The following material is excerpted from a guide
on Directors’ Responsibilities and Liabilities
by Osler Hoskin & Harcourt LLP.
the Shareholder Roles and Director Roles
With Angels and venture capital investors assuming
active participation in company management, there
is often some confusion about the respective roles
of directors, shareholders, and management.
- The role of directors is one of stewardship.
Directors are responsible for managing or, under
some statutes, supervising the management of,
the corporation. If the Board of Directors is
dissatisfied with company management, its recourse
is through the company’s CEO. If the CEO
is not performing as expected, the Board may replace
- Shareholders make a financial investment in
the corporation, which entitles those with voting
shares to elect the directors. Shareholders do
not normally have any rights to be involved directly
in company management. Their connection to company
management is typically via the Board of Directors
as described above. If shareholders are not satisfied
with the performance of the directors, they may
remove the directors or refuse to re-elect them.
Except for certain fundamental transactions or
changes, shareholders normally do not participate
directly in corporate decision-making and while,
as a practical matter, boards want to know the views
of the shareholders, strictly speaking, directors
are not normally required to solicit or comply with
the wishes of shareholders.
A director’s duty is
owed first and foremost to the corporation. This
duty is grounded in basic principles of good faith,
stewardship and accountability. Requirements imposed
both by common law and various statutes seek to
establish the parameters of this duty without limiting
the flexibility of these principles.
1. To Whom are Directors Accountable?
Directors are required by corporate statutes
to discharge their duties “with a view to
the best interests of the corporation.” Traditionally,
this phrase has been interpreted to extend only
to the “shareholders as a whole.” However,
in reaching their decisions, directors are often
confronted with a number of competing interests.
In recent years, some courts have been prepared
to give directors more scope in considering the
interests of different persons affected by corporate
acts without encroaching on the principle of acting
in the corporation’s best interests.
The courts recognize that acting with a view to
the best interests of the corporation does not mean
that directors must disregard the interests of “stakeholders”
such as employees, creditors, and the community
or country in which the corporation carries on business
who may be affected by the actions of the corporation.
Considering these interests is often in the long-term
best interests of the corporation. Nevertheless,
no court has ever recognized a duty to such stakeholders.
2. Directors Duty to the Interests of
Courts have held that directors owe a
duty to the corporation and not its individual shareholders.
In many instances, the distinction is not significant,
since what is good for the corporation will also
benefit its shareholders. Maximizing the return
to shareholders is also, in many cases, consistent
with the best interests of the corporation.
Nevertheless, there may be instances where the
interests of the corporation and its particular
shareholders or classes of shareholders diverge.
The interests of the common shareholders may lie
in realizing a short-term gain on their investment,
a goal which the directors may conclude is not necessarily
in the long-term best interests of the corporation.
Additionally, the interests of majority shareholders
may not be the same as the interests of the corporation.
A controlling shareholder may want the corporation
to take certain action that may be in its interest,
but not necessarily in the best interests of the
corporation. The right solution to these kinds of
issues depends very much on the facts of each situation.
3. Directors Duty to the Interests of
Directors recognize that their decisions
have an impact beyond the corporation and its shareholders.
Employees and the community will be affected by
a decision to close a plant. Debenture holders may
be affected by high-risk business strategies or
by corporate reorganizations. The national interest
may be affected by a decision to move operations
offshore. Directors may feel a responsibility to
consider the interests of these stakeholders.
The modern interpretation of a director’s
duty to the corporation permits directors to consider
these interests in coming to a decision about what
is in the best interests of the corporation.
If today the directors of a company were to consider
the interests of its employees, no one would argue
that in doing so they were not acting bona fide
in the interests of the company itself. Similarly,
if the directors were to consider the consequences
to the community of any policy that the company
intended to pursue, and were deflected in their
commitment to that policy as a result, it could
not be said that they had not considered bona fide
the interests of the shareholders.
Certain American jurisdictions have statutes permitting
directors to consider interests other than those
of the corporation or the shareholders as a whole.
Some states permit (and, in circumstances such as
take-over bids, require) directors to consider the
interests of employees, suppliers, creditors and
consumers. Some states include local and national
economies and society as a whole in the interests
to be considered. Such legislation was enacted in
the wake of high levels of take-over activity in
the 1980s (particularly by non-Americans) and was,
at least in part, a response to decisions facing
boards of directors that had significant implications
for stakeholders of the corporation other than shareholders.
These state statutes have been the subject of extensive
criticism and in some states have been repealed.
Conflict of Interest
Directors may have a number of relationships that
will put them in a position of conflict or give
rise to an obligation to disclose details of a relationship.
1. When Does a Conflict Arise?
Directors who have an interest in a contract
or proposed contract (e.g. a term sheet) with the
corporation must consider the matter carefully.
If the contract is material from the corporation’s
perspective, the directors will be under a statutory
obligation to declare their interest and, with some
exceptions, to refrain from voting on the matter.
Voting on a matter in these circumstances would
constitute a breach of their fiduciary obligation
to act in the best interests of the corporation.
Under the corporate statutes, directors have an
interest in a contract not only if they themselves
are a party to the contract, but also if they have
a material interest in any person who is a party
to the contract.
The statutes do not define when a director has
a material interest in a person, but material interest
is generally interpreted to mean an interest that
is sufficient to result in some benefit to the director.
