Directors’ Duties in Canadian Corporations

Serving as a director on a corporate board is a significant responsibility. In Canada, directors have two primary legal duties: the fiduciary duty of loyalty and the duty of care. Adhering to these obligations isn’t just good business practice—it can also help protect directors from personal liability.

1) Fiduciary Duty

Directors must act in the best interests of the corporation, which may include considering the interests of shareholders, employees, and other stakeholders. This duty demands loyalty and integrity, ensuring that decisions benefit the corporation as a whole rather than individual shareholders.

For example, directors generally cannot exploit corporate opportunities for personal gain without first offering them to the corporation. This principle is particularly relevant for board members nominated by shareholders who invest in other similar companies or verticals. Such nominee directors may feel compelled to share opportunities with their appointing shareholder. However, depending on how they handle these situations, they risk breaching their fiduciary duty to the corporation.

2) Duty of Care

The duty of care requires directors to act reasonably and make informed decisions based on adequate information. Courts typically defer to directors’ business judgment if their decision-making process is reasonable, well-documented, and conducted in good faith.

This business judgment rule protects directors who make sound decisions, even if the outcomes are not ideal. As such, proper documentation is particularly critical in high-stakes situations such as down rounds or mergers and acquisitions (M&A), where decisions can have significant impacts on shareholders and may therefore be subject to their heightened scrutiny.

Managing Conflicts of Interest

Closely related to these duties is the obligation to manage conflicts of interest. For instance, a director nominated by a venture fund that has invested in the corporation may have responsibilities to both the fund and the company. In such cases, conflicts should be handled through disclosure, recusal, or even resignation when necessary. Clear communication and formal agreements, such as information-sharing agreements, can help directors navigate these challenges while fulfilling their corporate obligations and mitigating personal liability.

Why It Matters

Understanding and upholding these duties is essential for directors to protect both themselves and the corporations they serve. By acting transparently, exercising sound judgment, and managing conflicts appropriately, directors can foster sustainable growth while minimizing legal risks.

Of course, this is only a summary of the legal expectations that directors are to follow. Please feel free to reach out and we’d be more than happy to advise you or your board on the extent of director duties and liabilities, or put in place a game plan to limit any of these risks going forward.