Director Misconduct: When Shareholders
Need to Take Action

Directors play a central role in any corporation, entrusted with making decisions that serve the best interests of the company and its shareholders. But what happens when directors abuse their position, act dishonestly, or prioritize their own interests over the corporation's?

Director misconduct can seriously harm a company's finances, reputation, and operations, and shareholders may need to step in to protect their investment and the integrity of the company.

This article explores what director misconduct looks like, how shareholders can recognize it, and what legal options are available to address it.

1. What Counts as Director Misconduct?

Directors owe a fiduciary duty and a duty of care to the corporation. They must:

• Act honestly and in good faith with a view to the best interests of the corporation
• Exercise the care, diligence, and skill that a reasonably prudent person would exercise in similar circumstances

Director misconduct occurs when these duties are breached, and can include:

• Self-dealing (personally benefiting from corporate opportunities)
• Conflicts of interest not properly disclosed or managed
• Misuse of corporate funds
• Neglect or mismanagement leading to financial harm
• Oppressive conduct toward minority shareholders
• Making decisions for personal gain at the company's expense

Important: Directors owe their duties to the corporation itself, not directly to shareholders—this is why legal action often must be brought on behalf of the company.

2. Signs of Director Misconduct

Shareholders should be alert for warning signs that may indicate misconduct, such as:

• Unexplained financial irregularities (missing funds, unapproved expenses)
• Unfair related-party transactions (e.g., selling company assets to friends or family at low prices)
• Failure to disclose material information to shareholders or other directors
• Preferential treatment of certain shareholders or directors
• Ignoring corporate governance rules or bylaws
• Refusing access to company financial records

3. What Legal Options Do Shareholders Have?

If shareholders suspect director misconduct, they have several potential remedies under Ontario law (and similarly in other Canadian jurisdictions):

A. Oppression Remedy (Section 248 of the Ontario Business Corporations Act) If a director's actions are oppressive, unfairly prejudicial, or unfairly disregard the interests of shareholders, a shareholder can apply to court for relief. The court has broad powers to:

• Set aside transactions
• Remove directors
• Order financial compensation

B. Derivative Action (Section 246 of the Ontario Business Corporations Act) If the corporation itself has been harmed, a shareholder can seek leave (permission) from the court to bring a derivative action on behalf of the company against the director. This allows shareholders to:

• Sue directors for breaches of fiduciary duty
• Seek recovery of funds lost due to misconduct

C. Request an Investigation (Section 161) Shareholders holding a required percentage of shares can apply to the court to appoint an investigator to examine the affairs of the corporation if fraud, misconduct, or oppression is suspected.

D. Call a Shareholder Meeting If urgent action is needed, shareholders may requisition a meeting to:

• Remove directors by shareholder vote
• Elect new directors
• Pass resolutions to improve corporate governance

4. Practical Steps for Shareholders

Before rushing to court, shareholders should:

• Request full disclosure of financial records and board minutes
• Document all concerns clearly and professionally
• Consult with a corporate litigation lawyer to evaluate the case strength
• Attempt internal resolution (e.g., through negotiation or mediation) when possible

Legal action should be a last resort—but it must be pursued promptly if directors are damaging the company or putting shareholder interests at risk.

Final Thoughts

Director misconduct can erode not only the value of a company but also trust among shareholders, employees, and the market. Shareholders have powerful legal remedies, but timing, strategy, and evidence are critical.

If you suspect misconduct, act early. The longer you wait, the harder it may be to protect the company and your investment.

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