Canada: Corporate Governance Essentials For Directors

Difficulties arise for corporations that lack a formal process for governing the calling and conduct of board meetings. It is therefore important for directors to be aware of the problems that may arise and how to deal with them.

Right to Attend Board Meetings

Only the directors of the corporation may attend meetings of the board of directors. Other persons, such as counsel for a party, may be admitted with the consent of the meeting.1 This is, however, subject to the provisions of the by-laws of the corporation, which can provide that other individuals may attend, such as an executive director. Directors and officers are under a duty of confidentiality, which others such as the media or special guests are not. At times, guests, like observers, are asked to sign confidentiality agreements.2

Every director has the right to attend and participate in all meetings of the board of directors. As such, a director cannot be excluded from meetings.

No Attendance by Proxy

The law is settled on the issue that a director cannot attend a meeting by proxy, as directors cannot delegate their duties to a third party.3 This law extends to resolutions in writing, which cannot be signed on behalf of a director by power of attorney.

Who can Chair the Meeting

Most by-laws provide that the chair of the board, if present and willing, will preside at meetings of the board. In the absence or refusal of the chair to preside, or to continue presiding, the president shall preside, unless the by-laws provides otherwise. If no such provision exists, a quorum of the board may elect a new chair from among the directors.4

Conflict of Interest

Directors must disclose their interest at the meeting of directors and must also refrain from voting on any contract in which they may have an interest.

In addition, the Ontario Business Corporations Act5 ("OBCA") provides that a director cannot attend any part of a board meeting where the contract in which he or she has an interest is being discussed.6 This provision is stricter than that of the Canada Business Corporations Act7 ("CBCA"), which only provides that the director may not vote on the contract. By-laws of a CBCA corporation could be expanded to incorporate the provisions of the OBCA.

To know which Act governs your company, determine the jurisdiction in which it is incorporated. This information is in the Articles of Incorporation or Letters Patent of the company; otherwise, seek legal advice.

Quorum Issues

Directors must maintain a quorum throughout a meeting. If a quorum is not maintained, the business conducted at the directors' meeting is not lawfully transacted. Beware of the "disappearing quorum". This is where a quorum is present at the start of the meeting but is lost at some point during the meeting itself. In this situation, the meeting must be adjourned, as any business transacted after the quorum is lost is invalid.

Dissent Votes

A director is often faced with a position put forward at a meeting with which he or she does not agree. That person should vote "No" to the resolution and request that his or her dissent vote be recorded in the minutes. Failure to do so may lead to potential liability since the corporate legislation deems the director to have consented to the resolution if the dissent is not recorded in the minutes.

A director not present at a meeting is also deemed to have consented unless, within seven days after becoming aware of the resolution, the director requests that his or her dissent be noted within the minutes of the meeting.8

Minutes of Meetings

Corporations are required to prepare and maintain records containing minutes of meetings and resolutions of directors. The minutes may be kept in a bound or loose-leaf book, or electronically. The corporation must take reasonable steps to prevent the loss or destruction, or the falsification, of the minute books. Minute books are also admissible in court as proof of all the facts contained within in the absence of any evidence to the contrary.

Directors have the right to review all minutes of board meetings. Under the CBCA, any shareholder may review that portion of the minutes of meetings where a director has declared a conflict of interest, but otherwise shareholders do not have the right to review minutes of the board.9

Some considerations that directors should keep in mind at all times are the following:

  • Prior to their approval, minutes should be critically and carefully reviewed by directors;
  • The reasoning and process behind directors' decisions at board meetings on crucial matters should be understood and noted in the minutes;
  • Management should be clear as to whether it is providing documents for information only and where no immediate action is required, or if it is seeking the directors' approval on a particular matter;
  • The materials provided to the directors before and at the meeting should be carefully reviewed and included as attachments to the minutes;

Election of Directors and Appointment of Officers

Whether a for-profit or a not-for-profit corporation, the rules on election or appointment of directors are the same. The basic rule is that shareholders/members elect directors. However, where there is a vacancy on the board, the directors in office may appoint a suitable replacement for the departed director to hold the office until the end of the term of the departing director.

If there are not enough directors remaining on the board to constitute a quorum, a meeting of shareholders/members must be called to elect new directors to the board to fill any vacancy.

Removal of Directors

In Canada, when a director is considered to be a problem because of misbehavior, or where a faction of the board refuses to attend meetings and thereby frustrates a quorum, the available remedies are limited.

A special meeting of shareholders or members could be convened to remove the "dissident" directors and to replace them with ones that are more compatible. The current Ontario Corporations Act10 requires that the right to remove directors be set out in the Letters Patent or by-laws and requires a 2/3 majority of members (s.67), otherwise a director cannot be removed during his or her term. The CBCA and OBCA provide that the removal is by a simple majority vote. The percentage of votes required for this purpose cannot be increased in the charter documents. A resolution signed by all the shareholders would normally be binding. However, directors may not be removed by a resolution in writing, but only at a properly constituted meeting of the shareholders pursuant to Section 123 of the OBCA and Section 110 of the CBCA.

If the director ceases to be qualified, for example, if he or she becomes certified as mentally incapable; becomes bankrupt; or if the by-laws of a charity so provide, becomes an "ineligible individual" under the Income Tax Act11, the director is automatically off the board.

Removal of Officers

Subject to any unanimous shareholder agreement, directors normally appoint officers. There are no provisions dealing with the removal of officers under corporate statutes. It has been assumed those who appointed the officers have the power to remove them.

Conclusion

While we do not address all of the issues that a director may encounter, these are some of the most prevalent issues that directors face on a regular basis.

1. Mayor, Alderman and Burgesses of Tanby v. Mason, [1908] 1 Ch. 457 (CA)

2. Hayes v. Bristol Plant Hire Ltd., [1957] 1 All ER 685 (Ch D).

3. McGuire & Forester Ltd. v Cadzow [1933] 1 D.L.R. 192 (Alb. C.A.)

4. Klein v. James (1986), 36 B.L.R. 42 (B.C.S.C.) affirmed (1987), 37 B.L.R. (XXV1) (B.C.C.A.).

5. R.S.O. 1990, Ch. B. 16.

6. OBCA at s. 132(5).

7. R.S.C 1985, c. C-44.

8. OBCA, s. 135(3).

9. Ibid at s. 120(6.1).

10. R.S.O. 1990, C c.38.

11. R.S.C. 1985, c. 1 (5th Supp.).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Ira Stuchberry
 
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