OBCA vs CBCA — Choosing the Governing Statute
Ontario corporations are governed by the Business Corporations Act RSO 1990 c B.16 (OBCA). Federal corporations are governed by the Canada Business Corporations Act RSC 1985 c C-44 (CBCA). The choice of governing statute affects: directors' residency requirements (CBCA requires 25% Canadian resident directors — OBCA has no residency requirement), shareholder remedies, and securities regulation triggers.
Ontario corporations that carry on business interprovincially or internationally often prefer CBCA incorporation to access federal court jurisdiction for oppression remedies and to avoid the OBCA's requirement for an Ontario registered office. The oppression remedy under OBCA s.248 and CBCA s.241 are substantively similar, both applying theBCE Inc v 1976 Debentureholders 2008 SCC 69 framework.
Directors — Appointment, Removal, and Composition
Number of Directors
OBCA s.115 requires at least one director. Offering corporations (those distributing securities to the public) must have at least three directors, at least two of whom are not officers or employees of the corporation or its affiliates (OBCA s.115(2)). The articles fix the number of directors or a minimum-maximum range.
Election and Appointment
Directors are elected by ordinary resolution of shareholders at each annual meeting (OBCA s.119(4)). The articles may provide for cumulative voting (OBCA s.120) — each shareholder has votes equal to shares held multiplied by number of directors to elect, all castable for one candidate. If the articles are silent, cumulative voting does not apply.
Between meetings, the board may fill a casual vacancy (OBCA s.124(1)) unless the articles require a shareholder vote. A director appointed to fill a vacancy holds office only until the next meeting at which directors are elected.
Removal
Shareholders may remove a director by ordinary resolution before the director's term expires (OBCA s.122(1)). A director may also resign in writing. A director ceases to hold office if disqualified (undischarged bankrupt, mental incapacity, criminal conviction as specified under articles, or non-individual: OBCA s.118(1)).
Fiduciary Duties of Directors and Officers
Statutory Duties — OBCA s.134
Section 134 of the OBCA imposes two duties on every director and officer:
- Fiduciary duty: Act honestly and in good faith with a view to the best interests of the corporation (s.134(1)(a)).
- Duty of care: Exercise the care, diligence, and skill that a reasonably prudent person would exercise in comparable circumstances (s.134(1)(b)).
These duties run to the corporation, not to individual shareholders:Peoples Department Stores Inc (Trustee of) v Wise 2004 SCC 68. Directors cannot be held directly liable by shareholders for breach of OBCA s.134 duties — the remedy belongs to the corporation through a derivative action.
The BCE Framework — Whose Interests?
BCE Inc v 1976 Debentureholders 2008 SCC 69 confirmed that directors owe their fiduciary duty to the best interests of the corporation as a whole — a concept that is not synonymous with maximizing shareholder value. Directors may consider the interests of shareholders, employees, creditors, consumers, governments, and the environment when they are affected by the corporation's actions, to the extent that doing so serves the corporation's best interests.
However, BCE also confirmed that consideration of stakeholder interests does not give stakeholders a right to demand particular outcomes. Stakeholders have no free-standing claim that their interests be prioritized over those of the corporation.
Business Judgment Rule
Courts will not substitute their business judgment for that of directors acting in good faith and on a reasonable informed basis: Peoples Department Stores (business judgment rule adopted from US law). The rule provides that a director's decision is entitled to deference if the director:
- Was disinterested and independent;
- Was reasonably informed; and
- Acted in an honest and good-faith belief that the decision was in the corporation's best interests.
The business judgment rule is a shield — it protects against liability for good faith business decisions that turn out poorly. It does not protect self-dealing transactions or decisions made in bad faith.
Conflict of Interest — OBCA s.132
A director or officer who is a party to, or has a material interest in a person who is party to, a material contract or proposed material contract with the corporation must disclose the nature and extent of their interest (OBCA s.132(1)). A director with a disclosed conflict must not vote on the contract (s.132(5)). A contract approved without disclosure is voidable at the option of the corporation.
