to corporate stakeholders who feel that the powers of the directors have been or are threatened to be exercised in a manner that is oppressive or unfairly prejudicial to, or that unfairly disregards, their interests. Derivative actions may be brought on a corporation’s behalf by a shareholder, creditor, director, or other proper person, against the corporation’s own management, board, or controlling shareholders, typically alleging breach of fiduciary duty, conflict of interest, or mismanagement. In both of these types of actions, the court is given broad authority to make orders and may hold individuals personally liable for actions undertaken while they were directors or officers, although certain defenses may be available (see “Defences to Liability” below).
- Unpaid Wages: Under several corporate statutes including the CBCA and the Ontario Business Corporations Act (the “OBCA”), directors are jointly and severally liable (or solidarily liable in the case of the CBCA), to the employees of the corporation for unpaid wages which become payable while they are serving as directors. While the British Columbia Business Corporations Act (the “BCBCA”) does not provide for this explicitly, the BC Employment Standards Act does: under that act, a person who was a director or officer of a corporation at the time an employee’s wages were earned or should have been paid may be personally liable for up to two months’ unpaid wages for each employee. Canadian jurisdictions vary when it comes to the maximum amount of wages for which directors may be held liable. The BC Employment Standards Act provides for a maximum of two months’ worth of wages, the CBCA provides for a maximum of six months, and the OBCA provides for a similar six month maximum for wages but one year for vacation pay.
- Unremitted Taxes: Under the Income Tax Act (the “ITA”), directors may be held personally liable for certain unremitted taxes of the corporation. They also may be responsible for failures to withhold taxes and can be subject to penalties. Further, directors of a corporation which fails to file a tax return required under the ITA may face criminal penalties and fines. There are further requirements under the Excise Tax Act, the Canada Pension Plan, and the Employment Insurance Act that if not met may result in personal liability for directors as well. Be sure to speak with a tax advisor about these and any other tax considerations before agreeing to be a corporate director.
- Environmental Liability: Directors (while not required to) may take into account various stakeholders in discharging their fiduciary duties. This authorization originates from common law and is now codified in the CBCA, as described above. Beyond this consideration, there are environmental statutes which may impose personal liability on corporate directors. For example, directors under the federal and Ontario Environmental Protection Acts are required to take all reasonable care to prevent the corporation from discharging or causing or permitting the discharge of a contaminant in contravention of the act or regulations, among other things.
- Securities Law: Directors of publicly traded companies may also face personal liability under securities laws. For instance, under the Securities Act of Ontario directors may be held personally liable for misrepresentations in disclosure materials including prospectuses and circulars, among other things.
- Bankruptcy Look-Back: Directors of public companies may also be subject to a statutory bankruptcy “look back” period and may be required to report being a director of a bankrupt company in disclosures made in respect of public companies for which they subsequently serve as directors.
Defences to Liability: Due Diligence and the Business Judgment Rule
A stakeholder’s claim that a director has breached his or her statutory obligations or fiduciary duties is not necessarily the end of the story: certain defences may be available.
Due Diligence Defence
Corporate statutes provide that a director is not liable for consenting to certain breaches of corporate law requirements, such as issuing shares for consideration that is less than fair market value, or paying a dividend where the corporation cannot meet solvency requirements, if the director exercised the care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances.
Business Judgment Rule
This common law rule provides that the court should not substitute its own decisions for those of directors, and can offer broad protection from claims of breach of fiduciary duty, so long as the director acted in good faith and within a range of reasonable alternatives. As the Supreme Court of Canada put it in BCE: “Deference should be accorded to business decisions of directors taken in good faith and in the performance of the functions they were elected to perform by the shareholders.”
Unanimous Shareholders’ Agreements and Declarations
Unanimous shareholder agreements can be useful tools for shareholders. These agreements can transfer both the power and the corresponding liability of directors over to shareholders instead, and should definitely be among the documents you review when you are considering a board invitation. Look in particular for any kinds of transactions that must be approved by the shareholders, and other obligations of the board and corporation that must be satisfied (annual audits, provision of budgets and other information to certain shareholders, etc.).
Also consider whether the shareholders’ agreement governs how individuals are nominated for election by shareholders, and make sure you understand the arrangements and requirements for your own nomination.
If your corporation is a wholly-owned subsidiary or only has one shareholder, a declaration by the sole shareholder restricting in whole or in part the powers of the directors is deemed to be a unanimous shareholder agreement under the CBCA and OBCA. Declarations can be effective tools to help a shareholder keep control of a wholly-owned company and reduce a director’s potential liability correspondingly.
Other Obligations and Prerequisites
Security and finance documents, especially loan agreements, are a common source of additional obligations for a company. A review of the company’s obligations and commitments under such documentation will help you understand some of the ongoing responsibilities and relationships the board must maintain, as well as the constraints within which it must operate.
For certain regulated businesses, a new director must obtain certain clearances or government approvals before joining a board – a process that may need to be initiated well before your intended election date.
Normally, individuals must provide consent in order to act as a corporate director. At issue in a recent decision, Bunton v. FTA Logistics Inc. and Ikenouye, was whether the applicant, Bunton, had been appointed as a director without her consent. This case arose because the Canada Revenue Agency was demanding payment of unremitted source deductions from Bunton on behalf of a corporation to which she had been a bookkeeper. The court held that in light of her lack of written consent, Bunton was never a director of the company.
However, if all directors have resigned or been removed by shareholders without replacement, corporate statutes such as the OBCA and the CBCA provide that any person who manages or supervises the management of the business and affairs of the corporation shall be deemed to be a director. Thus, it is possible for a person who has not given written consent to serve on the board to nonetheless face personal liability for managing the business and affairs of a company.
Certain stakeholders such as institutional and private equity investors may sometimes be granted a right to nominate a representative director on the board of a corporation in which these firms have investments. These nominee directors owe the same duty to the investee corporation as all other directors, must act in the corporation’s best interests, and will be held to the same standard of care. There may be instances where nominee-directors face conflicts of interests because the nominating investor’s interests may not align with those of the corporation. Sometimes, such major stakeholders choose to appoint a board observer in addition to, or instead of, a nominee-director so as to keep proximity to the board without their nominees needing to take on director duties or liabilities.
Indemnification and Insurance
Before consenting to act as a director you should seek independent legal advice. You should talk to your lawyer about putting in place an indemnification agreement and confirm that the corporation for which you will be acting has directors’ and officers’, or “D&O”, insurance in place. You should have your lawyer review this policy as well.
Where you live can matter when it comes to serving as a director.
- One quarter of the directors of federal corporations and businesses incorporated in Manitoba, Saskatchewan, and Newfoundland must be Canadian residents. If there are fewer than four directors of such a company, at least one director must be a Canadian resident in these jurisdictions.
- All other provinces and territories have no such director residency requirement.
Being invited to serve as a corporate director can be an honour and a very fulfilling experience. It can also be an effective way to build your professional network, and can even be the basis for a full-time career. But because a friendly neighbourhood Spider-Man may not be available to save the day, keep the following takeaways in mind:
- Get to know the company and its current board;
- Understand what is expected of you as a director, and the relevant requirements under corporate law, the company’s by-laws, any shareholders’ agreement, and other agreements;
- Get tax advice;
- Be prepared for personal liability which can arise out of corporate law and other statutes; and
- Review the company’s proposed insurance and indemnification arrangements.
This blog post is not legal or financial advice. It is a blog which is made available by SkyLaw for informational purposes and should not be used as a substitute for professional advice from a lawyer.
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