This is Part II of my saga on addressing circumstances of incapacity, Part I can be found at: https://www.allaboutestates.ca/powers-of-attorney-for-property-implications-of-obtaining-a-formal-capacity-assessment/.

Part II, being this blog post, addresses two situations that we, as estate planners, are commonly asked about:

1. Director becomes incapable – who can sign for them?
2. Shareholder (voting) becomes incapable – who can attend to governance regarding electing directors and officers and what can be considered at the shareholder agreement drafting stage to assist with this situation?

Keep an eye out for Part III, where I will consider the circumstance of a shareholder who is party to a transaction becoming incapable.

1. Director Becomes Incapable – Who Can Sign For Them?

                     (a) What happens?

If a formal incapacity assessment results in a finding of incapacity in respect to managing property , a director of a corporation will be disqualified from acting as such under s. 105(1)(b) of the Canada Business Corporations Act, or s. 118(1) of the Ontario Business Corporations Act.  If a foreign corporation is involved, consider whether similar provisions exist in the law governing the Director’s foreign corporations.

If no formal finding of incapacity is obtained, the provisions of any agreements governing an event of incapacity will not be immediately triggered, and the director will not automatically be disqualified from acting as a director.

The above is discussed further in my Part I post: https://www.allaboutestates.ca/powers-of-attorney-for-property-implications-of-obtaining-a-formal-capacity-assessment/.

                     (b) Impact

Directors no longer can perform their functions and will no longer hold office upon a declaration of incapacity. If the director had a power of attorney for property, the attorney appointed thereunder does not have authority to act as director on their behalf (this is not considering the circumstance of the director also being the sole shareholder).

                     (c) Who Can Sign For Them/Filling The Vacancy

Shareholders elect the replacement director. Such election is subject to the ability of a quorum board to fill the vacancy and nomination rights established by corporate documents (e.g. articles, by-laws, shareholder agreement).

The replacement may be the attorney appointed under the incapable person’s power of attorney but does not have to be;it can be anyone who qualifies. Again, this is subject to any relevant provisions in the corporate documents. As a result, you may wish to consider whether a formal shareholder resolution is required.

2. Shareholder (Voting) Becomes Incapable

                    (a) Director Appointment

Consider whether the shareholder has a power of attorney for property (“POA”). Consider whether the POA meets the formal and substantive requirements of a valid POA in a circumstance where the shareholder becomes incapable.

If the shareholder has a valid POA, the attorney(s) appointed likely has authority to manage the bundle of rights attached to the shares of the relevant corporation. This is subject to the wording in the POA, as, for example, it may contain restrictions that limit the timeframe in which the POA is effective, the property over which the attorney has authority to manage or the transactions that the attorney is authorized to engage in with respect to such property.

As a result, the attorney, who is acting as agent for the shareholder, may be able to exercise the shareholder’s voting rights to elect themself or another person as director. You may wish to consider relevant corporate documents, such as articles and by-laws, as well as whether a formal shareholder resolution would be required.

An important consideration is whether it is prudent for the attorney(s) to elect themselves as a director. Considerations in this regard may be reflected upon in another blog post.

                   (b) Drafting Corporate Agreements 

Consider whether there are corporate agreements that govern the event of incapacity of a shareholder. For example, shareholder agreements may include provisions that give other shareholders buy-out rights of the shares of the incapable shareholder.

Practically, at the shareholder agreement drafting phase, consider:

1. outlining the shareholders’ business succession plans. If a shareholder becomes incapable, what happens to their shares? If relevant, how are they to be valued? And;
2. including insurance provisions to fund provisions of the agreement, such as a buy/sell portion.

I would suggest carefully considering whether the agreement being drafted accurately represents your client’s comprehension and intention of the business succession plan.

Thank you for reading! Until next time,

Tamar