Directors who are also substantial shareholders
of the corporation are not automatically in a position
of conflict. Such directors must, however, separate
their role as directors from their interests as
shareholders. In voting on matters in their capacity
as shareholders, those directors may, of course,
vote without regard for the interests of other shareholders.
In voting as directors, however, they must still
act in the best interests of the corporation in
respect of any matter before them.
The corporate statutes require directors to disclose
in writing to the corporation their interest in
any material contract or to request that the interest
be entered in the minutes of a meeting of the board.
Whether the contract is material will be determined
with reference to the materiality threshold of the
The nature of a director’s interest must
be disclosed in sufficient detail to allow the other
directors to understand what the interest is and
how far it goes. A director’s interest must
also be disclosed within the timeframe prescribed
by the relevant corporate statute.
2. Voting and Abstaining from Voting
Directors cannot normally vote on a contract
in which they have a material interest. There are
exceptions for contracts that involve the directors’
remuneration or an indemnity in which they have
an interest. Exceptions are also made if the contract
in question relates to security for money lent to
the director or obligations undertaken by the director
for the benefit of the corporation or if it relates
to an affiliate of the corporation. As a result
of this last exception, directors who serve on boards
of affiliated corporations are not required to refrain
from voting on contracts between the two corporations
that they serve.
Two results may flow from a director’s failure
to disclose an interest in a material contract or,
in some cases, from voting when not entitled to
do so. First, the director may be required to account
to the corporation or its shareholders for any gain
or profit realized from the contract. Second, the
corporation, its shareholders or, in some cases,
securities regulators, may apply to the court to
have the contract set aside. Under some statutes,
the director may nevertheless avoid these results
if the contract is confirmed or approved by special
resolution of the shareholders after appropriate
disclosure of the director’s interest in the
contract. If the director failed to make the necessary
disclosure and the contract was not reasonable and
fair to the corporation at the time it was approved
by the shareholders, there is no protection for
the director under the corporate statute.
Directors should be aware that the specific provisions
in the corporate statutes dealing with a director
who is in a position of conflict apply only in relatively
limited circumstances. They apply only to certain
contracts or proposed contracts with the corporation
and would, arguably, not include litigation, for
example. Further, these provisions apply only to
contracts that are material to the corporation,
not to contracts that do not meet this threshold.
In practice, however, most directors apply the
rules broadly. They do not confine the restrictions
to the statutory requirements, but concern themselves
with the issue of perceived, and actual, conflict
and what seems to be the right thing to do. In practice,
directors will take themselves completely out of
the consideration of a particular matter where there
may be a perception of conflict or a perception
that they may not bring objective judgment to the
consideration of the matter. In appropriate circumstances,
directors will declare their position and absent
themselves not only from the vote, but also the
discussion. However, directors should be aware that
abstaining from voting, except in certain limited
circumstances, may not protect them from liability
under the corporate statutes. In particularly difficult
situations, it may be necessary or appropriate for
a director to resign.
the Role of Shareholders
The directors and not the shareholders
are responsible for the management of the corporation.
However, under the corporate statutes, certain matters
are considered so fundamental that they require
the approval of the shareholders. Under the Canada
Business Corporations Act these matters include:
- Effecting certain amalgamations or reorganizations;
- Selling all or substantially all of the corporation’s
- Adding or removing any restrictions on the
business that the corporation may carry on;
- Changing the corporation’s share capital;
- Increasing or decreasing the number of directors
or the minimum or maximum numbers of directors;
- Confirming by-laws; and,
- Adding or changing restrictions on the issue,
transfer or ownership of shares.
If a fundamental change affects holders of certain
series of classes of shares differently than others,
the change must also be approved by a majority of
the series or class of shares whose existing rights
may be affected by the change, whether or not the
shares otherwise carry voting rights.
As noted above, public corporations must also comply
with the requirements of the provincial securities
commissions and the stock exchanges which impose
requirements for shareholder approval.
Finally, there may be issues which the directors
determine should be put to the shareholders as a
matter of good corporate governance, whether or
not they are legally required to do so. The issue
of whether shareholder approval was necessary to
put a shareholder rights plan in place was commonly
debated when shareholder rights plans first came
into use in Canada. A number of boards of directors
determined that the advice of the shareholders through
a shareholders’ vote was essential well before
the view of the regulators to the same effect was
known. Similar considerations will certainly arise
in the future in the context of other decisions
facing public companies.
2. Shareholder Ability to Change the Board
Shareholders who are dissatisfied with
how the directors are running the corporation may
remove the directors or refuse to re-elect them.
In practice, this may be a difficult course to take,
particularly where the shares of the corporation
are widely held.
Although the corporate statutes require a corporation
to provide a list of shareholders to any shareholder
who requests it, thereby enabling shareholders to
mount a proxy battle over the election of directors,
many shareholders do not have the time or resources
required to counter a management proposal. The exceptions
are large institutional investors who have, on occasion,
made their voices heard at annual meetings or in
private meetings with representatives of a corporation
prior to a shareholder meeting.
Occasionally, proxy battles do occur which result
in the replacement of the board of directors.
Especially in private companies involving venture
capital investment, it is not uncommon for certain
decisions that are normally made by the Board of
Directors to require venture capital investor approval.
A common example are key management decisions and