Exceptions where director may vote (s.132(7)):
- Contract relating to the director's remuneration as director or officer
- Contract for indemnity or insurance for the director
- Contract with an affiliate
Shareholder Meetings
Annual Meetings
OBCA s.94 requires an annual meeting of shareholders to be held within 18 months of incorporation and subsequently no later than 15 months after the last annual meeting. At the annual meeting, shareholders must: receive financial statements (s.154), elect directors (s.119), and appoint the auditor (if required: s.149).
Special Meetings
Special meetings may be called by the board (OBCA s.96) or by shareholders holding not less than 5% of the voting shares (s.105 — demand for meeting). If the board fails to call the meeting within 21 days of the demand, the shareholders may call it.
Notice
Notice of a shareholders' meeting must be given not less than 10 days nor more than 50 days before the meeting (OBCA s.96(3)). Notice must state the time, place, and business to be transacted. Certain business (e.g., amending articles, amalgamation, dissolution) requires a special resolution (two-thirds of votes cast: s.1(1)).
Quorum
A quorum is present when holders of a majority of the shares entitled to vote are present or represented by proxy (OBCA s.100(1)), unless the articles otherwise provide.
Proxies
Shareholders may appoint a proxy to attend and act on their behalf (OBCA s.110). A proxy must be in writing, signed, and deposited with the corporation before the meeting. Solicitation of proxies from more than 15 shareholders triggers statutory proxy circular requirements (s.111).
Unanimous Shareholder Agreements — OBCA s.108
A unanimous shareholder agreement (USA) is an agreement among all shareholders of a corporation (OBCA s.108(2)) that restricts the powers of the directors to manage the business and affairs of the corporation. Where a USA restricts directors' powers:
- The shareholders to whom the power is transferred have the rights and duties of directors (s.108(5))
- Directors are relieved of the duty to manage the restricted powers (s.108(5))
- The existence of a USA must be noted on share certificates (s.108(6))
- A purchaser who acquires shares without notice of the USA is not bound by it (s.108(7))
USAs commonly include: drag-along and tag-along rights, shotgun buy-sell provisions, right of first refusal on share transfers, unanimous consent requirements for major decisions, restrictions on dividends and borrowing, deadlock resolution mechanisms, and non-competition covenants.
Director Personal Liability
Directors can be personally liable under the OBCA and other Ontario statutes:
- Wages — OBCA s.131: Directors are jointly and severally liable for up to six months' wages for employees if the corporation is unable to pay; liability survives two years after ceasing to be a director
- Environmental liability: Directors of corporations that cause environmental damage can be personally liable under the Environmental Protection Act RSO 1990 c E.19 and Ontario Water Resources Act RSO 1990 c O.40
- Tax — Income Tax Act s.227.1: Directors are jointly and severally liable for source deductions (CPP/EI/payroll taxes) not remitted by the corporation; two-year limitation after ceasing to be a director; due diligence defence available
- HST — ETA s.323: Directors personally liable for unremitted HST; same framework as ITA s.227.1
- Trust funds — OBCA s.38: Directors personally liable for dividends declared when the corporation is insolvent or that would render it insolvent, and for unauthorized repurchases of shares
Due Diligence Defence
For tax remittance liability (ITA s.227.1(3) and ETA s.323(3)), a director who exercised the degree of care, diligence, and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances is not liable. Soper v Canada[1997] 3 FC 242 (FCA): inside directors (involved in day-to-day management) are held to a higher standard than outside directors (no involvement in daily operations).
Indemnification and Insurance
OBCA s.136 permits the corporation to indemnify directors and officers against costs incurred in defending proceedings if: the director/officer acted honestly and in good faith with a view to the best interests of the corporation; and in criminal or administrative proceedings, had reasonable grounds to believe the conduct was lawful. OBCA s.136(4) requires mandatory indemnification where the director/officer was substantially successful on the merits.
Directors' and officers' liability insurance (D&O insurance) is standard in larger Ontario corporations. The policy typically covers defence costs and judgments for claims against directors and officers for alleged wrongful acts in their corporate capacity, subject to exclusions for fraud, criminal conduct, and claims covered by other insurance.