Corporate Governance Issues

Directors owe a fiduciary duty to act honestly and in good faith in the best interests of the corporation, and a duty of care to exercise the diligence a reasonably prudent person would. The duty runs to the corporation — not to any particular shareholder or faction.

Courts generally respect reasonable business judgment made on an informed basis through a proper process. That is why the record matters: documented deliberation, disclosed conflicts, and evidence that decisions were informed are what make a decision defensible.

Conflicts must be disclosed and managed, typically by the conflicted director abstaining and, where appropriate, independent review or valuation. Related-party transactions are the most frequent source of governance disputes in private companies.

The failure is usually procedural rather than dishonest: a transaction that might have been perfectly fair, entered without disclosure or independent scrutiny, becomes indefensible precisely because the process was absent.

Canada's oppression remedy is broad, allowing a court to address conduct that is oppressive, unfairly prejudicial or unfairly disregards a shareholder's interests — and courts have wide discretion in the relief they order, including buyouts.

Other tools include derivative actions brought on the corporation's behalf, rights to corporate records and financial information in defined circumstances, and, where an agreement exists, contractual deadlock and buy-sell mechanisms. A shareholder agreement remains far more predictable than statutory remedies.

As a company approaches insolvency, directors' duties intensify and personal exposure increases — unremitted payroll taxes and certain employee entitlements are the most common sources, and continuing to incur debt while insolvent adds further risk.

Preferring one creditor, moving assets or paying selected parties in this period can be reversed and can create personal liability. This is the point at which advice should be taken before acting, not after.