The simplest way is to determine what the company provides for in the event of a lawsuit against one of its directors: the provincial and federal corporate statutes (depending on whether the company is incorporated under Quebec or federal law) allow for the compensation of their directors who are sued if they have acted in good faith in the performance of their duties. It is therefore strongly suggested that directors obtain an agreement to this effect or pass a by-law that provides for an advance of costs, reimbursement of all defence and investigation costs and payment of any damages awarded by judgment or agreed to in an out-of-court settlement.
An alternative approach is to purchase directors’ liability insurance: the premium is paid by the company but the benefit goes to the directors and there is rarely a deductible to be paid.
This protection can exist even if the directors’ liability is already provided for in a by-law or agreement: the insurance will simply reimburse the corporation for the amounts it has paid out. The advantage of insurance is that it applies even in the event of financial difficulties on the part of the corporation that would prevent it from paying the amounts provided for in the by-law or agreement. Insurance is the belt and indemnification is the suspenders.
There are, of course, other ways for a director to protect himself or herself, such as a shareholders’ agreement (which sets out what is to be done, in advance, in certain circumstances to limit the director’s decisions) or a dissent noted in the minutes of a meeting, but the most important thing is to have indemnification and insurance.