With Proper Corporate Recordkeeping, Corporate Lawyers Can Save You And Your Company Time, Trouble And Money
By Jan Jaluvka
Experienced, knowledgeable corporate lawyers can help ...
Running a company these days can be challenging and time consuming, to say the least. There are so many things to do and keep track of, especially in the case of smaller privately-owned companies. Small wonder that corporate recordkeeping ranks near the bottom of the to-do list or, in many cases doesn’t even make it onto the list.
Unfortunately, too many business owners and managers are unaware of the vital importance of conducting their corporate proceedings according to the applicable legal requirements and accurately documenting them in a timely manner. With the help of a capable and experienced corporate lawyer these concerns can be readily and economically addressed.
A company minute book properly-maintained by a corporate lawyer serves as a journal of the company’s ongoing corporate activities, decisions and significant business transactions. It is the official repository of all major corporate documents and records. It shows the number and types of shares issued in the capital stock of the corporation and the names and particulars of both past and present shareholders together with the respective time periods of such share ownership. The minute book should set out both the past and present officers and directors of the company and the respective time periods of their tenure in office. Where applicable, it should record the payment of dividends to shareholders and compensation to management personnel.
A corporate lawyer can also ensure that the minute book satisfies the requirement of chronicling major corporate decisions and identifying the officers/directors who made them. It should likewise document all important business transactions indicating those officers/directors involved and confirming their authority to act on the company’s behalf in the transactions. In sum, the company’s corporate records as set out in its minute book should provide a full paper trail of all the above matters and by doing so they confirm the status and authority of previous officers and directors at the material times and, usually of more immediate concern, they confirm the power and authority of the current officers and directors to act and conduct business on the company’s behalf. A corporate lawyer can help ensure the company records are accurate and up to date.
Annual Shareholders Meetings—Are The Law
For both Ontario and Canada business corporations the applicable law requires that the company hold an annual meeting of its shareholders or, alternatively, have resolutions evidencing the conduct of the necessary annual proceedings shareholders’ proceedings signed by the shareholders. The Ontario Business Corporations Act provides that the directors of a corporation must call an annual meeting of the shareholders within eighteen months of the corporation commencing its existence and subsequently no later than fifteen months after the most recent previous annual shareholders meeting.
Normally, prior to the annual meeting of the shareholders, the company’s directors hold a meeting to approve the company’s most recent financial statements. The shareholder meeting then takes place. At this meeting the shareholders approve the financial statements, elect directors of the corporation to serve for the coming year, ratify and confirm the actions and proceedings of the directors during the previous year and, in the case of privately-held corporations, dispense with statutory audit provisions which otherwise would apply. After the annual shareholders’ meeting, the new board of directors holds a meeting at which the directors appoint officers of the corporation to serve for the coming year and, where applicable, approve the payment of dividends to the shareholders and compensation to management.
The Ontario Business Corporations Act further provides that failure to comply with the statutory requirements regarding the conduct of corporate proceedings and corporate recordkeeping constitutes an offence under the said Act. A corporation found guilty of such an offence is liable to a fine of up to $25,000. A director or officer of the guilty corporation, who, without reasonable cause, authorized, permitted or acquiesced in such offence is also guilty of an offence under the said Act and on conviction is liable to a fine of up to $2,000 or to imprisonment for a term of up to one year, or to both.
Corporation Information Returns—Are Also The Law
The Ontario Corporations Information Act imposes a statutory obligation upon a corporation and its officers/directors to file notice with the Ontario Government of any changes of its officers or directors, or of their addresses or of the registered office of the corporation. The said Act also makes non compliance with the above reporting provisions an offence with penalties similar to those noted above for those parties found guilty of committing such an offence.
In recent years the Ontario Government has become more active in pursuing enforcement proceedings against corporations and their officers and directors.
The Government’s making non-compliance with the its statutory corporate proceeding and corporate recordkeeping requirements quasi-criminal in nature demonstrates the vital importance of a corporation complying with same. However, there are other significant reasons why compliance is essential to the overall legal and financial wellbeing of your company. Consider the following:
1. If the Canada Revenue Agency (formerly Revenue Canada and now commonly referred to as the C.R.A.) conducts an audit of your corporation’s business, typically one of the first items they examine is the company minute book. If the minute book does not document an action or transaction under scrutiny, the C.R.A. may reassess your corporate income tax return on the grounds that such action or transaction did not actually occur because there is no record in the minute book of it having occurred. In such a situation verbal protestations to the contrary are no substitute for the written record. In other words, documentation beats conversation.These kinds of headaches can be avoided by having a corporate lawyer record and document the company's activities and transactions in the corporation's minute book.
2. As mentioned above, at the annual shareholders’ meeting of a privately-owned company the shareholders normally vote to exempt the corporation from the need to have formally audited financial statements since such statements are often deemed unnecessary in the circumstances and are quite costly to have prepared. If all shareholders do not provide their consent to the audit exemption, then a later disagreement or falling out among shareholders can result in a disaffected shareholder forcing the company to expend considerable sums of money to obtain audited financial statements for any years in which the minute book failed to record the unanimous consent of the shareholders to the audit exemption.
3. Where the shareholders or a shareholder of a corporation wishes to sell their/his/her shares to an outside party or parties the prospective purchaser/s will, in the vast majority of cases, have their corporate lawyer review the company minute book to provide a legal opinion regarding the overall corporate status of the company , whether all necessary corporate proceedings have been conducted properly and whether the shares of the seller to be sold to the purchaser/s have been validly issued to and are lawfully owned by the seller shareholder/s. If in the course of the purchaser’s corporate lawyer’s examination of the minute book it turns out that required shareholders’ or directors’ resolutions were never recorded or the shareholder records are incomplete, the task of correcting the corporate recordkeeping omissions and updating the company minutes can suddenly become an onerous undertaking involving great urgency, anxiety, time expenditure and cost. The problems become magnified in this type of situation if the signature of a former shareholder or director cannot be obtained due to death, disappearance or unwillingness to cooperate. The inability to remedy the situation may prevent the purchaser’s lawyer from providing the necessary legal opinion with delay and possible complete cancellation of the share sale transaction being the result. Again, this type of problem can be avoided by proper corporate record keeping conducted by a corporate lawyer.
4. When a corporation seeks financing from a bank or other financial institution the lender usually requires a legal opinion from its lawyer regarding the borrower company’s corporate status, whether the loan transaction has been duly authorized by the company’s directors, the identities and various particulars of the company’s directors and signing officers and whether they possess the requisite capacity and authority to enter into the loan transaction on the corporation’s behalf and legally bind the corporation. Here again, where inadequate corporate recordkeeping prevents the lender’s lawyer from providing the necessary legal opinion to the lender, the corporation and management may be subjected to hardships of the type outlined in the previous paragraph and with similar consequences being the likely outcome.
Companies and their managers who neglect or ignore proper corporate recordkeeping do so at their peril. Putting this task in the hands of a knowledgeable and experienced corporate lawyer is, in the long run, the surest and most cost-efficient means of protecting you and your company from the potential problems and pitfalls discussed. Doing so also allows you to focus on your main task--that of running a profitable business.
For other legal articles dealing with business and corporations see the following: Incorporation- Pros and Cons
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