Where’s that Minute Book?

The maintenance of accurate and up-to-date corporate records is an important though frequently neglected part of operating a business.

Unfortunately, business owners often regard the completion of corporate updates and annual filings as an unnecessary administrative burden. This is a mistake. Business owners should be aware that failing to maintain adequate corporate records exposes a corporation to serious risks which generally outweigh the costs of completing regular updates. Moreover, these risks tend to materialize at particularly inopportune moments such as at the closing of a time-sensitive financing, the eve of an important acquisition or upon notification of a CRA audit. In such circumstances, the last question you want to be asking is “where’s that minute book?”

Shareholder and Director Resolutions

All Canadian corporations, both federal and provincial, are required to hold annual shareholder and director meetings to approve financial statements, elect/appoint directors and officers and decide other prescribed matters. Shareholder meetings are also required to authorize fundamental changes such as the sale of a business, major acquisitions, amalgamations and reorganizations. However, in the private company context, instead of actual physical meetings, these matters are typically dealt with by way of unanimous written resolutions.

Problems arise when a corporation takes one or more actions requiring shareholder approval without first obtaining or sufficiently recording such approval. Cases have occurred in which a disaffected minority shareholder emerges to challenge “unauthorized” corporate actions several years after the events in question. Where shareholder approval was not obtained or where no records exist to confirm the particular shareholder’s approval, a corporation may be faced with the unsavory prospect of unwinding a transaction by court order. As a result, corporations (particularly those with multiple arm’s length shareholders) should always ensure that any actions requiring shareholder approval are properly recorded.  

One area of particular concern is ensuring shareholder consent to an exemption from the general audit requirement. Under Canadian corporate law, any shareholder has the right to receive audited financial statements unless they have provided their express consent that the corporation be exempted from this requirement. Nonetheless, it should be recognized that some corporations may be required to complete audited financial statements under the terms of a shareholders or financing agreement. But when possible, the failure to obtain consent to the exemption can provide an aggrieved minority shareholder with the right to compel a small business to conduct an expensive and time-consuming audit.

Corporate records also provide a recognized means of tracking dividend payments, management bonuses/salaries and share redemptions. Such records are particularly important in defense of tax filings. The CRA has challenged corporations’ income tax filings where tax filings and corporate records fail to accord.  As a result, properly recorded director resolutions detailing such transactions can be invaluable in defense of a CRA investigation. 

Annual Returns

Some corporations (depending on their jurisdiction of incorporation) are also required to file annual returns to maintain their corporate status. These returns typically include basic information such as the names and addresses of directors along with a small fee, though in some foreign jurisdictions (e.g. Delaware) these fees may actually be quite substantial. The consequences for failing to complete these annual returns can also be severe. For example, the Canada Business Corporations Act authorizes the dissolution of corporations for failure to file annual returns – though such administrative dissolutions typically only occur after multiple years of unfiled returns.

Apart from dissolution, the failure to file an annual return immediately puts a corporation “in-default” and thereby prevents the relevant corporate registry from issuing a certificate of good standing. These certificates are a standard part of financings, acquisitions and other significant transaction involving the corporation. Delays caused by the need for such certificates can result in considerable costs.

Extra Provincial & Foreign Business Registrations

Corporations which carry on business in multiple provinces or foreign jurisdictions are also required to complete additional filings or “extra-provincial registrations” to maintain their corporate status in these jurisdictions. This is equally true for federally incorporated companies, which despite their “federal” status are in fact required to complete extra-provincial registrations in every province in which they carry on business. Like annual returns, the failure to complete these filings can result in penalties and other restrictions. Corporations that fail to complete extra provincial filings are generally subject to an administrative penalty and are prevented from commencing a court action in the jurisdiction in which they have failed to file. In addition, for any significant acquisition or financing, lenders and purchasers almost always require confirmation by way of a certificate of good standing that the vendor/borrower is validly existing in every jurisdiction in which it carries on business. The failure to maintain these registrations can thus have serious consequences on a corporation’s ability to defend its interests and complete important transactions.  

Public Registry Updates

In addition, filings must be made in the event of certain prescribed corporate changes including the election/appointment of new officers/directors or a change to the corporation’s registered address. This information forms part of the public registry. Corporations have an obligation to ensure that such information is kept current. Discrepancies between what is recorded in the public registry, what is stated in the minute book and what is actually going on are a frequent cause of confusion. These issues often delay the timely execution of legal opinions required in many corporate transactions including financings and acquisitions.

Ultimately, corporate records are a reflection of a corporation’s existence as a separate legal person. Like individuals, corporations require regular checkups to stay in good health. Problems arise when these checkups are ignored or delayed – the consequences of which typically arise in the midst of important and time-sensitive transactions.