THE CORPORATE MINUTE BOOK – IMPORTANT RECORDS FOR YOUR BUSINESS
June 14, 2016
Corporate minute books are required assets for corporations.
Unfortunately, they are often ignored or misunderstood by many business owners.
Corporate minute books may seem unnecessary or like make-work projects for lawyers and accountants to many business owners but they play an important role in the lives of corporations.
WHAT'S A MINUTE BOOK?
Simply put, minute book is a collection of documents which record the establishment and governance of a corporation.
Typically, a basic corporate minute book includes the following:
Certificate of Incorporation;
Articles of Incorporation;
shareholders’ resolutions (or minutes of shareholders’ meetings);
directors’ resolutions (or minutes of directors’ meetings);
registers and ledgers listing the directors, officers and shareholders of the corporation (past and present);
records of any transfers of shares of the corporation;
the corporation’s share certificates (where shareholders insist on holding their share certificates, this should be recorded in the minute book and ideally a copy of the share certificate is retained in the minute book);
any shareholder agreement(s);
records relating to extra-provincial registrations (where the corporation registers to conduct business in another jurisdiction);
annual returns (filed with the Corporate Registry);
records relating to registered business or trade names (where the corporation does business under a name that is different than the corporation’s name and registers the name with the Corporate Registry); and
records of significant corporate actions, such as: re-organizations related to tax or succession planning); major commercial agreements owners deem to be especially important for the corporation’s business (such as consulting agreements or employment agreements between the founders of the corporation and the corporation); or documents or filings relating to the corporation’s copyrights, trademarks or patents.
Bank statements, contracts or other records relating to the general day-to-day operations of the corporation do not need to be added to the minute book. These types of records should still be retained, they just do not need to be kept in the corporation’s minute book.
WHAT DO GOOD CORPORATE RECORDS LOOK LIKE?
Think of your corporate minute book as a record of the life of your corporation.
A person unfamiliar with a corporation or its business should be able to review your corporation's minute book and easily determine:
whether the corporation was properly incorporated;
who currently owns, and who previously owned, what shares of the corporation;
what are the rights of each shareholder of the corporation;
who currently manages, and who previously managed, the corporation; and
has the corporation been properly maintained (i.e., were regular directors’ and shareholders’ meetings duly held, and were their decisions properly taken and recorded).
WHY ARE MINUTE BOOKS IMPORTANT?
Improper, incomplete or lost corporate records can end up costing business owners in higher legal and accounting fees, CRA-imposed penalties, higher borrowing costs, the inability to access financing and lost business opportunities.
A properly managed, up to date minute book is important in a number of situations, including:
If the Canada Revenue Agency audits your business, for example, it may seek to review your corporate records.
If your records are incomplete, out of date or if they were improperly prepared, in certain circumstances you could end up having fines or penalties imposed.
To be clear, CRA cannot fine you for poorly maintaining your corporate records, but if you did some tax planning and you rolled one of your companies into an another, for example, and the records of that rollover are not complete and properly prepared, you could face fines or penalties from CRA.
Or, as another example of what could go wrong, if your corporation pays dividends to shareholders (even if it is a small family-owned business) and those payments are not properly authorized by the board of directors and proof of the directors’ approval is not properly recorded in the minute book, you can run into problems.
Also, you may wish for your own accountant to perform an audit of your business; and in this case your own auditor will also need to review your corporate records.
2. BORROWING MONEY.
If your business wishes to borrow money from a bank, the bank may want to see your corporate records.
If the bank is unclear on who owns what portion of the business (because your shareholders, shareholder ledgers or your share transfer register are incomplete) either you may not be able to borrow money from the bank or your costs to borrow that money may end up being higher.
The cost of borrowing may be higher because the bank may set a higher interest rate on the loan (based on what the bank deems to be a higher risk because of the incomplete shareholder records) and because of higher legal fees (as you pay for your lawyer to fix your records and then the bank’s lawyer to review your records).
In other cases, a bank may require a legal opinion from you lawyer about your corporation, and if your corporate records are incomplete or not up to date, your lawyer may not be able to provide that opinion and this could prevent the bank from giving you that loan.
