Corporate governance and directors' duties

A corporation is a legal person, but it can think and act only through people. Corporate governance is the system of rules and practices by which a corporation is directed and controlled: who makes which decisions, to whom they are accountable and how conflicts between owners, managers and other stakeholders are resolved. This lesson explains the roles of shareholders, directors and officers, the duties directors and officers owe, the remedies available when those duties are breached or minority shareholders are treated unfairly, and the basics of securities law, which governs how corporations raise money from investors.

Shareholders, directors and officers

Corporate law divides power among three groups. Shareholders own the corporation's shares but do not manage it; their main powers are to elect and remove directors, appoint the auditor, approve fundamental changes such as amalgamations, sales of substantially all assets and amendments to the articles, and receive dividends when declared. Directors, acting together as a board, manage or supervise the management of the business and affairs of the corporation: they set strategy, appoint and oversee officers, declare dividends, approve financial statements and major transactions. Officers, such as the chief executive officer, chief financial officer and corporate secretary, are appointed by the board and run the business day to day under its delegated authority.

Shareholders act at meetings or by written resolution signed by all shareholders entitled to vote. Under the CBCA, an ordinary resolution requires a simple majority of the votes cast, and a special resolution requires at least two-thirds of the votes cast; special resolutions are needed for fundamental changes. Shareholders may requisition a meeting if they hold at least 5 % of the voting shares, and may submit proposals to be included in management's materials. Each share usually carries one vote, but corporations can create classes with different rights, such as non-voting or multiple-voting shares, preferred dividends or priority on liquidation. In a dual-class structure, founders hold multiple-voting shares that keep control while the public owns most of the equity, a common arrangement in Canadian companies.

Directors' fiduciary duty

Section 122(1) of the CBCA, and similar provincial provisions, require every director and officer in exercising their powers and discharging their duties to act honestly and in good faith with a view to the best interests of the corporation (the fiduciary duty) and to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances (the duty of care). The fiduciary duty is owed to the corporation, not to any particular shareholder or stakeholder. In Peoples Department Stores Inc. (Trustee of) v. Wise, 2004 SCC 68, and BCE Inc. v. 1976 Debentureholders, 2008 SCC 69, the Supreme Court held that in determining the best interests of the corporation, directors may consider the interests of shareholders, employees, creditors, consumers, governments and the environment, and must treat affected stakeholders fairly, but there is no rule that shareholder interests always prevail. A 2019 amendment, section 122(1.1), codified this list and added retirees, pensioners and the long-term interests of the corporation.

Loyalty demands that directors avoid conflicts of interest. A director who has a material interest in a contract with the corporation must disclose it and generally abstain from voting; the contract is then protected if it is approved by disinterested directors or shareholders and is fair to the corporation. Directors and officers must not take for themselves business opportunities that belong to the corporation. They must not use confidential corporate information for personal advantage, and they must not compete with the corporation.

The leading Canadian case on corporate opportunities is Canadian Aero Service Ltd. v. O'Malley (1974). Senior officers of Canaero worked on a topographical mapping contract for Guyana, then resigned, formed their own company and won the contract. The Supreme Court held them liable to account for their profits, because they had taken an opportunity that the corporation was actively pursuing and that they had learned of through their positions; their resignation did not end their fiduciary obligations for that opportunity. Section 120 of the CBCA requires directors and officers to disclose in writing the nature and extent of any interest in a material contract or transaction with the corporation, and directors must generally not vote on it.

The duty of care and the business judgment rule

The duty of care requires the diligence of a reasonably prudent person, an objective standard. Directors are not expected to be infallible, and courts do not second-guess business decisions with hindsight. Under the business judgment rule, courts defer to decisions that fall within a range of reasonable alternatives, made honestly, prudently, in good faith and on reasonable grounds, after an appropriate process of gathering information (Peoples; BCE). Directors may rely in good faith on financial statements and on reports of professionals such as lawyers, accountants and engineers, which is a statutory defence under the CBCA. Directors who attend meetings, ask questions, read materials, seek expert advice for important decisions and record their reasoning in minutes are well protected.

Shareholder remedies

Canadian corporate statutes give shareholders and others strong remedies. The oppression remedy (CBCA section 241) lets a security holder, creditor, director, officer or other proper person apply to court if the corporation's business or the conduct of its directors is oppressive or unfairly prejudicial to, or unfairly disregards, their interests. Under BCE, the court asks whether the complainant had a reasonable expectation that was violated and whether the conduct complained of amounts to oppression, unfair prejudice or unfair disregard. Reasonable expectations are judged objectively, considering factors such as commercial practice, the nature of the corporation, the relationship between the parties, past practice and representations made. Courts can make almost any order, including requiring the corporation or majority to buy the complainant's shares at fair value. The oppression remedy is used frequently in closely held corporations, for example when a minority shareholder is excluded from management and dividends while the majority pays itself large salaries.

A derivative action (CBCA section 239) lets a complainant bring an action in the name of the corporation, with the court's leave, to enforce a right of the corporation, typically against directors for breach of duty; the complainant must give notice to the directors, act in good faith and show that the action appears to be in the corporation's interests. Shareholders who object to fundamental changes, such as an amalgamation or sale of substantially all assets, have dissent and appraisal rights under section 190 and can require the corporation to pay the fair value of their shares.

Securities regulation basics

When a corporation raises money by selling shares or other securities, securities law applies. Securities regulation in Canada is provincial: each province and territory has a securities act and a commission, coordinated through the Canadian Securities Administrators (CSA) and largely harmonized national instruments; efforts to create a cooperative national regulator have not been joined by every province. Issuers must file a prospectus, a detailed disclosure document reviewed by regulators, before distributing securities to the public, unless an exemption applies. The main exemptions in National Instrument 45-106 include the private issuer exemption for private companies selling to founders, family, close friends and business associates, the accredited investor exemption for investors meeting income or asset thresholds, the offering memorandum exemption and crowdfunding exemptions. Reporting issuers must make continuous disclosure, including annual and interim financial statements and timely disclosure of material changes, and insiders must report trades. Insider trading, buying or selling with knowledge of undisclosed material facts, is prohibited by provincial securities acts and the Criminal Code.

Governance expectations keep evolving beyond legal minimums. Investors and stock exchanges expect independent directors, separate audit, compensation and nominating committees, a code of conduct, whistleblower procedures and board oversight of risks such as cybersecurity and climate. Rules on diversity and climate disclosure have shifted repeatedly in recent years in both countries and remain contested, so companies should check current requirements of their regulators and exchanges at the time of any filing.