Tips for the New Entrepreneur Part 3: Overview of Corporate Governance

By Merovitz Potechin on Tuesday July 9, 2019.

This third blog is an introduction on corporate governance issues and is part of a new series entitled “Tips for the New Entrepreneur” aimed at providing a New Entrepreneur with practical tips and pointers for exploring legal issues when setting up and growing a new business. These blogs may also provide, for your convenience, key official sources of reference.  

What Does A Corporate Governance Structure Look Like?

Now that you have decided to incorporate your new company either federally or provincially, the next step is to establish a robust, yet nimble, corporate governance structure based on your business requirements and good corporate principles. 

The corporate governance structure usually distributes the rights and responsibilities among three main levels of decision-making stakeholders or groups: (1) the Shareholders, (2) the Board of Directors and (3) the Officers.  It is important to know that some of these obligations are prescribed by provincial and federal legislation. 

1. The Shareholders of Your Corporation

The Shareholders are the owners of the Corporation.  They invest in the company by purchasing one or more shares directly from the company or from an existing Shareholder who sells the shares it currently owns.  The Shareholder’s liability in the Corporation at the time of purchasing its shares is usually limited to the amount paid for the shares.

The Articles of Incorporation determine the specific rights and privileges attached to the shares which may include (1) the right to vote and be notified about shareholders’ meetings; (2) the right to receive dividends; and (3) the right to receive a portion of the remaining property of the corporation upon dissolution. They also have the very important role to elect and dismiss the Directors.

A critical aspect of share ownership pertains to the “controlling interest” that may be held by the Majority Shareholders whereby one or a group of shareholders hold more than 50% of the voting shares of the Corporation.  Minority Shareholders, for their part, own less than 50% of the voting shares. Consequently, this implies that unless otherwise specified in a shareholder’s agreement the Majority Shareholders basically determine the composition of the Board of Directors.  

2. Its Board of Directors

The role of the Directors is to manage, or supervise the management of, the business and affairs of the Corporation.  A Director must be an individual who is at least 18 years old, not have been declared incapable by law and not be in bankrupt status. The number of Directors is designated by the Articles of Incorporation and at least 25% of the Directors must be resident Canadians. Each Director usually has only one vote on any decision taken at the Board of Directors.  The Directors may also select the Officers who will manage the day-to-day business operations of the Corporation.  The Directors have a high level of discretion in managing the affairs of the Corporation.  There is an overarching principle that the Directors must exercise sufficient oversight over the business affairs such that certain matters cannot be delegated to others such as:

• Approval of the Financial Statements
• Issuance of shares and declaration of dividends
• Calling Board of Directors’ or Shareholders’ meetings
• Nominating Directors

3. And Its Corporate Officers

The Officers of the Corporation are usually responsible for the day-to-day management of the business and affairs of the Corporation. Some of the standard officer positions are the President, the Secretary and the Treasurer.  One person can hold the three positions simultaneously. The Officers are appointed by the Board of Directors and their respective duties are determined by the Directors and by the by-laws of the Corporation.  You can appoint any individual as an Officer of your Corporation and this person does not have to be a Director or own any shares in your company.

Pursuant to the Canada Business Corporations Act (the “CBCA”) and the Ontario Business Corporations Act (the “OBCA”), any privately-held corporation must have at least one Shareholder and one Director. It is noteworthy that in some small corporations, it is possible for the same person to be the sole shareholder, the sole director and only officer and therefore perform all associated duties.

What Are My Key Responsibilities And Accountabilities As A New Shareholder And/Or As A New Director Of The Corporation?

As a Shareholder, your basic rights and obligations are determined by the provincial or federal corporate statutes under which the company is incorporated.  They include:

• Responsibility for oversight and monitoring of the company’s performance by reviewing corporate financial statements and directors’ reports, appointing an auditor (or waiving the requirement for an audit of the financial statements);
• Participating in Shareholders Meetings and voting on key matters such as fundamental changes to the constitution of the corporation including its capital structure, nominating and appointing directors, creating and modifying the corporation’s by-laws;
• Furthermore, the Articles of Incorporation, the corporate by-laws and a Shareholder’s Agreement can create additional rights, obligations and restrictions for any and/or all groups of shareholders of a company.