3. NEW BUSINESS PARTNERS | INVESTORS.
If you want to add business partners or attract investors, at the very least they will want to see who owns what portion of your business, confirm the rights of each shareholder and track the history of the corporation. To do this, they will rely on your corporate minute book.
If your corporate records are not clear when certain shares were issued or repurchased, for example, or if share certificates are missing, those potential partners or investors way walk away because they cannot be sure what they are investing in or what portion of the business they are obtaining.
4. SELLING YOUR BUSINESS.
Incomplete corporate minute books can lead to higher due diligence costs.
A purchaser's lawyer will review your corporate minute book, and if there are any problems or if the records are not up to date, you will be asked to fix those record and remedy any defects (at your own cost).
In addition, incomplete corporate minute books can end up lowering the purchase price, as a purchaser may seek to balance what it determines to be additional risk linked to the corporate records with the price it is willing to pay for the corporation.
If it's unclear what happened to certain old shareholders, whether a previous corporate restructuring was properly completed, or if share certificates are missing, for example, potential purchasers will normally demand adjustments to the purchase price that correspond to the errors or gaps in the corporate records, or these errors and gaps could make the deal fall through altogether.
5. SUCCESSION PLANNING.
If you want to re-organize your corporation to add family members as owners, transfer your corporation to family members entirely or add a family trust, for example, your corporate records will need to be up to date, properly set up and maintained.
Otherwise, you will need to pay more in legal and potential accounting fees to fix potential problems, and it may make the succession-planning process more complicated (and therefore more expensive) than it would have been if you had good corporate records.
6. LIMITING PERSONAL LIABILITIES OF DIRECTORS AND OFFICERS.
There are several provisions in The Business Corporations Act (“BCA”) which impose liabilities and costs on directors and officers personally.
One such example is set out in section 113(1) of the BCA, which it states:
Directors of a corporation who vote for or consent to a resolution authorizing the issue of a share under section 25 for a consideration other than money are jointly and severally liable to the corporation to make good any amount by which the consideration received is less than the fair equivalent of the money that the corporation would have received if the share had been issued for money on the date of the resolution.
In other words, if directors of ABC Corporation voted to issue 100 common shares to me for my favour Star Wars action figure, and that action figure’s fair market value is less than the fair market value of the 100 shares, then each director is personally liable for the difference.
So, using this example, if my Star Wars action figure had a market value of $100, but 100 common shares in ABC Corporation could be reasonably determined to have a fair market value of $100,000, then the directors who voted in favour of that deal would collectively owe the corporation $999,900.
[Note: obviously, I wouldn’t trade my favourite Star Wars action figure, but I was trying to get your attention with a little bit of drama.]
Now what does this have to do with corporate records?
In this example, if you were a director of ABC Corporation and you were opposed the the previous Star Wars trade, you may wish to specifically record your dissent with the decision of the board of directors to make sure that your opposition to the decision was duly recorded. An accurate corporate minute book can help ensure that your dissent is duly recorded and that you could avoid being responsible for $999,900.
Good corporate record-keeping may not remove risks to directors and officers entirely, but it may minimize the risks that directors and officers will be personally liable for costs and liabilities of the corporation.
HOW OFTEN SHOULD CORPORATE MINUTE BOOKS BE REVIEWED?
A best practice would be for you to have a review of your corporate records completed each year.
The better your corporate records are, the less time and the less work it is to have them reviewed and ensure they are accurate and up to date.
It often makes the most sense to review your corporate records at the same time that you file your annual return with the Corporate Registry or when your corporation’s shareholders and directors either hold their annual general meeting or sign their annual resolutions.
WHAT TO DO IF YOUR CORPORATE RECORDS ARE A MESS?
You guessed it - consult with a lawyer.
If you do find yourself in that situation, do not panic. Most deficiencies with corporate records can be easily fixed if caught in time.
More serious problems may not be able to be fixed entirely, but a lawyer may be able to address those problems so as to at least minimize or lessen applicable risks and liabilities.