3.5 Directors, Officers and Shareholders: Rights, Obligations and Duties Flashcards
What fiduciary duty do directors and officers have?
Directors and officers must act in the best interests of the corporation, avoiding conflicts of interest and personal gain from corporate property or information.
What must directors and officers do if they have a conflict of interest?
They must disclose the conflict and not participate in the related transaction.
Are directors personally liable for corporate debts?
Generally, no. However, they can be held personally liable in specific cases where solidary liability applies.
When can directors be personally liable for wages?
If a corporation becomes insolvent, directors are personally liable for up to six months of unpaid wages owed to employees.
When does wage liability apply?
Only if employees first sue the company and are unable to collect payment.
When can directors be personally liable for dividends?
If they issue dividends that render the company insolvent, they must personally pay back the dividend.
When can directors be personally liable for taxes?
If the company fails to remit:
GST/QST (Sales Tax) collected from customers
Payroll Deductions (e.g., employee income tax)
Why are directors personally liable for unpaid taxes?
Because the corporation acts as a mandatary (agent) of the government in collecting taxes.
Are shareholders personally liable for corporate debts?
No, shareholders have limited liability, meaning they are only responsible for the money they invest in shares.
What is an exception to shareholder limited liability?
If there is a Unanimous Shareholders Agreement (USA), shareholders may take on director responsibilities and liability.
What is a Unanimous Shareholders Agreement (USA)?
A private contract signed by all shareholders that allows them to restrict director powers and take on certain decision-making rights.
How can a USA protect minority shareholders?
It can override the 50%+1 rule by requiring a higher voting percentage (e.g., 70%-90%) for key decisions.
How does a USA affect the sale of shares?
It can:
Restrict share sales by requiring existing shareholders to have a right of first refusal (they get first choice to buy shares).
Prevent unwanted owners (e.g., stopping heirs from inheriting shares if a shareholder dies).
What risk does a USA create for shareholders?
If shareholders take over director powers, they may also assume director liabilities (e.g., unpaid wages, tax debts, wrongful dividends).
Can a USA be used in public companies?
No. A USA is only used in private companies before going public because it requires 100% shareholder agreement.
