Duties of a Corporation’s Directors in the Event of a Conflict of Interest

Yes, subsection 120(2) of the Canada Business Corporations Act(hereinafter the “CBCA”) and section 127 of the Business Corporations Act (hereinafter the “QBCA”) prohibit a director who has an interest to vote on that matter, except as specifically provided by applicable law.

Applicable legislation imposes upon the director a duty of loyalty towards the corporation, which includes a fiduciary duty to act in the best interest of the corporation. The director must therefore act solely in the interest of the corporation, without considering the interests of any other person (e.g., shareholders, creditors, employees, etc.). As a mandatary of the corporation, the director must avoid being in a position where his or her personal interest would come into conflict with that of the corporation and must act in a disinterested manner.

In addition (and subject to certain nuances between federal and provincial corporations), the law requires that the director of a business corporation:

(i) disclose to the corporation’s board of directors any interest that he or she, a related person or a legal person of which he or she is a director or an officer has in a contract or transaction involving the corporation and, generally, any interest that may give rise to a conflict of interest; and
(ii) abstain from voting on the matter subject to this conflict of interest.

The existence of a family relationship between a director and a person referred to in a decision by the board of directors does not, in and of itself, create a presumption of conflict of interest. Despite the appearance of bias, the conflicting interest must be real and substantial in the circumstances.

It is worth highlighting a few elements which are specific to federal business corporations, considering that sections 127 and 128 of the QBCA expressly provide an opposite application of this concept to provincial business corporations. Despite being unable to vote on a matter in which he or she has an interest, the director of a federal business corporation is entitled to attend a meeting of the board of directors and the deliberations regarding that matter, unless the articles or by-laws of the corporation provide for specific restrictions. Indeed, the presence of the interested director throughout the meeting may even be essential to achieve the required quorum and to allow the board of directors to maintain it.

What happens if the interested director breaches his or her obligations to disclose an interest or to abstain from voting? The board of directors or the shareholders could then ask a court to annul the contract or transaction in question and order the director or officer concerned to report and account for the situation. There is no need to describe all the issues this could cause.

Here are a few examples of best practices which may prevent conflictual situations:

• it might be prudent for the director of a corporation to withdraw from deliberations and decision-making if there is an appearance of bias or of a potential conflict of interest;
• the corporation’s by-laws may be used to clarify the procedures to follow in the event of a conflict of interest of a director, as long as such procedures do not violate the provisions of the CBCA and the QBCA, which are of public order;
• the corporation may adopt a clear and specific policy to manage conflicts of interest within the board of directors.

If you have any questions about the duties and obligations of directors, please do not hesitate to contact our Business Law team.