We often hear from clients who tell us they are about to make an investment in a private company, and want to know if they should also become a director of the company.
There are reasons why becoming a director in such a circumstance might be beneficial, but there are also risks that you need to understand.
The following are some of the benefits to becoming a director:
- As a director, you will be entitled to all information concerning the company. Nothing
can be kept from you if you ask for it. This puts you in the best position to monitor the
activities of the company.
- As a member of the board of directors, you will have the best access to senior
management and thus will be in a best position to hold them accountable and for you to
provide strategic guidance to them.
- You will be in the best position to ensure the company follows sound financial practises
and fulfills its legal obligations.
There are numerous statutes that impose personal liability on directors. These include potential personal liability for:
- unremitted income tax source deductions,
- unremitted HST,
- unpaid wages and vacation pay, and
- breach of environmental laws.
What can you do to mitigate the risk of being a director?
Consider declining the offer to be a director, and attempt to get the same rights to access of information through a properly worded shareholders’ agreement. This could include a right to attend any directors’ meeting.
If you do decide to become a director:
- first perform reasonable due diligence on the company before accepting the appointment, including an assessment of the financial statements, reference check with the owner manager and current and past board members, as well as professional advisors, bankers, lenders, and investors.
- take you job seriously, and pay attention to information you do receive. Review the role of the board, and your role on the board with the person who appoints you.
- insist that the board meets regularly so that you are always up to date on the affairs of the company.
- always attend board meetings. Absentee board members significantly increase their exposure to risk.
- make financial statements a part of every meeting of the board.
- keep a file on all board materials during your tenure for at least 3 years after your cease to be a director.
- make sure the company has and uses adequate professional advisors (accountants, lawyers, etc.)
- ask about the usual indemnity for directors in the company by-laws, and obtain a copy.
- maintain appropriate director’s liability insurance.
The preceding is a short overview and is not meant to be taken as legal advice. Directors’ duties are complex and have serious consequences for failing to properly discharge them. If you are thinking about being a board member of a company, legal advice is necessary.
Need advice? If you need help, contact Mihkel Holmberg or Kate Watson for expert legal advice concerning your business
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HOLMBERG WATSON BUSINESS & ESTATE LAWYERS
This newsletter is produced by the business lawyers at Holmberg Watson Business & Estate Lawyers. The information in this newsletter is general information only and should not be considered exhaustive or treated by readers as legal advice and ought not be relied upon without further, detailed legal counsel being sought.