Incorporation Documents

At incorporation, the first documents you should find in your corporation’s Minute Book include:

  1. General Operating By-law (“By-Law No. 1”) – By-Law No. 1 is a list of general operating rules for the corporation.
  2. First Director(s) Resolution – The individual(s) who agreed to be the first director(s) on the Articles have a legal obligation to approve certain things right after incorporation including: the allocation of shares and confirming the consideration (i.e. amount) paid for those shares. Once the first director(s) has approved these matters they officially resign as the “first director(s)”.
  3. First Shareholders Meetings – Once the shares are allocated, the shareholders hold their first meeting (or unanimously sign resolutions in lieu of a meeting). A shareholder (owner of a company) does not have to be a director and a director does not have to be a shareholder.  Some of the items approved at the first shareholders meeting are:
    • Establishing the number of directors
    • Accepting the resignation of the first director(s) and voting on the new director(s)
    • Confirming By-Law No. 1.
  4. Consent to Act – Directors must consent to act as directors and this consent must be signed and inserted into the Minute Book.  This ensures that a director is not elected to the Board and his or her name is not put on the public record without his or her consent.
  5. Exemption from Appointment of an Auditor – Most privately held corporations are not required to have audited books. However, the statute governing a Canadian or Ontario corporation will require that the shareholders approve an audit exemption.
  6. Registers – Registers must be prepared for the corporation listing (i) the addresses and dates of appointment and resignation for directors and officers, and (ii) all of the individuals or corporate entities that hold shares in the corporation, the number of shares they own and the date they received those shares. It also records when shares are returned to the company or transferred to other individuals or corporate entities. Each shareholder will also have an individual ledger showing the date upon which shares were received and how many shares were allotted.
  7. Government Forms – All corporations must file returns with the government under which they are incorporated regarding changes to the status or personal information of the directors and officers.
  8. Share Certificates – Every shareholder has a right to a share certificate. This certificate evidences ownership and should be a part of the Minute Book.

Annual Corporate Governance

What is Annual Corporate Governance?

All corporations incorporated federally and provincially in Ontario are required by law to hold annual meetings of shareholders or to have annual resolutions signed by all of the shareholders in lieu of holding an annual meeting. Both the annual meeting and the annual resolutions are used to document certain critical decisions affecting the corporation both in the year that just past, and the year to come. Correctly identifying, preparing, passing, documenting and filing these decisions make up a corporation’s Annual Corporate Governance.

How is Annual Corporate Governance Helpful?

In addition to the legal obligation, engaging in appropriate Annual Corporate Governance is helpful in two ways:

  1. Liability Management – Annual Corporate Governance helps ensure that the responsibility and authority to manage the corporation (along with the associated liability) is clearly understood. This is of particular concern to directors and officers for whom liability insurance should be purchased.
  2. Changes in Structure (Investment, New Shareholders) / Major Transactions – When a corporation finds itself in a position to raise capital through investment, or is taking on new shareholders for any purpose, one of the first inquiries a potential investor or shareholder will make it to review the Minute Book (which includes all of the Annual Corporate Governance) to get a better understanding of your corporation’s governance structure. Corporations that have not maintained complete records generally find it very time consuming (and costly) to try and update and fully rectify their Minute Book at the time of investment. Furthermore, holding incomplete records can risk alienating the potential investor or shareholder from participating in the transaction. This can also be the case when a corporation is entering into other major transactions (including financing), as counterparties often wish to ensure that the individuals they are dealing with have the appropriate authority to bind the corporation to a significant commitment.

What decisions need to be documented?

Annual Corporate Governance documents involving several key decisions, including:

  • Financial Statements – Approval by the directors and submission to the shareholders
  • Approval of dividends, management salaries or bonuses
  • Directors – Resignations during the year, elections for the next year and consents to act as directors
  • Officers – Resignations during the year and appointments for the next year
  • The issuance and transfer of any shares in the corporation
  • Appointing Auditors & Accountants for the following year
  • Exemption from statutory audit requirements
  • Address Changes – Changes in the registered addresses of the corporation, shareholders, directors or officers, all of which require filing notice with the government.

What are the potential consequences of not maintaining Annual Corporate Governance?

