What is the role of a corporate director in a Canadian business?
The expectations of a director in Canada is not always clear.
Various types of businesses operate successfully in Canada. The business structure chosen by the founding business owners often dictates how the business is run. One example involves corporations that rely on shareholders and directors.
What is the role of a director? Shareholders elect a director. The director is then responsible for the overall supervision of the corporation. This role is essentially one of oversight. Directors then appoint officers to manage day to day operations. The exact number of directors required varies depending on the company. In general, Canada’s laws of corporate governance require private companies to have a minimum of one director while a public company in Canada must have at least three. The company can increase the number of directors as needed for its operations. The majority of directors must be a Canadian resident.
Canadian laws of corporate governance require directors to act in good faith to achieve the best interests of the corporation – the duty of loyalty. But what exactly does this mean? The definition has been scrutinized through court cases for generations. One of the most notable recent cases being BCE Inc. V. 1976 Debentureholders. In BCE, the Supreme Court of Canada stated the board of directors owes a duty of loyalty to the corporation not to shareholders.
Did the Supreme Court of Canada’s holding provide clarity? Unfortunately, not. Courts throughout the country continue to grapple with how to apply this decision. Courts asked to assess whether a director has meet their duty must consider the shareholder value as well as other factors, such as the effect of the decision on shareholders.
Critics of this case argue the holding muddies the waters. That it keeps courts from applying a clear and meaningful standard for director accountability. Proponents state it provides flexibility for the board of directors to apply the answer that is correct for whatever problems their corporation may face.
How has this case impacted Canadian corporation governance? Although there is debate on the impact of this case, the decision appears to have moved the country’s practice more clearly away from a shareholder primacy. This model, commonly used in the United States and the United Kingdom, finds the best interest of the corporation are in line with the best interest of the corporation’s shareholders.
What is the takeaway lesson? The case provides an example of the complexity of judicial scrutiny directors face within the Canadian court system. Navigating this system is difficult. Directors and shareholders alike are wise to act to defend their interests in the event of a legal dispute. A lawyer experienced with Canadian business law can provide counsel.