Legal Obligations for Directors

Duty

The Acts in each province impose a duty on every director and officer that they must, in exercising their powers and performing their duties of office:

  • act honestly and in good faith with a view to the best interests of the cooperative; and,
  • exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

These duties are owed exclusively to the cooperative and not to any one or more of the members of the cooperative.

Directors cannot place their own private interests in conflict with their duties owed to the cooperative. A director cannot take personal benefit from his/her position and must disclose any conflict or potential conflict to the board in a timely fashion.

Best Interests

When considering the best interests of the cooperative, directors are expected to consider the interests of the cooperative’s members/shareholders as a collective whole rather than thinking only of the cooperative as an abstract legal entity. This means taking into account the interest of all the members/shareholders and not allowing one sectional interest to prevail over all the others. In general, directors and officers act in the cooperative’s best interests when they act in ways that maximize profits and take into consideration the interests of all the members/shareholders.

Confidentiality

The general principles of director confidentiality are:

  • Directors have no obligation to share board minutes or the details of board discussions with anyone outside the board, not even members or employees of the cooperative; and,
  • Directors must not share sensitive information from board minutes or board discussions with anyone outside the board, not even members or employees of the cooperative.

As a part of a director’s duty of loyalty, they must keep confidential board minutes and the details of board discussions. Any communications from the board should come from the board and not from individual members. Breach 1 of the duty of confidentiality could result in damages to the cooperative for which a director may be found liable.

Statutory Duties

There are a number of legal requirements whereby a director may be found personally liable. These include potential liability to the cooperative’s employees for unpaid wages and liability to the cooperative where the directors have voted to issue shares in the cooperative to someone for less than fair value or where the directors have voted to redeem shares contrary to the Act. Be sure to review the Act in your jurisdiction to determine what specific liability is placed on directors. As well, personal liability can be incurred by a director where the cooperative commits an offence under a number of acts including the Canadian Environmental Protection Act.

Good Management

Upon appointment as a director:

  • Become familiar with the coop’s policies and the current structure of management;
  • Become familiar with the nature and extent of the coops articles of incorporation, its bylaws and its organizational objectives;
  • Determine the degree to which indemnification of directors is provided through agreement, bylaws and/or through directors’ liability insurance.

On an ongoing basis:

  • Attend all or at least the vast majority of board meetings;
  • Prior to meetings, ensure you have received and reviewed all documents and reports on which voting is anticipated;
  • Review in detail all minutes of meetings and ensure that any clarifications and corrections are brought forward prior to approval;
  • Review in detail all financial statements and ask questions for clarification;
  • Obtain written legal opinions for any action to be taken by the board which is outside the directors’ expertise;
  • Obtain written professional opinions from specialists on whose advice the board is expected to act;
  • Vote against any expenditures if there is a question about the solvency of the cooperative;
  • Inquire on at least an annual basis as to whether the cooperative is up to date on tax payments, EI and CPP remittances;
  • Implement controls for the execution of cheques and contracts;
  • Comply with the duty of confidentiality;
  • Avoid or disclose any conflict of interest in a timely fashion; and,
  • Do not leave decision making to other directors; you rely on the other directors and officers at your risk.