SERVING ON A BOARD OF DIRECTORS… VOLUNTARILY, PAID, OR AS A CORPORATE OFFICER?

SERVING ON A BOARD OF DIRECTORS…

VOLUNTARILY, PAID, OR AS A CORPORATE OFFICER?

Whether you are appointed due to your role within a company or invited as an honorary member to serve on the board of directors of a company or organization, are you aware that you could incur personal liability?

Every legally constituted business or organization has its own legal existence. Its destiny is generally determined by its directors, who may or may not be shareholders. Shareholders invest funds in exchange for an ‘ownership’ percentage of the company; the directors convened in a board, make management decisions for the company, and may delegate certain decisions to committees or executives. Although shareholders are allowed to act in their own interests, the same does not apply to directors, who must always ensure the best interests of the company or organization.

Expressing dissent:

An administrator who does not share the ‘majority opinion’ regarding a board decision has an interest in formally expressing their disagreement in the meeting minutes. For example, if a board of directors decides to pay a dividend to shareholders at the expense of creditors (beyond a threshold established by law), this decision could be overturned and require administrators who allowed the payment of such dividends to reimburse the company.

It is important to emphasize that an administrator who does not formally express disagreement with a proposed resolution is deemed to have voted in favor of it if accepted during a board meeting, even if absent; they may be personally liable for the financial consequences that ensue. Expressing disagreement can also form the basis of a legal defense in the event of legal action taken against the company or organization accused of committing a civil or criminal wrong, or acting in bad faith or fraudulently.

Another effective protective measure is to subscribe, for the benefit of administrators, to a liability insurance policy that indemnifies them in case of unintentional wrongdoing.

Conflict of Interest:

It may happen that an administrator is called upon to make decisions on matters directly or indirectly affecting their professional or personal activities. This administrator would potentially be in a conflict of interest situation. Hence, they must disclose their interest before the discussion begins and choose to withdraw and abstain from voting on the ensuing resolution. The administrator must not only avoid a conflict of interest, but even the appearance of a conflict, which could be detrimental to both the individual and the company or organization. Therefore, the board will regularly require a declaration of interests at the beginning of meetings to identify situations that may lead to closed-door discussions or the exclusion of one or more concerned administrators from debates.

“Payable Bankruptcy”:

We are all familiar with the story of an entrepreneur who goes bankrupt, depriving creditors of thousands of dollars, only to resume business the next day under a new business name. Often, these businesses have a single leader who is both a shareholder, a board director, and an executive. In case this entrepreneur acted in bad faith or fraudulently with the intent to harm suppliers, employees, or other creditors, the court may lift the corporate veil that otherwise isolates the company’s assets from those of its administrator. Such action will be particularly useful when the main objective pursued by the administrator in creating a company is to shield their personal assets from the creditors of their business with the intention of committing fraud.

WARNING: The information contained in this article, while of a legal nature, does not constitute legal advice. It is recommended to consult with a professional for advice that will address your specific situation.