Chapter 2 - Directors’ and Officers’ Responsibilities Flashcards
Do Shareholders have a say in day-to-day operations?
no
Who is empowered to act on behalf of a corporation?
board of directors (not the directors)
in 2011, new Business Corporations Act (QBCA) came into effect in Quebec. Under this new law, the sole shareholder of an owner-managed corporation governed by the QBCA may elect not to ___
create a board of directors.
under the new Business Corporations Act (QBCA) came in Quebec The sole shareholder who does not elect a board of directors must first ___ by means of ___
- withdraw all powers from the board of directors
- a written declaration recorded in the corporation’s records.
Director terms can range in length if elected but unless otherwise stipulated, the term of a director elected by shareholders ends when?
the following annual meeting
The law imposes on directors the duty to ___ , meaning ___
- act with loyalty
- they must act in the exclusive interest of the company, without allowing their own interests or those of the shareholder to interfere
boards of directors concentrate on drawing up policies in four areas:
- company performance
- employee accountability
- relationship between the board and employees
- administrative duties
Directors resign ___ , and are not ___
at any time
required to give any reason for doing so.
potential consequence for Directors who resign without notice and without valid reason?
may be held responsible for the harm caused to the company by their actions
A director who resigns must ensure that
the notice of change of directors is filed in Ottawa or Quebec City
Reimbursement of expenses: If a director is sued, the company is obliged to ___ and ___
defend them
to pay any damages arising from the suit.
Can Shareholders assume directors’ powers and replace directors?
Yes
Clauses to restrict directors’ powers in the articles of incorporation or in a unanimous shareholder agreement can take any of the following forms: (3)
- Requirement for a special majority, greater than that stipulated by law, for adopting directors’ decisions (e.g., 100%, 75%)
- Requirement that directors take certain steps or that shareholders ratify certain decisions by the directors.
- Transfer of certain specific powers from the directors to shareholders
most loan agreements contain clauses intended to restrict the powers of shareholders and directors. The most frequent restrictions prohibit the company from the following actions without the lender’s written agreement: (7)
- Declaring dividends
- Making changes to shareholders’ rights
- Granting loans or guaranteeing commitments by a third party
- Purchasing all or part of other companies
- Setting up a subsidiary
- Merging or combining activities with another company
- Liquidating assets or assigning them as collateral
main situations in which a director may be held liable: (5)
- unpaid wages
- source deductions
- reduction of the company’s capital
- environmental obligations
- dissolution of the company
UNPAID WAGES under QBCA; Either of two conditions must be met, for directors to be held liable:
- The company must have been sued within one year after the debt became due and the employee must have been unable to execute the judgment against the company.
- The company must have declared bankruptcy or been put into liquidation in the year following the date on which the wages became due and the employee must have filed a claim for the debt with the trustee or the liquidator.
UNPAID WAGES under Canada BCA; conditions must be met, for directors to be held liable: (5)
- If the corporation is not bankrupt, the suit must be undertaken within six months (rather than one year) after the wages have become due.
- if the corporation has been dissolved, a claim must have been filed with the trustee within six months
- Directors are not liable for wages, but rather debts related to services provided by employees for the company
- Directors may be held liable only if they are sued while in the position of director or within two years of role
- A director who pays a debt for which he is liable, that is proved in liquidation and dissolution or bankruptcy proceedings, is legally entitled to any preference to which the employee would have been entitled. For instance, he may be entitled to priority of payment under the Bankruptcy and Insolvency Act.
Tax deductions: directors are responsible for all amounts that the company has failed to deduct, remit, withhold, or pay under a taxation act, such as (3)
- source deductions
- sales taxes
- contributions to health insurance plans
Tax deductions: director will not be held liable if he exercised the degree of ___ (3), to ensure that the corporation had deducted, remitted, withheld, or paid the amounts due.
- care
- diligence
- skill of a reasonably prudent person
directors may take the following measures to ensure tax deductions (3):
- Establish controls to check that amounts have been withheld from employees’ wages and remittances made.
- Ask corporation’s financial officers to report on implementation of controls established.
- Obtain confirmation that amounts have been withheld and remittances made
Difference between Federal and Quebec legislation for director’s liability
Quebec: director conduct analyzed on personal characteristics and circumstances
Federal: compared to reasonably prudent person (subjective)
A company may not declare or pay dividends, redeem its shares, or grant loans or advances to its shareholders if there are reasonable grounds to believe that it is __
insolvent
corporation may provide financial assistance for its __ if the corporation is __ , as well as to a __
- parent company
- wholly owned by the parent company
- subsidiary
Quebec Business Corporations Act contains no specific requirements concerning financial assistance to ___
shareholders
Quebec Business Corporations Act provides that directors are liable if the company declares or pays a dividend when there are reasonable grounds for believing that it could not ___
discharge its liabilities
The decision to dissolve a corporation and liquidate its assets requires the consent of ___
the shareholders.
The shareholders are only liable to the corporation’s creditors to the extent of the amounts they receive in the division of the corporation’s ___
Assets
Tax debts: before proceeding with the distribution of a person’s property, the director must obtain ___ and submit it to __
- a certificate stating that there are no outstanding tax debts
- Revenu Quebec
Why may directors be liable if they liquidate a company’s assets and use the proceeds of the sale to pay creditors?
Because it represents a distribution of assets
Directors must ensure that their dissent is expressly recorded in ___
the minutes of the meeting
If a director who attended the board meeting fails to record his or her dissent, two other means of defence are available:
- May remove the presumption of liability by showing that they relied on the opinion of an expert
- Existence of a unanimous shareholder agreement providing that some decisions can only be made by shareholders (ex: declare dividends)
PROTECTIVE MEASURES against liability for director (6)
- ACT IN GOOD FAITH AND FOR THE EXCLUSIVE GOOD OF THE COMPANY
- PLAY AN ACTIVE ROLE
- BE SKEPTICAL
- KEEP RECORDS
- ENSURE COVERage IN EVENT OF PROSECUTION
- OBTAIN PROFESSIONAL ADVICE
The purpose of liability insurance is to protect ___ and ___ , but not just ___ , in the event of legal proceedings
- the directors
- the company
- the company
Liability insurance for directors may take either of two forms:
- Insurance for legal costs
- Indemnity insurance
difference between Insurance for legal costs and Indemnity insurance
- Insurance for legal costs: insurer applies amount of insurance to the damages
- Indemnity insurance: director is required to pay the damages and costs, and the insurer will reimburse the director up to the amount of insurance
Recommended that small businesses have insurance equivalent to __% of shareholders’ equity
25
what is the springboard effect?
ex-employees can’t use confidential information belonging to the employer as a springboard to begin competing with their former employer.
a non-competition clause of under__ year(s) is reasonable, except in exceptional circumstances.
2
Non-solicitation clauses covering a period of __ year or less from termination of employment have almost always been recognized as valid by Quebec courts.
1
