Directors Archives - Defamation & Business Litigation Lawyers Toronto | Grigoras Law

Director Liability: Consenting to and Voting for Certain Resolutions

Grigoras Law — Sun, 22 Jan 2023 07:13:36 +0000

In Ontario, under the Ontario Business Corporations Act (OBCA), directors of a corporation have a legal responsibility to ensure that the corporation is financially stable before making certain transactions. This includes the payment of dividends, redemption or reacquisition of shares, reduction of stated capital, or provision of financial assistance to certain non-arm’s length persons. These transactions are generally forbidden if there are reasonable grounds to believe that the corporation would be unable to pay its liabilities as they become due, or that the value of its assets would be less than the aggregate of its liabilities and some or all of the stated capital or redemption or liquidation entitlement of its shares.

According to OBCA Section 130(2), if directors vote for or consent to a resolution authorizing any of the actions listed in clauses (b) to (f), which are contrary to OBCA Sections 30, 31, 32, 37, 38, 136, 185 or 248, they are jointly and severally liable to restore to the corporation any amounts so distributed or paid and not otherwise recovered by the corporation. This means that if a corporation’s directors authorize a dividend, for example, contrary to Section 38 of the OBCA, they are jointly and severally liable to restore the amount distributed or paid to the corporation if it is not otherwise recovered.

Furthermore, according to OBCA Section 130(3), a director who has satisfied a judgment rendered under this section is entitled to contribution from the other directors who voted for or consented to the unlawful act upon which the judgment was founded. A director liable under subsection (2) is entitled to apply to the court for an order compelling a shareholder or other recipient to pay or deliver to the director any money or property that was paid or distributed to the shareholder or other recipient contrary to OBCA Sections 30, 31, 32, 37, 38, 136, 185 or 248.

It’s worth noting that there are some exceptions in the OBCA that may allow for a defence against liability for the directors. According to OBCA Section 130(6), a director is not liable under subsection (1) if the director proves that he or she did not know and could not reasonably have known that the share was issued for a consideration less than the fair equivalent of the money that the corporation would have received if the share had been issued for money.

In summary, under the OBCA, directors of a corporation in Ontario have a legal responsibility to ensure that the corporation is financially stable before making certain transactions and may be held liable for any distributions that contravene the OBCA’s solvency tests. They may also be liable for restoring any amounts so distributed or paid and not otherwise recovered by the corporation. However, there are provisions in the OBCA that may allow for a defence against liability for the directors if they can demonstrate that they did not know and could not reasonably have known about the circumstances that led to the liability.

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From Boardroom to Courtroom: Corporate Criminal Liability

Grigoras Law — Sat, 21 Jan 2023 07:29:36 +0000

In 2004, the Canadian government introduced Bill C-45, also known as the Amendments to the Criminal Code Affecting the Criminal Liability of Organizations, which aimed to address the criminal responsibility of organizations, including corporations. This bill made amendments to the Criminal Code of Canada, specifically to sections 22.1 and 22.2, which deal with the liability of organizations for crimes committed by their representatives. However, it is important to note that these amendments do not change the current laws regarding the personal liability of directors and officers.

As a director or officer of a public corporation in Ontario, it’s crucial to be aware of the legal implications of your actions. The Criminal Code of Canada includes a number of provisions that pertain to fraud, and these can apply to those in leadership positions within a company. For instance, Section 382.1 of the Code makes it an indictable offence for an individual to buy or sell securities by making use of insider information that they have acquired through their office, duties, or occupation within the corporation. Additionally, it’s also a crime to disclose insider information, or “tipping,” which can result in either an indictable or summary conviction.

The Code also states that it’s illegal to circulate or publish any false information in a prospectus, statement, or account with the intent to deceive. These types of “white collar” offences under the Criminal Code are not often invoked, but the provincial securities regulators may prosecute securities-related offences under their mandate vested in them under securities legislation.

The Ontario Securities Act (OSA) prohibits illegal insider trading and tipping. As a director or officer of a public corporation, you are considered an “insider” by definition, and it’s illegal to purchase or sell securities while in possession of “knowledge of a material fact or material change” that has not been made public. Similarly, it’s also prohibited to tip others with non-public material facts or changes unless it’s in the course of regular business.

The relevant provincial securities authority can prosecute offenders of insider trading or tipping. The OSA does provide an express defence for those accused of insider trading or tipping if they can prove that they reasonably believed the material fact or change had been disclosed at the time of their actions. Additionally, directors or officers can raise the defence of “due diligence,” even if it’s not explicitly mentioned in the law.

Penalties for violating the OSA can include fines of up to $5,000,000, imprisonment for up to 5 years less a day, or both. For insider trading or tipping specifically, fines can be as high as triple the profit made or loss avoided.

Another legislation to be aware of is the Corruption of Foreign Public Officials Act (CFPOA) which makes it illegal to bribe foreign public officials, whether the bribe is given within or outside of Canada. This includes offering or giving any money or other valuable thing with the intent to influence the official’s duties.

It’s important to note that directors and officers are not automatically held liable for criminal acts committed by the corporation solely due to their position. Like any individual, a director or officer must commit the prohibited act and have the corresponding knowledge or intent for a particular offence. However, if they are found to have directed the corporation to commit a crime, they may be charged along with the corporation.

A director or officer can become a “party” to an offence in the corporate context through a variety of actions, such as aiding or abetting the commission of an offence, engaging in criminal activity with a common intention, counselling another to commit an offence, or being an accessory after the fact. It’s important for directors and officers of organizations to be aware of these changes in the law and to take appropriate measures to ensure compliance with them.

