Most startup founders have a general idea that serving as a director of a corporation should not be taken lightly. But what are the key duties and personal liabilities that the law imposes on directors and how can you mitigate them? The basics regarding the three categories of director obligations—fiduciary duties, duties of care and statutory liabilities—are outlined below.
Directors are the principal agents of the corporate entity. Like any person in a legally recognized relationship of trust and responsibility, they are bound by fiduciary duties to put the corporation’s interests before their own.
For startup founders, this generally means two key obligations:
This latter duty can be tricky, especially where founders work simultaneously on a number of ventures. If situation arises, founders should seek consensus by agreement among their co-founders as to what opportunities they can pursue outside the corporation.
Directors have an obligation to exercise diligence when making decisions about the management of the corporation’s business. Ontario courts do not require directors to be perfect, and they are very reluctant to overturn board decisions without good reason.
Generally, if directors consider reasonable alternatives, and reach reasonable conclusions, their decisions will be insulated from substantive review or remedy by the corporation’s other stakeholders.
Decisions regarding issuing new shares and selling the company are likely the most material decisions that attract attention for start-ups. If a start-up acquires a broad range of outside stakeholders (creditors, shareholders, employees), it is recommended to document available alternatives for any decision, as well as the process through which the directors arrived at their conclusion to proceed in a particular way.
Directors are subject to personal liability under a broad range of statutes. For startup founders, three key categories of liability exist:
In each case, a director’s diligent determination of whether such obligations are owed proves the best tool for managing these liabilities after incorporation. The Canada-Ontario Business Service Centre offers an online guide to assist founders, and certainly the input and management of these issues by a capable finance professional is recommended.
Finally, in Ontario, shareholders have a broad statutory right of court action to allege that they have been “oppressed” or “unfairly prejudiced” by the actions of the board or the majority shareholders of a corporation.
This right of action does not represent a separate category of director liabilities, but start-up founders should be sensitive to the remedy’s availability as a tool for stakeholders to make allegations of breaches of fiduciary duties and duties of care.
This article was produced by James Smith and Shane MacLean and is made available through the generosity of Labarge Weinstein Professional Corporation.