Shareholders and board of directors relationship

What Is the Relationship Between a Corporation & Its Shareholders? | Your Business

shareholders and board of directors relationship

B. Separating the Shareholder Roles and Director Roles If the Board of Directors is dissatisfied with company management, its recourse is will put them in a position of conflict or give rise to an obligation to disclose details of a relationship. Historically, board directors have had little or no direct contact with The limited relationship between board directors and shareholders. The relationship between a privately held corporation and its shareholders depends What Is the Difference in the Board of Directors & the Stockholders of a.

Legal Relationship Between Shareholders & CEOs

When Does a Conflict Arise? Directors who have an interest in a contract or proposed contract e. If the contract is material from the corporation's perspective, the directors will be under a statutory obligation to declare their interest and, with some exceptions, to refrain from voting on the matter.

Voting on a matter in these circumstances would constitute a breach of their fiduciary obligation to act in the best interests of the corporation.

Under the corporate statutes, directors have an interest in a contract not only if they themselves are a party to the contract, but also if they have a material interest in any person who is a party to the contract. The statutes do not define when a director has a material interest in a person, but material interest is generally interpreted to mean an interest that is sufficient to result in some benefit to the director. Directors who are also substantial shareholders of the corporation are not automatically in a position of conflict.

Such directors must, however, separate their role as directors from their interests as shareholders.

The Relationship between the Board of Directors and the Management

In voting on matters in their capacity as shareholders, those directors may, of course, vote without regard for the interests of other shareholders. In voting as directors, however, they must still act in the best interests of the corporation in respect of any matter before them.

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. Whether the contract is material will be determined with reference to the materiality threshold of the corporation.

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. A director's interest must also be disclosed within the timeframe prescribed by the relevant corporate statute. Voting and Abstaining from Voting Directors cannot normally vote on a contract in which they have a material interest. There are exceptions for contracts that involve the directors' remuneration or an indemnity in which they have an interest.

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. As a result of this last exception, directors who serve on boards of affiliated corporations are not required to refrain from voting on contracts between the two corporations that they serve.

shareholders and board of directors relationship

Two results may flow from a director's failure to disclose an interest in a material contract or, in some cases, from voting when not entitled to do so. First, the director may be required to account to the corporation or its shareholders for any gain or profit realized from the contract. Second, the corporation, its shareholders or, in some cases, securities regulators, may apply to the court to have the contract set aside.

Under some statutes, 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. 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, there is no protection for the director under the corporate statute.

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. They apply only to certain contracts or proposed contracts with the corporation and would, arguably, not include litigation, for example.

Further, these provisions apply only to contracts that are material to the corporation, not to contracts that do not meet this threshold. In practice, however, most directors apply the rules broadly. They do not confine the restrictions to the statutory requirements, but concern themselves with the issue of perceived, and actual, conflict and what seems to be the right thing to do. In practice, 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.

In appropriate circumstances, directors will declare their position and absent themselves not only from the vote, but also the discussion. However, directors should be aware that abstaining from voting, except in certain limited circumstances, may not protect them from liability under the corporate statutes.

In particularly difficult situations, it may be necessary or appropriate for a director to resign. Reviewing the Role of Shareholders 1. General The directors and not the shareholders are responsible for the management of the corporation. However, under the corporate statutes, certain matters are considered so fundamental that they require the approval of the shareholders.

Under the Canada Business Corporations Act these matters include: Effecting certain amalgamations or reorganizations; Selling all or substantially all of the corporation's assets; Adding or removing any restrictions on the business that the corporation may carry on; Changing the corporation's share capital; Increasing or decreasing the number of directors or the minimum or maximum numbers of directors; Confirming by-laws; and, Adding or changing restrictions on the issue, transfer or ownership of shares.

If a fundamental change affects holders of certain series of classes of shares differently than others, 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, whether or not the shares otherwise carry voting rights.

shareholders and board of directors relationship

As noted above, public corporations must also comply with the requirements of the provincial securities commissions and the stock exchanges which impose requirements for shareholder approval. Finally, there may be issues which the directors determine should be put to the shareholders as a matter of good corporate governance, whether or not they are legally required to do so. 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.

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. Similar considerations will certainly arise in the future in the context of other decisions facing public companies.

Legal Relationship Between Shareholders & CEOs |

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. However, most shareholders have common rights and a standard relationship to the corporation that they partially own. Fiduciary Duties The corporation as a whole has a duty to the well-being of the shareholders, as the shareholders are considered owners of the corporation.

Typically, directors of the corporation are elected by the shareholders. The corporation is run for the benefit of the shareholders, who delegate their authority to directors and managers. The corporation is obligated to act in the best financial interest of the shareholders, but this is sometimes constrained by legal concerns or by other stakeholders such as consumers, employees and the general public.

shareholders and board of directors relationship

Information Although the shareholders are the legal owners of the corporation, they have limited avenues to make decisions. Information is often clouded for shareholders of privately held corporations because accounting doesn't have to follow rigid federal regulations that apply to publicly held companies.

Chief executive officer pay, for example, is not restricted. Unlike public corporations, privately held companies do not have as many disclosure rules. Shareholders -- often family members, angel investors and those close to the owners -- are not as concerned with the day-to-day operations or accounting procedures as they are with profits.