There are two general types of obligations imposed upon corporate director:
- the obligation to act honestly, in good faith and in the best interests of the corporation (the “Duty of Loyalty”); and
- the obligation to exercise the care, diligence and skill of a reasonably prudent person (the “Duty of Care”).
Duty of Loyalty
The duty of loyalty is also referred to as “fiduciary duty”. While typically directors’ fiduciary duties are owed solely to the corporation, acting in the “best interests of the corporation” may require directors to consider various other interests such as those of shareholders, employees, suppliers, creditors, consumers and government.
Directors are prohibited from putting themselves in a position where their duty to act in the best interest of the corporation and their self-interest are in conflict. If they use their position as directors to obtain a profit or other benefit for themselves, they may be required to give up the benefit to the corporation. Fiduciary obligations also apply to directors who leave a business to set up a competing business. Such departing fiduciaries are under an obligation not to solicit former customers for a reasonable period of time.
Where a director is party to a material contract or transaction or a proposed material contract or transaction with the corporation the director is required to disclose the existence of his or her interest either to the corporation in writing or by requesting to have it entered into the minutes of the directors’ meeting. A director who has a conflict of interest may not vote on any resolution to approve the contract, except in certain specific situations (such as setting the remuneration for the directors).
Duty of Care
A director is required to “exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.” Failure to meet this standard exposes a director to liability to the corporation for damages arising out of her or his negligence.
Although a complete answer cannot be given to what is required of a director to conform to the standard of a reasonably prudent person, the following are some examples of what is required:
- a director should attend directors’ meetings unless unable to do so; and
- a director should consider whether a reasonable person would accept the information presented to the director at a director’s meeting or whether in the circumstances further inquiry is required.
Other Obligations and Liabilities
Directors may be personally liable for up to six months unpaid employee wages and up to twelve months unpaid vacation pay, unpaid corporate taxes, WSIB & EI remittances.
Other specific liabilities imposed on directors by statute, include that directors may not:
- issue of shares for inadequate compensation
- provide unauthorized financial assistance
- make an improper payment to a shareholder
- pay an improper commission
- make an improper redemption, purchase or other acquisition of shares
- declare a dividend if there are reasonable grounds for believing that after the payment of the dividend:
- the corporation would be unable to pay its liabilities as they become due; or
- the realizable value of the corporation’s assets would be less than the total of its liabilities and stated capital.