The following article contains substantial contributions from Donna Kubota and Sandra Corrigan—they provide invaluable contribution in the practice of Ontario law.
This article focuses on the need for owners of small- and medium-sized companies to ensure their minute books are up-to-date. Though the author specializes in Ontario law, the principles of proper recordkeeping apply throughout Canada and the United States.
What is the Purpose of a Minute Book and Why is it Needed?
A corporation’s minute book serves as the official record of the corporation’s activities. Among other things, the minute book should document all material corporate transactions that affect or involve the corporation. It should also reflect all resolutions passed by directors with respect to the governance of the corporation’s business and affairs, as well as all resolutions passed by the shareholders. Additionally, the minute book’s registers and ledgers should accurately reflect and summarize all information in the minute book concerning shareholders, directors and officers, in addition to any changes to this information.
Both the Ontario Business Corporations Act and the Canada Business Corporations Act specifically require that all corporations prepare and maintain the following at their registered office or another location in Ontario designated by the directors:
- The articles and bylaws and all amendments thereto, in addition to a copy of any unanimous shareholder agreement known to the directors;
- Minutes of meetings and resolutions of shareholders;
- A register of directors;
- A securities register;
- A register of transfer; and
- Copies of all notices.
In addition, a corporation is required to prepare and maintain the following:
- Adequate accounting records and
- Records containing minutes of meetings and resolutions of the directors and any committee thereof.
Failure to Maintain Proper Corporate Records
An Administrative Perspective
A corporation’s failure to establish or maintain proper corporate records could result in, among other things, the following:
- Significantly more time and legal fees spent on attempting to piece together and document past corporate proceedings relating to valid share issuances and transfers, dividend declarations, approval of shareholder loans, changes in directors and officers, approvals of material contracts and any other corporate actions that should be properly documented in the corporation’s minute book;
- Delays in responding to inquiries and requests from the Canada Revenue Agency (as part of a tax audit) from the corporation’s bankers regarding possible loans to the corporation and from disputing shareholders regarding their ownership of shares;
- Delays in responding to other questions or concerns from shareholders regarding corporate actions and decisions made by the corporation’s directors;
- Delays in proceeding with significant transactions (including the proposed sale of additional shares of the corporation, potential investments by third parties, loans from financial institutions or even the sale of the business of the corporation);
- Former directors being held accountable for certain actions taken by succeeding directors (if the retirement or resignation of the former directors was not properly documented in the corporate records or in the required corporate notice filings);
- Difficulties for succeeding directors in trying to piece together or determine the corporation’s past history, resulting in an inability to rectify past corporate acts because the original directors are no longer available to sign rectification resolutions;
- Inability of the beneficiaries of a deceased shareholder to acquire ownership of the shares of the deceased shareholder (due to improper or ambiguous documentation in the minute book regarding the shareholder’s issued shareholding);
- The corporation being in default of mandatory government notice filings, which in turn could potentially result in cancellation of the corporation’s charter for repeated noncompliance; and
- The directors being subject to monetary penalties for failure to maintain proper corporate records and attend to required government filings in compliance with applicable law.
A Litigation Perspective
The points previously described are just the tip of the iceberg. Recent findings, such as the following, indicate that you can have substantial awards of damages in a lawsuit.
- From a technical perspective, section 117 of the Ontario Business Corporations Act, which, of course, applies only to Ontario companies, provides that, after incorporation, the directors of the company must hold a meeting (or pass a written resolution) in which they adopt bylaws and forms of share certificates, authorize the issuance of securities, appoint officers and make banking arrangements. Therefore, if a company does not have a minute book, or if it has not passed any of the mandatory board or shareholder resolutions, it is not in compliance with the provisions of the Ontario Business Corporations Act. If this is the case, then, technically, an owner-officer may not be a shareholder of record and has likely not been validly appointed as an officer.
- As part of the litigation proceedings, the opposing party may request copies of not only the charter documents of the corporation (to confirm that it has been validly incorporated), but also copies of the directors’, officers’ and shareholders’ registers (typically contained in a corporation’s minute book) reflecting the names of the corporation’s directors, officers and shareholders. They may also seek written confirmation of the position and office held by a client in the corporation being sued.
- If a corporate officer has signed documents, contracts or other documents on behalf of the corporation in his or her official capacity (and such documents are the subject of the litigation proceedings), their appointment as an officer should be documented in the minute book to avoid any possible argument that they have been inadvertently exposed to personal liability.
In light of the previous points, it is extremely important for directors to ensure that their corporation’s records are properly and accurately maintained throughout the life of the corporation.
A Tax Audit Perspective
The top Canada Revenue Agency auditors are trained to ask for your minute books. If this occurs, you will not have time to make changes. Also, tax auditors tend to ask when the minute book documents were signed. If the answer to this question is “last week,” the tax auditor has his assessment and will likely penalize for failure to maintain proper books and records.
I have personally witnessed the following situations, which were the direct result of poorly kept minute books:
- Banking problems – An ex-owner entered a bank and signed a check to himself, as he felt he was short changed on a buyout that took place six years earlier. As the business owners did not change the banking authority, the bank was absolved of all liability.
- Sale problems – A client wanted to sell his 40-year-old business. However, the original sale had not been documented correctly. Therefore, the heirs of the original owner charged a fee to sign the documents.
- Tax problems – Canada Revenue Agency auditors asked to see copies of an actual shareholder loan agreement. The client only made accrual entries in his records. A substantial loan and income inclusion was assessed with penalties and interest.
- Business purpose litigation problems – A shareholder sued and stopped a company from diversifying a product line, as it was outside the scope of the company’s stated purpose in its articles of incorporation.
What You Can Do
Every year, follow a plan: pay your taxes and all installments when due and file statutory business returns as required. Review all major business activities, such as salaries, bonuses, new directors added and new positions created. All major business events must be recorded, dated, signed, sealed and delivered in writing for filing in the minute book.
Operate your business professionally for your future benefit and success and, most importantly, for your family’s future and success.
I personally recommend that corporations keep their minute books at their office. Though many lawyers like to keep minute books in their files, the minute book is so central to your business that it should be a regularly used document.
In short, it is a vital corporate practice to ensure that a corporation’s records are established and maintained in accordance with applicable law, particularly in view of our litigious society.