Chapter 2 - Directors’ and Officers’ Responsibilities

Question 1

Do Shareholders have a say in day-to-day operations?

Answer 1

no

Question 2

Who is empowered to act on behalf of a corporation?

Answer 2

board of directors (not the directors)

Question 3

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 ___

Answer 3

create a board of directors.

Question 4

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 ___

Answer 4

• withdraw all powers from the board of directors
• a written declaration recorded in the corporation’s records.

Question 5

Director terms can range in length if elected but unless otherwise stipulated, the term of a director elected by shareholders ends when?

Answer 5

the following annual meeting

Question 6

The law imposes on directors the duty to ___ , meaning ___

Answer 6

• 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

Question 7

boards of directors concentrate on drawing up policies in four areas:

Answer 7

• company performance
• employee accountability
• relationship between the board and employees
• administrative duties

Question 8

Directors resign ___ , and are not ___

Answer 8

at any time
required to give any reason for doing so.

Question 9

potential consequence for Directors who resign without notice and without valid reason?

Answer 9

may be held responsible for the harm caused to the company by their actions

Question 10

A director who resigns must ensure that

Answer 10

the notice of change of directors is filed in Ottawa or Quebec City

Question 11

Reimbursement of expenses: If a director is sued, the company is obliged to ___ and ___

Answer 11

defend them
to pay any damages arising from the suit.

Question 12

Can Shareholders assume directors’ powers and replace directors?

Answer 12

Yes

Question 13

Clauses to restrict directors’ powers in the articles of incorporation or in a unanimous shareholder agreement can take any of the following forms: (3)

Answer 13

• 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

Question 14

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)

Answer 14

• 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

Question 15

main situations in which a director may be held liable: (5)

Answer 15

• unpaid wages
• source deductions
• reduction of the company’s capital
• environmental obligations
• dissolution of the company

Question 16

UNPAID WAGES under QBCA; Either of two conditions must be met, for directors to be held liable:

Answer 16

• 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.

Question 17

UNPAID WAGES under Canada BCA; conditions must be met, for directors to be held liable: (5)

Answer 17

• 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.

Question 18

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)

Answer 18

• source deductions
• sales taxes
• contributions to health insurance plans

Question 19

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.

Answer 19

• care
• diligence
• skill of a reasonably prudent person

Question 20

directors may take the following measures to ensure tax deductions (3):

Answer 20

• 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

Question 21

Difference between Federal and Quebec legislation for director’s liability

Answer 21

Quebec: director conduct analyzed on personal characteristics and circumstances

Federal: compared to reasonably prudent person (subjective)

Question 22

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 __

Answer 22

insolvent

Question 23

corporation may provide financial assistance for its __ if the corporation is __ , as well as to a __

Answer 23

• parent company
• wholly owned by the parent company
• subsidiary

Question 24

Quebec Business Corporations Act contains no specific requirements concerning financial assistance to ___

Answer 24

shareholders

Question 25

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 ___

Answer 25

discharge its liabilities

Question 26

The decision to dissolve a corporation and liquidate its assets requires the consent of ___

Answer 26

the shareholders.

Question 27

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 ___

Answer 27

Assets

Question 28

Tax debts: before proceeding with the distribution of a person’s property, the director must obtain ___ and submit it to __

Answer 28

• a certificate stating that there are no outstanding tax debts
• Revenu Quebec

Question 29

Why may directors be liable if they liquidate a company’s assets and use the proceeds of the sale to pay creditors?

Answer 29

Because it represents a distribution of assets

Question 30

Directors must ensure that their dissent is expressly recorded in ___

Answer 30

the minutes of the meeting

Question 31

If a director who attended the board meeting fails to record his or her dissent, two other means of defence are available:

Answer 31

• 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)

Question 32

PROTECTIVE MEASURES against liability for director (6)

Answer 32

• 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

Question 33

The purpose of liability insurance is to protect ___ and ___ , but not just ___ , in the event of legal proceedings

Answer 33

• the directors
• the company
• the company

Question 34

Liability insurance for directors may take either of two forms:

Answer 34

• Insurance for legal costs
• Indemnity insurance

Question 35

difference between Insurance for legal costs and Indemnity insurance

Answer 35

• 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

Question 36

Recommended that small businesses have insurance equivalent to __% of shareholders’ equity

Answer 36

25

Question 37

what is the springboard effect?

Answer 37

ex-employees can’t use confidential information belonging to the employer as a springboard to begin competing with their former employer.

Question 38

a non-competition clause of under__ year(s) is reasonable, except in exceptional circumstances.

Answer 38

2

Question 39

Non-solicitation clauses covering a period of __ year or less from termination of employment have almost always been recognized as valid by Quebec courts.

Answer 39

1