As we know, entrepreneurs are busy people and they often take upon the role of directors, shareholders and officers of their company all at once. So much for one person! Don’t worry, this is more than feasible. Thanks to the article “The Three Types of Actors in an Ontario corporation”, you now understand the many different hats entrepreneurs wear within a corporation. If the role of a shareholder seems pretty clear, many entrepreneurs confuse the notions of “directors” and “officers”. Today we set the records straight and explain the ins and outs of what officers do within a corporation in Ontario.
What is an officer in an Ontario corporation ?
If the word “officer” makes you think of a member of the armed forces in a position of power, you are not entirely wrong. An “officer” in the corporate context, although not working for Her Majesty, is a person in a position of power who acts on behalf of the corporation.
But isn’t that what directors already do? Yes, it is BUT…
OFFICERS ARE APPOINTED, NOT ELECTED
The way they are appointed, in Ontario, to office is different from the way directors are brought to power.
Keep in mind that shareholders are entitled to vote during a shareholders meeting in order to elect directors (not officers). Once this is done, directors become responsible of the management.
Even if they are not obligated to do so, the directors themselves can appoint officers. Thus, officers are chosen and designated at the discretion of the board of directors.
Unless an unanimous shareholders agreement exists, the shareholders have no say over the appointment of officers.
THEIR DAY-TO-DAY WORK
If and when they are appointed, officers do not carry out the same duties as directors. As they designated someone else to do it, directors are not involved in the company’s daily management. Directors will still define the general and strategic orientations of the Ontario corporation, while officers will be responsible for the daily execution of the orientations defined by said directors.
Amongst the officers, we often find a Chief Executive Officer (CEO), a Vice-president (VP), a Secretary, a Chief Financial Officer (CFO), a Chief Technology Officer (CTO) and a Chief Compliance Officer (CCO) but they can have any other title the board of directors has agreed upon.
They are usually employees. However, the law does not consider them as ordinary employees (they are “officers”, after all!). Indeed, since they are involved in the upper reaches of the corporation, the Ontario Business Corporation Act and Canada’s Business Corporations Act bestow more important responsibilities and duties.
The board of directors, in Ontario, determines the salary paid to the officers of a corporation. Just like regarding the appointment of officers, shareholders have no say over the salaries paid to the officers, provided that there is no unanimous shareholder agreement to the contrary effect.
What an officer can or cannot do in a corporation Ontario?
Because of their role, officers are considered “mandataries”. A mandatary is someone to whom we give power of representation. Thus, they have the power to act on behalf of the Ontario corporation with regards to third parties. Subject to their job description, officers can even conclude legal acts on behalf of the corporation.
As mandataries and pursuant to section 134 (1) of Ontario Business Corporation Act,, officers must act, “honestly” and “in good faith”, and carry out their mandate with the “care, diligence and skill that a reasonably prudent person would exercise”. But is this not also required for the directors? Yes, it is.
According to section 135(4) of Ontario Business Corporation Act, a director cannot be held liable for the corporation’s obligations if he can prove that he was acting within the scope of his duties with “the care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances”.
The persons appointed to occupy the functions of them within the corporation must comply with certain ethics rules. In the same vein as their duty to be honest and loyal towards the corporation, officers must avoid putting themselves in a conflict of interest.
If the officers find themselves in a conflict of interest, section 132(1) of the Ontario Business Corporation Act states that they must disclose it in writing to the corporation, or request the nature and extent of said interest to be entered in the minutes of the directors’ meeting.
For instance, say you incorporated a cell phone company (“Toronto mobile”) and decided to hire an officer as CFO who, although he has not been working for Her Majesty, is still a shareholder of your competitor (“Ottawa mobile”). If your board of directors has to discuss a potential partnership with Ottawa mobile, your CFO would be required to notify the board in writing that he possesses shares within that company. He would also have to notify the board of the number of shares he has and whether or not he is entitled to dividends.
Officers cannot use the information they obtained in the context of their function for their own benefit or for the benefit of third parties. Finally, just like directors, officers must execute their duties and do so in compliance with the Law.
What are officers liable for?
Officers face a liability that is similar to the liability that directors face. Indeed, generally speaking, officers are not personally responsible for the debts and other obligations contracted by the corporation. Therefore, in the unfortunate event that the Ontario corporation becomes insolvent, its creditors will not be able to turn to officers in order to recover their debt, unless the officers have cautioned or personally granted the obligation in question.
Just like directors, officers can be held liable for their non-compliance with certain laws, such as tax and environmental laws. As for their civil liability, let us underline that it differs depending on whether the officers act in the scope of their duties in regards to the corporation or not. Remember that officers are usually employees of the corporation but it is not necessarily the case.
In the hypothesis that officers act within the scope of their duties (i.e they had the authority to engage in an act), their civil liability cannot be incurred. However, if said officers act outside of the scope of their duties (i.e had no authority), they cannot hide behind the corporation and can be held liable for their action. Again, in Ontario, if a Chief Technology Officer (CTO) makes a mistake while working in his department, he cannot be held personally responsible for it. However, if such CTO meddles around in the finance department of the company, he could be held personally liable for damages that may occur.
As we said, the role of officers is often confused with that of directors. This is understandable, because entrepreneurs who run start-ups often take on the roles of shareholder, director and manager all at once. That said, as we have illustrated, the role of directors differs from that of officers in many respects in Ontario.