It’s also important to note that Bill C-45 introduced the concept of “corporate culture” as a mitigating factor when determining the sentence for a corporation found guilty of an offence. This means that the courts will take into account the steps taken by the corporation to prevent and detect the illegal activity in question when determining the appropriate sentence. This highlights the importance of implementing and maintaining a strong compliance program within the organization to mitigate the risk of criminal liability.

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Incorporating Your Business

Grigoras Law — Fri, 01 Jan 2021 07:10:07 +0000

What is a Corporation

An incorporated company is one of the most common ways of conducting a business. The corporation is a separate person in the eyes of the law – it’s a separate legal entity. It’s “separate” because it’s a separate legal entity from the people who own the corporation (who are called shareholders). It’s a “person” because it has the capacity, rights, powers, and privileges of a natural person. This article aims to address some of the more important components and considerations when incorporating a company in Ontario.

Ownership and Management of the Corporation

Shareholders

The people that own the corporation are called shareholders and they are only liable for their investment in the corporation or the property that they transferred to the corporation, and nothing more. Shareholders are also generally not involved in the management of the corporation except in situations where the shareholders do want to control and manage the corporation (and take on the added liability), and this is done through the means of a unanimous shareholders agreement.

Directors

The management of the corporation is otherwise left to the directors who are the individuals elected by the shareholders to manage and supervise the management of the business and affairs of the corporation. The directors are the ones who have ultimate authority to make decisions for the corporation.

The initial first directors of the corporation must be named in the articles of incorporation. Any director(s), including any first director(s), must consent in writing to his or her election or appointment. The initial first director(s) will hold office from the time of the certificate of incorporation.

Officers

Directors may also delegate some of their powers to an officer, which makes sense given that it may be impractical for the directors to handle every single aspect of the corporation’s business. The directors can appoint and/or designate the officers of the corporation and specify what the officers’ duties are. There can be different types of offices to which an officer may be appointed and different degrees of control that are exercised by an officer; there is no real hard-and-fast rule. Some common types of officers in a corporation are the chief executive officer, chief financial officer, president, treasurer, and secretary.

How to Incorporate

Incorporating a company is done by an incorporator – who can be an individual or another corporation – and who sends the articles of incorporation to a director who endorses the articles of incorporation with a certificate of incorporation. The certificate of incorporation is proof that the company has been incorporated under the Ontario Business Corporations Act (the “OBCA”).

The articles of incorporation have a required format to them and must contain certain information. The Articles of Incorporation – Form 1 on the Ministry of Government Services requests the following information:

The corporation’s name
The corporation’s registered head office in Ontario
The number of directors. If the articles do not provide for cumulative voting, the minimum and maximum number of directors (the corporation must have at least one director except that an offering corporation is required to have three or more directors, of whom at least one-third are not officers or employees of the corporation or its affiliates)
The names and addresses for service for each of the first directors (at least 25% of the directors must be resident Canadians, or, if there are less than four directors, at least one must be a resident Canadian)
Whether there are any restrictions on the business the corporation may carry on or on the powers that the corporation may exercise
The classes and any maximum number of shares that the corporation is authorized to issue
The rights, privileges, restrictions and conditions (if any) attached to each class of shares and the authority of the directors with respect to any class of shares that may be issued in series
Whether there are any restrictions on the issue, transfer or ownership of shares
Any other provisions which the corporation wishes to include (note: you may want to deal with other matters in the corporation’s by-laws because they are easier to amend)
The name and address for service of each of the incorporators

The Corporation’s Name

The incorporated company must have a registered name and this name must be approved before the corporation can carry on business in Ontario. This requirement prevents confusion or deception from the corporation having a name similar to another registered corporation in Ontario.

The corporation can have a numbered name assigned to it (which can be changed later by filing articles of amendment) or, alternatively, it can propose its own, unique name. For a unique name, the corporation, must submit the proposed name in the articles of incorporation along with an Ontario-biased or weighted computerized search report from Innovation, Science and Economic Development Canada’s automated name search system called NUANS.

The NUANS report for the proposed name is generated separately, and, when submitting the articles of incorporation with a NUANS report for a proposed name, the NUANS report cannot be older than 90 days. There are also various rules dealing with the corporation’s name, which are governed by the OBCA and its Regulations, but which are beyond the scope of this article.

Registering a Corporate Name

As mentioned above, when filing articles of incorporation with a proposed corporate name, an Ontario-biased or weighted computerized search report from NUANS, dated no more than 90 days prior to the submission of the articles of incorporation is required. If filing the articles of incorporation electronically, they must contain the NUANS reference number, date of the report, and the proposed name that was searched. If no name is specified in the articles of incorporation, a numbered name will be assigned to the corporation.

By-Laws

Apart from certain exceptions, the business or affairs of the corporation can be regulated by by-laws that will be passed by the directors by way of resolution. Some common by-laws of a corporation include those dealing with setting a financial year-end, banking arrangements, election and appointment of directors, quorum of directors, term of directors, corporate officers, shareholder approvals, remuneration, shareholder meetings, etc.

After Incorporating

Incorporation is only the first step which allows the business to come into existence as a legal person. However, there are other steps necessary in order to carry on the corporation’s business. These other steps are referred to as the organization process and include the making of by-laws or governing resolutions by the directors (and the approval of the same by the shareholders), issuing shares, appointing officers, holding organizational meetings, and other essential steps.

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