As a Director, you have the all-encompassing fiduciary duty and duty of care.  These duties are included in Section 122(1) of the CBCA, or Section 134(1) of the OBCA:

“Every director and officer of a corporation in exercising his or her powers
and discharging his or her duties to the corporation shall, (a) act honestly
and in good faith with a view to the best interests of the corporation; and
(b) exercise the care, diligence and skill that a reasonably prudent person
would exercise in comparable circumstances.”

To fulfil your fiduciary duty, you must ensure that the interests of the corporation are always paramount.  This means, for example, that the Director acts in good faith and places the interest of the Corporation over others and must not disclose corporate confidential information.  Under the premise of its fiduciary duty, the Director must also proactively disclose any conflict of interest it may have with the Corporation and abstain from voting on any such matter in accordance with the applicable legislation (Section 132(1) of the OBCA; Section 120(1) of the CBCA).

The Supreme Court of Canada has also stated that the duty of care is relevant to the assessment of the “standard behaviour that should reasonably be expected of a director in similar circumstances”. It is also interesting to note that while this is an objective test, the competence expected of any one director may vary based on the professional experience of such Director.  Consequently, a Director should be able to demonstrate that it acted with honesty and diligence by reviewing the information provided and documenting the Board of Directors’ decision-making process to be able to demonstrate that it consulted experts as required and exercised due diligence in reaching its decisions.

Finally, the CBCA, the OBCA and other statutes dealing with specific matters such as income tax, the environment or in relation to health and safety can impose certain specific liabilities on directors of a corporation.  For example, in certain circumstances, the directors of a corporation may be jointly and severally liable to employees for up to six months’ worth of unpaid salaries and associated source deductions.

What are Recent Changes or New Corporate Obligations that I Should Know About as A New Entrepreneur?

After your company has been duly incorporated and you have received your Articles of Incorporation, the Corporation has certain ongoing corporate obligations. They include the preparation of annual financial statements, appointing auditors (or waiving such appointment) and maintaining corporate records at its registered office including the Articles of Incorporation, By-Laws and all amendments thereto, a copy of any Shareholders’ Agreement, minutes of meetings and resolutions of Shareholders and/or of the Directors and corporate registers of the shareholders, directors and officers of the Corporation.

Recent changes introduced to the CBCA require that privately-held corporations that are incorporated federally collect and retain additional information with respect to individuals who exercise “significant control” over the corporation.  More specifically, the shareholders registry of these corporations will need to be updated with additional information on any individual with “significant control” whereby:

• such individual is the registered or beneficial owner, or has direct or indirect control, over a number of shares that carry at least 25% of the voting rights attached to all of the corporation’s outstanding voting shares, or is equal to at least 25% of the fair market value of all of the corporation’s outstanding shares; or any individual who has any direct or indirect influence such that if exercised would result in the control in fact of the corporation.
• Two or more individuals with joint ownership of a significant number of voting shares may each considered to be an individual with “significant control”.
• The updated Shareholders Register will contain the following information regarding all individuals with “significant control: (1) their name, date of birth, and last known address; (2) their jurisdiction of residence for tax purposes; (3) the date on which the individuals acquired or lost significant control status; (4) a description of how the individual qualify for the “significant control” status such as its right, title and interest in the voting shares of the corporation; (5) steps taken to identify all individuals with “significant control” and to ensure that the new registry is accurate and up-to-date; (6) any other prescribed information to be determined through the associated regulations in the future.

Additional Sources of Reference:

• Share structure and shareholders, Innovation, Science and Economic Development Canada website: https://www.ic.gc.ca

• Business services – Service Ontario (Start, dissolve and change a corporation): https://www.ontario.ca/page/business-services

• Ontario Business Corporations Act, R.S.O. 1990, c. B.16, Sections 132-134, 149, 154: https://www.ontario.ca/laws/statute/90b16
  
• Canada Business Corporations Act, R.S.C. 1985, c. C-44, Sections 120-122, 140: https://laws-lois.justice.gc.ca

• Budget Implementation Act, 2018, No.2 (Bill C-86): https://www.parl.ca/

For experienced advice regarding corporate governance matters, contact the Business Law Team at Merovitz Potechin LLP.