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Roles of Shareholders and Directors

A. Source
The following material is excerpted from a guide on Directors' Responsibilities and Liabilities by Osler Hoskin
& Harcourt LLP.

B. Separating the Shareholder Roles and Director Roles
With Angels and venture capital investors assuming active participation in company management, there is
often some confusion about the respective roles of directors, shareholders, and management.

The role of directors is one of stewardship. Directors are responsible for managing or, under
some statutes, supervising the management of, the corporation. If the Board of Directors is
dissatisfied with company management, its recourse is through the company's CEO. If the
CEO is not performing as expected, the Board may replace him. 1

Shareholders make a financial investment in the corporation, which entitles those with
voting shares to elect the directors. Shareholders do not normally have any rights to be
involved directly in company management. Their connection to company management is
typically via the Board of Directors as described above. If shareholders are not satisfied
with the performance of the directors, they may remove the directors or refuse to re-elect

Except for certain fundamental transactions or changes, shareholders normally do not participate directly in
corporate decision-making and while, as a practical matter, boards want to know the views of the
shareholders, strictly speaking, directors are not normally required to solicit or comply with the wishes of

C. Duties of Directors
A director's duty is owed first and foremost to the corporation. This duty is grounded in basic principles of
good faith, stewardship and accountability. Requirements imposed both by common law and various statutes
seek to establish the parameters of this duty without limiting the flexibility of these principles.
1. To Whom are Directors Accountable?
Directors are required by corporate statutes to discharge their duties “with a view to the best interests of
the corporation.” Traditionally, this phrase has been interpreted to extend only to the “shareholders as a
whole.” However, in reaching their decisions, directors are often confronted with a number of competing
interests. In recent years, some courts have been prepared to give directors more scope in considering the
interests of different persons affected by corporate acts without encroaching on the principle of acting in the
corporation's best interests.
The courts recognize that acting with a view to the best interests of the corporation does not mean that
directors must disregard the interests of “stakeholders” such as employees, creditors, and the community or
country in which the corporation carries on business who may be affected by the actions of the corporation.
Considering these interests is often in the long-term best interests of the corporation. Nevertheless, no court
has ever recognized a duty to such stakeholders.
2. Directors Duty to the Interests of the Shareholders
Courts have held that directors owe a duty to the corporation and not its individual shareholders. In many
instances, the distinction is not significant, since what is good for the corporation will also benefit its
shareholders. Maximizing the return to shareholders is also, in many cases, consistent with the best

at least in part. . Voting on a matter in these circumstances would constitute a breach of their fiduciary obligation to act in the best interests of the corporation.g.interests of the corporation. it could not be said that they had not considered bona fide the interests of the shareholders. Some states permit (and. A controlling shareholder may want the corporation to take certain action that may be in its interest. The national interest may be affected by a decision to move operations offshore. The modern interpretation of a director's duty to the corporation permits directors to consider these interests in coming to a decision about what is in the best interests of the corporation. Under the corporate statutes. with some exceptions. there may be instances where the interests of the corporation and its particular shareholders or classes of shareholders diverge. Directors Duty to the Interests of Other Stakeholders Directors recognize that their decisions have an impact beyond the corporation and its shareholders. Employees and the community will be affected by a decision to close a plant. in circumstances such as takeover bids. the directors will be under a statutory obligation to declare their interest and. The right solution to these kinds of issues depends very much on the facts of each situation. Some states include local and national economies and society as a whole in the interests to be considered. a response to decisions facing boards of directors that had significant implications for stakeholders of the corporation other than shareholders. the interests of majority shareholders may not be the same as the interests of the corporation. suppliers. When Does a Conflict Arise? Directors who have an interest in a contract or proposed contract (e. Debenture holders may be affected by high-risk business strategies or by corporate reorganizations. but not necessarily in the best interests of the corporation. Such legislation was enacted in the wake of high levels of take-over activity in the 1980s (particularly by non-Americans) and was. Nevertheless. Certain American jurisdictions have statutes permitting directors to consider interests other than those of the corporation or the shareholders as a whole. 1. 3. Directors' Conflict of Interest Directors may have a number of relationships that will put them in a position of conflict or give rise to an obligation to disclose details of a relationship. directors have an interest in a contract not only if they themselves are a party to the contract. to refrain from voting on the matter. If the contract is material from the corporation's perspective. but material interest is generally interpreted to mean an interest that is sufficient to result in some benefit to the director. These state statutes have been the subject of extensive criticism and in some states have been repealed. The statutes do not define when a director has a material interest in a person. Similarly. Additionally. and were deflected in their commitment to that policy as a result. creditors and consumers. a goal which the directors may conclude is not necessarily in the long-term best interests of the corporation. Directors may feel a responsibility to consider the interests of these stakeholders. but also if they have a material interest in any person who is a party to the contract. a term sheet) with the corporation must consider the matter carefully. If today the directors of a company were to consider the interests of its employees. D. require) directors to consider the interests of employees. if the directors were to consider the consequences to the community of any policy that the company intended to pursue. no one would argue that in doing so they were not acting bona fide in the interests of the company itself. The interests of the common shareholders may lie in realizing a shortterm gain on their investment.

