Paperwork! Paperwork! It is the bane of all existence. Take the following example:
The Prime Minister (PM) of Canada holds shares in a private company and prior to becoming PM, he sells his shares, but it was not until a few years later that he was actually compensated for his shares. He is now the Prime Minister when he receives the funds. Opposition parties raise a furor. There are ethical issues, conflicts of interest, reputational risks and myriad of other issues for the PM. Did the PM have an interest in the company while he was sitting PM? All this stemmed from the lack of the corporation updating the “minute book”.
Google “chretien golf grand-mere” to learn more. In short, the Honorable Jean Chrétien had an interest in the Grand-Mère golf course and due to the company not maintaining accurate corporate records, Honorable Jean Chrétien was embattled in a long bitter feud with the opposition party. Had the corporation maintained proper records, he may not have been faced with the embarrassment. Grand-Mère Golf Club did not document the transfer of the shares or maintain proper corporate records on an up-to-date status.
I always am asked what is a minute book and the purpose of a minute book. A minute book of the corporation is the official record that evidences owners, directors, officers, share structure, accountants/auditors, major purchases/sales of shares or assets, tax information, the authorized officials to act on behalf of the corporation, amongst other items. Resolutions passed by the directors or shareholders of the corporation confirm the corporation’s actions. Dividends declared by directors must be recorded into the company’s minute book.
So why is proper record keeping important? Shareholders, directors and even third parties such as the Canada Revenue Agency or the WSIB can request to review the minute book. Dividends or bonuses not properly declared by the directors may result in taxing problems for the shareholders. CRA may reassess the corporation. Improper share allocations or no evidence of shareholder holdings may have tax or litigation consequences. If two corporations are amalgamated, the Ontario government (or other governments) requires a copy of the signed resolutions. Suppose there are no share certificates, then there is no evidence of shareholders, which may cause evidentiary issues for an alleged owner of a company. That individual may have actually been told that he had received equity into the company, but due to a lack of evidence (share certificates,
resolutions, share capital etc.), the courts may rule that he was not entitled to profits of the company. All money contributed may have been lost.
Other lawyers rely on the legal opinions of opposing lawyers which are based on a review of the minute book. Banks often request opinions from lawyers prior to lending. A corporation relying on an accountant or other non-lawyers to generate the minute books may inadvertently draft improper by-laws or resolutions which may result in delays. In share-purchase transactions, I, as the lawyer, would request the vendor to provide the purchaser a copy of the minute book. If the vendor cannot provide a copy of an updated minute book, I would advice my client to walk away from the purchase. You don’t want to find out later that there were other equity owners of the corporation.
Under Canadian law and Ontario law, directors must call annual shareholder meetings and the purpose of the meetings is to approve financial statements, elect directors/officers, appoint an auditor or dispense the auditor. Both under the legislation and under the case law, shareholders have a long-standing right to access a corporation’s securities register in order to allow a shareholder to communicate with other shareholders. This overarching right was reiterated by the court in Cooper v. Premier where the court said, “The right of inspection that a shareholder has is a right vested in him personally, to be exercised independently of the consent of the company.” Therefore, any shareholder may request a copy of the corporation’s records. Non-compliance may result in litigation and unnecessary expenses.
The Penalty – $2000 to $25,000 or imprisonment
Under the Ontario Business Corporations Act, failure to maintain corporate records may result in a $2,000 fine or imprisonment of up to no more than a year for every director or officer. A corporation may be subject to a $25,000 fine.
In any business transaction, there is risk and reward consideration. Grand-Mère Golf Club took the risk of not properly documenting the share transfer, and Jean Chrétien was rewarded with extended media coverage and an RCMP probe.
Comply with the law and hold annual shareholders’ meetings and avoid problems which may result in aggravation, high costs or even penalties. Annual minutes should be conducted by a corporate lawyer. It is more economical to have the minute books updated annually rather than waiting until the last minute.