Canadian Articles of Incorporation – Part 4 of 4: What to consider when selecting Directors for my business?

Links from this article: Canadian Controlled Private Corporation Lifetime Capital Gains Exemption here Canada Business Corporations Act

Canadian Articles of Incorporation – Part 4 of 4: What to consider when selecting Directors for my business?

Introduction Firstly, this post will outline exactly what a Director is responsible for in a business, and subsequently, the importance of strategically selecting the number and attributes of your business’ director(s).

What is a Director?

A Director of a corporation is an individual that belongs to the corporation’s Board of Directors. The Directors of a corporation are accountable to the corporation’s members/shareholders. The Board and its Directors are responsible for supervising and managing the activities of the corporation. Typically, Directors are appointed by shareholders of the corporation, and this process is governed by the Articles of Incorporation.

Directors are required to act in the interest of the corporation and its shareholders. Directors have both a duty of care and a fiduciary duty towards the corporation. The Director’s duty of care includes exercising the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Similarly, the Director’s fiduciary duty X amounts to ensuring that the corporation’s interests are paramount in the Director’s decision making.

A Director’s failure to meet these two standards may result in liability on behalf of said Director. Additionally, a Director may be liable to the corporation for specific employment, tax, environmental and other legislative impositions of personal liability on Directors in specific circumstances. One should strongly consider the risks if being offered a Director position with a corporation, and should seek legal advice prior to accepting such a position. There are certain steps a potential Director may take to mitigate their risk, such as acquiring Directors Liability Insurance.

Can I be both a Director and the business’ Founder/CEO?

Absolutely! One can be the sole shareholder, Director and Officer in a corporation.

Requirements for Directors

• (1) Number of Directors: A corporation in Canada must have at least one director. Typically with a startup business, the founder will fill the business’ Director, Officer(s), and Shareholder roles. As the company grows and the startup takes on more investors, these investors may demand a position on the Board as a condition for their investment. The founder/majority shareholder should try to ensure that they maintain control over the Board in order to preserve their autonomy and self-direction in operating and growing the business.
• (2) Quorum: Quorum is the minimum number of Directors that the Board of Directors must have present in order to pass a resolution. A Board of Directors can continue to govern when Directors are missing, so long as quorum is achieved. When quorum is not achieved, the Board of Directors can continue to govern the business in limited ways, but may not pass resolutions that are required for many of the Board’s most crucial responsibilities. (fix this part up!)
• (3) Other Director Requirements:

(a) To be a Director in Canada, an individual must:

• be at least 18 years old;
• not have been declared incapable by a court in Canada or in another country; • be an individual (a corporation cannot be a director); and
• not be in bankrupt status.

(b) Residency of Directors:

When selecting Directors for a corporation, the controlling shareholder(s) (whom will usually be the Founder in the context of a startup) should ensure that the business meets the definition of a Canadian Controlled Private Corporation in order to eligible for reduced tax rates on active income, have the ability to utilize the Small Business Dividend Tax Credit when withdrawing profits from the business, and have the ability to depend on the Lifetime Capital Gains Exemption up to $800,000+ per individual.

In order to be eligible for these benefits, at least 25% of Directors must be resident in Canada. If a corporation has less than four Directors, at least one must be resident in Canada. To see the factors that determine residency, please click here.

(c) End of Director’s term:

Directors may leave or be removed from the Board of Directors for various reasons. A corporation must have at least one active Director, otherwise it may be dissolved by Corporations Canada as per subsection 212(1) of the Canada Business Corporations Act. Directors may leave or be removed from the Board of Directors by means of:

• Removal by the shareholders
• Disqualification (such as entering bankrupt status)
• Resignation
• Death

Drafting the Articles of Incorporation is a crucial consideration for any DIY drafter. You can use Clausehound.com’s incorporation templates to ensure that your incorporation process is as easy and cheap as possible!

When drafting your Articles of Incorporation, you will want to consider the information in the following blogs:

Currently Live!

• 1 of 4 – Introduction to Incorporating a business
• 2 of 4 – Which Articles of Incorporation should my company use?
• 3 of 4 – Selecting and protecting your company’s name
• 4 of 4 – What to consider when selecting Directors for my business?

Coming Soon!

• Part 5 – What to consider when selecting the corporation’s share attributes?
• Part 6 – What type of restrictions should be in place?
• Part 7 – Other Important Information
• Part 8 – What’s else should I consider before developing my business?

For access to Clausehound’s blogs related to various legal & business topics, please visit blog.clausehound.com.

Draft on!