it may be necessary or appropriate for a director to resign. General The directors and not the shareholders are responsible for the management of the corporation. vote without regard for the interests of other shareholders. The corporate statutes require directors to disclose in writing to the corporation their interest in any material contract or to request that the interest be entered in the minutes of a meeting of the board. First. Reviewing the Role of Shareholders 1. those directors may. E. except in certain limited circumstances. these provisions apply only to contracts that are material to the corporation. its shareholders or. but also the discussion. the director may be required to account to the corporation or its shareholders for any gain or profit realized from the contract. may apply to the court to have the contract set aside. however. 2. Further. The nature of a director's interest must be disclosed in sufficient detail to allow the other directors to understand what the interest is and how far it goes. not to contracts that do not meet this threshold. However. from voting when not entitled to do so. Such directors must. certain matters are considered so fundamental that they require the approval of the shareholders.Directors who are also substantial shareholders of the corporation are not automatically in a position of conflict. the corporation. In appropriate circumstances. Under the Canada Business Corporations Act these matters include: . directors will declare their position and absent themselves not only from the vote. Second. however. They apply only to certain contracts or proposed contracts with the corporation and would. In voting on matters in their capacity as shareholders. conflict and what seems to be the right thing to do. however. arguably. As a result of this last exception. Voting and Abstaining from Voting Directors cannot normally vote on a contract in which they have a material interest. In voting as directors. directors will take themselves completely out of the consideration of a particular matter where there may be a perception of conflict or a perception that they may not bring objective judgment to the consideration of the matter. under the corporate statutes. for example. There are exceptions for contracts that involve the directors' remuneration or an indemnity in which they have an interest. directors who serve on boards of affiliated corporations are not required to refrain from voting on contracts between the two corporations that they serve. They do not confine the restrictions to the statutory requirements. In particularly difficult situations. but concern themselves with the issue of perceived. separate their role as directors from their interests as shareholders. However. securities regulators. may not protect them from liability under the corporate statutes. Directors should be aware that the specific provisions in the corporate statutes dealing with a director who is in a position of conflict apply only in relatively limited circumstances. in some cases. in some cases. the director may nevertheless avoid these results if the contract is confirmed or approved by special resolution of the shareholders after appropriate disclosure of the director's interest in the contract. they must still act in the best interests of the corporation in respect of any matter before them. directors should be aware that abstaining from voting. Two results may flow from a director's failure to disclose an interest in a material contract or. most directors apply the rules broadly. Under some statutes. If the director failed to make the necessary disclosure and the contract was not reasonable and fair to the corporation at the time it was approved by the shareholders. In practice. Whether the contract is material will be determined with reference to the materiality threshold of the corporation. of course. and actual. there is no protection for the director under the corporate statute. not include litigation. In practice. Exceptions are also made if the contract in question relates to security for money lent to the director or obligations undertaken by the director for the benefit of the corporation or if it relates to an affiliate of the corporation. A director's interest must also be disclosed within the timeframe prescribed by the relevant corporate statute.

on occasion. whether or not the shares otherwise carry voting rights. and. the change must also be approved by a majority of the series or class of shares whose existing rights may be affected by the change. this may be a difficult course to take. proxy battles do occur which result in the replacement of the board of directors. Shareholder Ability to Change the Board Shareholders who are dissatisfied with how the directors are running the corporation may remove the directors or refuse to re-elect them.  Confirming by-laws. If a fundamental change affects holders of certain series of classes of shares differently than others. Similar considerations will certainly arise in the future in the context of other decisions facing public companies. A common example are key management decisions and financing decisions. Effecting certain amalgamations or reorganizations. A number of boards of directors determined that the advice of the shareholders through a shareholders' vote was essential well before the view of the regulators to the same effect was known. whether or not they are legally required to do so. public corporations must also comply with the requirements of the provincial securities commissions and the stock exchanges which impose requirements for shareholder approval. The exceptions are large institutional investors who have. Note: Especially in private companies involving venture capital investment. transfer or ownership of shares. 2. In practice. Although the corporate statutes require a corporation to provide a list of shareholders to any shareholder who requests it. thereby enabling shareholders to mount a proxy battle over the election of directors. The issue of whether shareholder approval was necessary to put a shareholder rights plan in place was commonly debated when shareholder rights plans first came into use in Canada. made their voices heard at annual meetings or in private meetings with representatives of a corporation prior to a shareholder meeting.  Increasing or decreasing the number of directors or the minimum or maximum numbers of directors. Occasionally. there may be issues which the directors determine should be put to the shareholders as a matter of good corporate governance. Finally.  Adding or removing any restrictions on the business that the corporation may carry on. many shareholders do not have the time or resources required to counter a management proposal. it is not uncommon for certain decisions that are normally made by the Board of Directors to require venture capital investor approval.  Changing the corporation's share capital. 1 .  Adding or changing restrictions on the issue.  Selling all or substantially all of the corporation's assets. particularly where the shares of the corporation are widely held. As noted above.