Private Corporation : Advisory Committee Liability?

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mr_l
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Private Corporation : Advisory Committee Liability?

Post by mr_l »

OK, I have no clue where to post this but I figure people here may have some insights on this situation. A "friend" of mine has been invited by an experienced entrepreneurial family member to join the Advisory Committee of a this family member's start-up corporation. Having little experience in entrepreneurship or law, my friend is not entirely sure what he is getting into...in particular, are there any legal liabilities here? He is receiving what seems like a large number of shares package (although the shares aren't worth much at this point) and the duties seem reasonably vague and minimal (e.g. offer advice to the CEO, attend a few meetings per year, do not disclose confidential information). It could be a cool opportunity, but are there any downsides? In particular, any considerations / legal liability that he should know about before joining the Advisory Committee?

Thanks! Even if you could point me to some key words to search on Google (I tried and failed) or links to a site about "What you should know before joining a Corporate Advisory Committee". Or maybe there is nothing to know and I'm too much of a worry wart!

mr_l
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ghariton
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Re: Private Corporation : Advisory Committee Liability?

Post by ghariton »

Directors of a corporation may, under exceptional circumstances, be held liable for corporate misbehaviour. This is quite rare, and tends to involve environmental issues when it does happen. Directors can also be on the hook for taxes collected (or withheld) but not remitted to CRA and a handful of other matters. Thus, in practice Directors' liability is quite limited, and courts are very reluctant to impose it.

But from your post, your friend will not even be a Director but merely an advisor. That makes liability even less likely. As far as I know, an advisor would only be held liable for gross misbehaviour, such as breach of trust, e.g. disclosing confidential information or using it for his own benefit. In theory, he could be held liable for advising the corporation to commit acts he knows to be criminal, e.g. money laundering. He would not be liable for bad or incompetent advice.

Take the above as a general comment. There may be particular circumstances in the case of your friend that may override what I have just written.

The above should not be construed as legal advice. If in doubt, formally engage a lawyer.

George
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mr_l
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Re: Private Corporation : Advisory Committee Liability?

Post by mr_l »

Thanks!! This is perfect, was simply looking for the common sense viewpoint and you have more than provided it!
OhGreatGuru
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Re: Private Corporation : Advisory Committee Liability?

Post by OhGreatGuru »

It does beg the question: why is your friend being invited to be on an advisory committee if he has "little experience in entrepreneurship or law, ... (and) ... is not entirely sure what he is getting into..." In the mind of the company, what skill or experience is your friend bringing to the table that would benefit the company? Or is this "advisory committee" just a smokescreen by the company principals to assure other investors that the company has some oversight?

PS: I think it would be not at all out of line for your friend to pose some his questions and reservations to the person who has made him the offer. ie:
- precisely what is the role of the Advisory committee;
- what would my obligations be;
- " I am of course flattered by the offer, but as I have little experience in entrepreneurship or law, I am not clear what skill or experience the company believes I would be contributing to the Committee", etc.
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Re: Private Corporation : Advisory Committee Liability?

Post by Rooster »

Directors can incur statutory liability for unpaid wages, unremitted taxes, certain environmental offenses and in certain other limited circumstances. I would not advise anyone joining a board unless they know the compnay's situation well (they have a duty to ask questions and be informed) and the company has a comprehensive directors and officers (D&O) liability insurance.

If this is solely an advisory role, director liability would not be applicable. I would however caution that he ensure that the role is not a "de facto" director role, where he would particupate unofficially to board decisions. In such cases, director liability would apply even if he was never formally named to the board ( and worse he would not be an insured party under any D&O insurance policy). Also, as he is being compensated for his advisory services he would owe the company duties of care and diligence in rendering his services.

Basically, no worries if it is just advisory and he doesn't cross over to board functions and he does his job with reasonable care and diligence (under his presumably unwritten advisory services contract).
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kcowan
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Re: Private Corporation : Advisory Committee Liability?

Post by kcowan »

I did some of this as a paid management consultant to the CEO. Some of the advice included dealing effectively with the board itself. Much of it was unwritten. That is the approach I would recommend. On a cash retainer. At some point, a Board position might become justified.

(Regarding compensation, I would avoid shares in a private corporation. I think Canadian Tire Money might be the exception. :rofl: )
For the fun of it...Keith
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Re: Private Corporation : Advisory Committee Liability?

Post by mr_l »

Rooster wrote: If this is solely an advisory role, director liability would not be applicable. I would however caution that he ensure that the role is not a "de facto" director role, where he would particupate unofficially to board decisions. In such cases, director liability would apply even if he was never formally named to the board ( and worse he would not be an insured party under any D&O insurance policy).
[...]
Basically, no worries if it is just advisory and he doesn't cross over to board functions and he does his job with reasonable care and diligence (under his presumably unwritten advisory services contract).
He is under the impression that it is simply an advisory role, that the directors are separate, and the documents indicate certain relationships between the advisors and directors, again suggesting that they are separate roles. It seems the advisory committee would advise the CEO within their respective area of expertise, and pull directors or officers or employees into their meetings as needed. But I will definitely pass that point along.
Rooster wrote:I did some of this as a paid management consultant to the CEO. Some of the advice included dealing effectively with the board itself. Much of it was unwritten. That is the approach I would recommend. On a cash retainer. At some point, a Board position might become justified.
(Regarding compensation, I would avoid shares in a private corporation.
OK, great suggestions. In-person advice or over the phone. Yes, I don't see that the shares would necessarily be worth anything even if the company went public successfully especially not knowing how many are outstanding or understanding what moves the company could do to make the issued compensation shares worthless.....of course, it is a friendly relationship so perhaps this is not a concern.

"Cash retainer" - does that just mean they would pay upfront for your role as advisor, e.g. pay you $xx,xxx in advance for one year in Advisor role and renew annually? That is interesting suggesting.

Cheers,
mr_l
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kcowan
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Re: Private Corporation : Advisory Committee Liability?

Post by kcowan »

mr_l wrote:"Cash retainer" - does that just mean they would pay upfront for your role as advisor, e.g. pay you $xx,xxx in advance for one year in Advisor role and renew annually? That is interesting suggesting.

Cheers,
mr_l
The retainer is payable monthly (not in advance) and is cancellable on one month's notice. (If the engagement takes more than 50% of his time, then the cancellation period could be extended to allow for new clients to be lined up. In one engagement, I had to commit 80% so I insisted on a 6 month cancellation period.)

If his friend is unwilling to pay cash, then he does not value the advice highly enough.
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