Corporate Governance

Question 1

What is the main role of a director?

Answer 1

To manage or supervise the management of the business and affairs of the corporation

Question 2

What are the director’s important powers?

Answer 2

1. Power to issue shares subject to the corporation’s constitution
2. Power to declare dividends
3. Power to adopt bylaws governing day-to-day-affairs of the corporation
4. Power to call meetings of shareholders
5. Power to delegate responsibilities and appoint officers

Question 3

How many directors must a corporation have?

Answer 3

If they are private, they only need at least one director. If they are public, there must be at least 3 with at least 2 not being officers or employees of the company

Question 4

How are the first directors decided?

Answer 4

Appointed at the time of incorporation and hold office until the first meeting of the shareholders within 18 months of incorporation

Question 5

How are post-incorporation directors appointed and removed?

Answer 5

By majority vote, a director can be appointed or removed. A director can sit in their position for 3 years without needing to face reelection and each share gets one vote provided there is no alternative voting structure in the constitution

Question 6

What is the responsibility of an officer?

Answer 6

Depends on their designation by the board of directors what the specific tasks are. In general, they are responsible for day-to-day hands on management of the corporation

Question 7

When are directors held personally liable as opposed to the corporation?

Answer 7

For breach of duty or mismanagement.

Question 8

How can a director defend themselves against a claim of breach of duty?

Answer 8

Directors are able to establish that they did their due diligence and they are also able to rely on audited financial statements or expert reports

Question 9

What is corporate indemnity defense?

Answer 9

Directors of officers can be reimbursed for costs associated with liability for breach of duty as ling as they can show they acted honestly, reasonably, and in good faith

Question 10

What is the business judgement rule?

Answer 10

Recognizes that judges are not business experts and so they grant the benefit of the doubt to business experts. This does not protect a director from specific legal obligations

Question 11

In what ways can directors be strictly liable?

Answer 11

They are liable when they vote on matters that cause financial loss to the corporation like improper payment of dividends.
If the corporation becomes insolvent, the directors are liable for up to 6 months wages for the employees while they were directors. The government can also collect income tax from the directors

Question 12

How can a director avoid conflicts of interest?

Answer 12

1. Disclosing any interest they have in contracts made with the corporation (they cannot vote on matters related)
2. Not taking corporate opportunities for themselves without giving right of first refusal to the corporation
3. Not carrying on business competing with the corporation without permission
4. Not being on the board of directors of two related corporations working on a deal

Question 13

What is insider trading?

Answer 13

When a director or officer or anyone with a serious interest buys or sells the corporation shares using confidential information to avoid a loss or make a profit.

Question 14

What is the risk of being a shareholder in a private corporation?

Answer 14

You can be “locked in” because the shares are not easy to get rid of at their true worth.
You can also be “frozen out” by losing your ability to participate in management and receive a dividend based on the actions of the directors

Question 15

What are the main rights of a shareholder?

Answer 15

To vote at any meeting of shareholders
To receive any dividend declared
To receive remaining property of the company on dissolution

Question 16

How are shareholders meetings called?

Answer 16

Either the meeting is called by the directors or the shareholders can call a meeting but this requires a large proportion of shareholders. All shareholders are entitled to advance notice of the meeting and can send a proxy in their place if they cannot go

Question 17

What is the difference between an ordinary and special resolution?

Answer 17

Ordinary resolution is passed by simple majority and special resolutions require two-thirds majority vote

Question 18

What is a pre-emptive right?

Answer 18

Gives shareholders a number of subscription rights based on the number of shares they hold. When a new set of shares is issued, they can use their subscription rights to purchase the new shares before any one else gets a chance. This makes it so that there is less chance of them losing their voting interests

Question 19

When can the board of directors declare new shares?

Answer 19

Only when there is a good faith intention of raising capital or another best interest of the corporation. Shares cannot be issued simply to change voting power

Question 20

What company information do shareholders have a right to?

Answer 20

Shareholders have a right to the company’s financial statements, documents of record, minutes of shareholders’ meetings, bylaws, special resolutions, shareholders and directors registers, register of transfer of shares, the constitution

Question 21

What information do shareholders not have a right to?

Answer 21

They have no right to inspect the books of account. However, they can apply to the courts to appoint an inspector who will audit the books

Question 22

What is the appraisal protection for minority shareholders?

Answer 22

When a major decision is made to the company, a shareholder can choose to have their shares bought out at a price decided by the courts. Only counts for major changes in the nature of the business

Question 23

What is the derivative protection for minority shareholders?

Answer 23

A minority shareholder can start a derivative action in the courts on behalf of the corporation when a wrong doing has been committed by a director. They must show that the directors won’t bring an action themselves, they are acting in good faith, and it is in the best interest of the corporation or the shareholders.

Question 24

What is the winding up protection for minority shareholders?

Answer 24

Court order to dissolve the corporation and sell the assets to divide up proceeds between partners and other owners. Courts are reluctant to use this remedy for successful or large corporations

Question 25

What is the oppression protection for minority shareholders?

Answer 25

This is a remedy available to any complainant who has a legitimate interest in the company. They can begin a court action if they have shown that their interests or reasonable expectations have been disregarded by the behaviour of the corporation

Question 26

What is a shareholder agreement?

Answer 26

An agreement among the shareholders outside the constitution

Question 27

What are some examples of shareholders agreements?

Answer 27

Agreeing to elect each other to the board of directors, agreeing to not sell shares to outsiders

Question 28

What is special about a unanimous shareholders agreement?

Answer 28

All shareholders are party to it and it can be used to restrict the powers of the directors. New shareholders are also made party to the agreement on purchasing shares