Do the seller’s directors have to resign after a share sale?

When shares change hands, the owners change. That alone does not change who sits on the board, because a director leaves office only in the ways the Act lists. This page uses the federal Canada Business Corporations Act (CBCA). If the company was incorporated under a provincial Act, the same questions apply, but read that statute for the answers.

How a director leaves office

Section 108(1) of the CBCA says a director ceases to hold office on death or resignation, on removal under section 109, or on becoming disqualified under section 105(1). A change in who owns the shares is not on that list. A resignation takes effect when the written resignation is sent to the corporation or at the time it specifies, whichever is later (s. 108(2)), so a letter can be timed to closing.

What the new owner can do instead

Shareholders elect directors by ordinary resolution (s. 106(3), subject to s. 107(b) where the articles provide for cumulative voting). They may remove directors by ordinary resolution at a special meeting (s. 109(1)); where the articles provide for cumulative voting, s. 107(g) sets a different vote test for removal. If directors are not elected at a meeting, the incumbents continue in office until their successors are elected (s. 106(6), subject to s. 106(6.1)). If every director resigns or is removed without replacement, a person who manages or supervises the management of the business is deemed to be a director (s. 109(4)), subject to the exceptions in s. 109(5). Ask whether the agreement requires letters at closing, and who joins the board at that moment. The director and officer resignations entry covers the closing papers.

Liability that can outlast a resignation

Resigning does not erase what happened while someone was a director. Under CBCA s. 119, directors are jointly and severally liable to employees for debts not exceeding six months of wages for services performed while they are directors, subject to the conditions in s. 119(2). A director is not liable under that section unless sued while a director or within two years after ceasing to be one (s. 119(3)). Under Income Tax Act s. 227.1, directors at the time a corporation failed to deduct, withhold, remit or pay an amount as required by the provisions s. 227.1(1) lists can be jointly and severally liable with the corporation, subject to the conditions in s. 227.1(2), and no action may start more than two years after the director last ceased to hold the office. The CRA also describes a due diligence defence. Ask the seller what protection the agreement gives the outgoing directors, and see what director liability you take on in a share purchase.