What duties does a director owe the company?

What are the two duties?

Section 122(1) of the CBCA, and section 134(1) of Ontario’s Business Corporations Act, require every director and officer to:

1. act honestly and in good faith with a view to the best interests of the corporation (the fiduciary duty); and
2. exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances (the duty of care).

The Supreme Court of Canada has said the fiduciary duty is owed to the corporation, not to any particular group, and that directors may consider the interests of shareholders, employees, creditors and others in deciding what’s in its best interests (BCE Inc. v. 1976 Debentureholders, 2008 SCC 69). Section 122(1.1) of the CBCA now lists factors a federal corporation’s directors may consider.

What does the duty of care require in practice?

Being informed and engaged, not being right. Courts generally defer to reasonable business decisions made on an informed basis, in good faith, without conflicts. In practice:

• read the materials, ask questions and record the reasons for decisions;
• get professional advice on matters you don’t know well;
• watch the company’s cash position, especially near insolvency.

Directors can rely in good faith on financial statements and on reports from lawyers, accountants and other professionals, which is a defence under both statutes.

What about conflicts of interest?

A director with an interest in a material contract with the corporation must disclose the nature and extent of it in writing or in the minutes, and generally can’t vote on it. That’s section 120 of the CBCA and section 132 of the OBCA. Common startup examples:

• a founder’s other company selling services to the startup;
• a director who is also a lender or investor in the deal being approved;
• a director being offered a business opportunity that belongs to the company.

Does an investor’s board nominee represent the investor?

Not legally. A nominee director owes the same duties to the corporation as every other director. They can bring the investor’s perspective and share information as the agreements allow, but must decide in the corporation’s interests. When an investor’s interests and the company’s diverge, for example on a down round, nominee directors often take advice on how to handle the conflict.

	Fiduciary duty	Duty of care
Asks	Were you loyal to the corporation?	Were you careful and informed?
Typical breach	Undisclosed conflict, taking a corporate opportunity	Approving a deal without reading it
Statute	CBCA s. 122(1)(a), OBCA s. 134(1)(a)	CBCA s. 122(1)(b), OBCA s. 134(1)(b)

How do directors protect themselves?

• Indemnification. The corporation may indemnify directors for costs of proceedings related to their role if they acted honestly and in good faith, under section 124 of the CBCA and section 136 of the OBCA. A written indemnity agreement makes it certain.
• D&O insurance, often a condition for outside directors and investors.
• Good records. Minutes and written resolutions showing what was considered.
• Dissent. A director who disagrees should have their dissent recorded, or they’re generally deemed to have consented.

Directors also face specific statutory liabilities, such as for unpaid wages and tax remittances. See are directors personally liable for company debts?

This guide is general information about Ontario and Canadian law, not legal advice for your situation. To talk through your role on a board, book a free 15-minute consult.