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In our article “The 3 types of actors within a company“, we explained the 3 roles that are the director, the shareholder and the manager. Today, Lex Start explains the ins and outs of one of the pillars of the corporation: the director.
What is a director in Quebec?
In Quebec, the director is first and foremost responsible for the general supervision and management of the activities of a Québec corporation.
The directors form the “board of directors” which is responsible for making all internal and commercial decisions of the corporation. This board is also responsible for defining the company’s strategic orientations.
Under Quebec law, the first duties of the board of directors, after the incorporation of the company, are, among others, to: adopt the by-laws, authorize the issuance of shares and appoint the officers of the company.
Unless specifically mentioned in the company’s by-laws, directors are elected for a one-year term by the shareholders. These shareholders also have the power to restrict or withdraw all the powers of the directors through an unanimous shareholder agreement.
According to the Quebec Business Corporations Act, any natural person may become a director on the sole condition that he or she is not declared incapable or incapable within the meaning of the Civil Code of Quebec. To be a director, one must therefore be of legal age, not be subject to a tutorship or curatorship regime, not be bankrupt and not be subject to a court decision prohibiting one from acting as a director.
A federal corporation seeking registration in Quebec must also have a board of directors composed of 25% Canadian residents. If this board has less than four directors, at least one of them must be a Canadian resident.
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What are the duties of directors?
Being a manager of a company’s activity implies, without great surprise, duties that are regulated. According to Quebec law, a director is required to act with prudence and diligence on one hand, and with honesty and loyalty on the other hand.
The duty to act with prudence and diligence
In the course of his or her functions, a director makes important decisions. The duty to act with prudence and diligence is, among other things, part of the obligation for a director to be adequately informed before making an important decision. As we have seen above, it is not necessary to be an expert to become a director, but a director fulfills his duty of prudence and diligence by consulting and following the recommendations of a professional, when necessary.
For example: A director who chooses not to consult an accountant even though he has no knowledge of the subject matter infringes his duty of prudence and diligence when he alone validates the financial statements of the corporation.
The duty to act with prudence and diligence is also reflected in the prohibition for a director to impose on the corporation a financial obligation that it would not be able to assume.
Ex: A director who signs a contract in the name of the corporation even though the corporation does not have sufficient financial resources is in breach of his duty of prudence and diligence.
Finally, in Quebec, subject to the appointment of an officer or the existence of an unanimous shareholder agreement, the director cannot delegate the powers conferred upon him and must fulfill his role personally.
The duty to act with honesty and loyalty
A director must disclose the nature and value of any advantage he or she would have in a contract or transaction to which the corporation is a party. The duty to act with honesty and loyalty goes hand in hand with the duty to avoid any conflict of interest. A director must act in the sole interest of the corporation and may not make a decision that is motivated by his own interests or those of others.
Ex: An individual cannot be a director of two competing companies, otherwise he is in breach of his duty of honesty and loyalty.
What are the responsibilities of directors in Quebec?
The Quebec corporation has the particularity of being a legal entity in its own right. In principle, the directors cannot be held liable for the obligations contracted by the corporation. In the context of Quebec business corporations, we use the term “limited liability of directors”.
However, in certain very specific cases, it is possible to engage the personal liability of directors.
First, it should be noted that directors are personally liable when they fail to fulfill the duties mentioned above (i.e. to act with prudence and diligence, honesty and loyalty).
It is important to note that, in certain circumstances, directors may be jointly and severally liable for unpaid salaries of employees of the corporation up to a maximum of six months’ wages.
In Quebec, directors may also be required to pay the corporation the true consideration it should have received when authorizing prohibited acts such as the payment of a commission or dividend that is not permitted by the Quebec Business Corporations Act.
In short, it is important to understand that the Quebec business corporation brings a certain advantage: that of the limited liability of its directors, but it would be dangerous to think that through this mechanism a director can allow himself to take any action. Compliance with the legislative provisions must be one of a director’s primary concerns.
The important thing to remember about the role of the director is that he or she plays a key role in the Quebec business corporation. He or she is responsible for making all management decisions regarding the company’s activities and must therefore respect multiple obligations. Although the business corporation is a distinct legal entity, the director may be held personally liable for his actions.
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Do not hesitate to contact us by email or by phone, we will be happy to provide you with more details on the role and place of the director.