In addition to the concerns with Liability Management, Changes in Structure and Major Transactions discussed above, not maintaining Annual Corporate Governance exposes a corporation to the following:

  • Substantial fines and penalties for breaching the Business Corporations Act (Ontario) or the Canada Business Corporations Act levied against the corporation and directors
  • Reassessment of income tax position by the Canada Revenue Agency
  • Significant (and costly) room for contention regarding decisions & accounting practices during a shareholder dispute
  • Missing critical communication from the government

Can I prepare the Annual Corporate Governance myself?

We are always happy to work with our clients to craft a bespoke solution to their Annual Corporate Governance needs. Smaller start-up clients often wish to draft initial resolutions themselves and have us provide a simple review, whereas more mature businesses often appreciate a comprehensive overview conversation prior to having us prepare their Annual Corporate Governance materials.

Minute Book

What is a “Minute Book” and why should I care?

After completing the incorporation process, your lawyer should provide you with a corporate minute book which becomes the permanent repository of your corporation’s key documents (the “Minute Book”). The Minute Book must be kept at the corporation’s registered office or at another place in Canada as designated by the corporation’s board of directors (the “Board”).

Your Minute Book should include Incorporation Documents and Annual Corporate Governance along with appropriately documenting and reflecting any decisions made by the Board or shareholders.

There are at least three good reasons to maintain your Minute Book:

  1. It’s the Law: Both federally and provincially incorporated companies are required to maintain corporate records that meet the statutory requirements of the Canadian Business Corporations Act (section 20) and Ontario Business Corporations Act (section 140) respectively.Although rare, it is possible statutory penalties may be assessed for failure to attend to these matters.
  2. Equity Transactions: An investor or purchaser of your corporation will likely want legal opinions relating to various corporate governance matters. Having an up-to-date Minute Book will provide for a smoother (and likely less expensive) transaction process. Even if you wish to transfer the corporation to a family member, you will want to ensure that the transfer is appropriately documented in order to avoid costly remediation in the future.
  3. Third Party Review: Various other parties may also want or need to examine your Minute Book from time to time to verify corporate authority or structure including:
  • Professional service providers (e.g. lawyers, accountants) prior to being retained
  • Lenders prior to issuing a loan
  • Real estate agents prior to completing commercial real estate transactions
  • The Canada Revenue Agency (as part of a tax audit)
  • Other federal/provincial taxation authorities.

As you can imagine, time is usually of the essence when a Minute Book is requested for review and remediating an out-of-date Minute Book can increase costs.  Setting up a Minute Book from incorporation and regularly maintaining it will save money and aggravation.

Unanimous Shareholder Agreements

What is a Unanimous Shareholder Agreement?

Corporate statutes in Canada[1] provide that a corporation’s default position is to be managed entirely by its directors and officers. This situation can be reversed through the use of a unanimous shareholder agreement (“USA”), which restricts the power of the directors to manage the corporation and instead transfers additional authority to the shareholders. All of the shareholders must agree that they desire to enter into a USA.

Why is a USA useful?

A USA is particularly useful for a closely held start-up company to establish the rules for governing and managing the corporation. The USA will provide mechanisms for resolving deadlocks and govern any transfer of shares. Clarifying expectations between shareholders at the initial stages of organizing the company can be the best way for the corporation to avoid drawn out and expensive disputes in the future.

What are the drawbacks?

Shareholders may become subject to the liabilities normally assigned to directors and officers to the extent that the USA removes powers and responsibilities from the directors and gives it to the shareholders. Protection from liability for shareholders is an important factor in deciding to incorporate a business in the first place. Consequently, any loss of that protection should be carefully weighed.

Typical USA Contents

USAs typically address a number of key measures that are designed to ensure a fair outcome for all parties involved during the course of the corporation’s existence:

  1. Dispute Resolution: Consideration can be given as to how deadlocks amongst shareholders can be resolved. The dispute resolution process may be limited to mediation or binding arbitration, which can be a less expensive alternative than seeking restitution through the courts. Shareholders may also wish to consider whether one of them should have a tiebreaking vote or a veto over certain actions.
  1. Unanimous Shareholder Approval: In the case where one shareholder owns the majority of shares, it is important to consider whether any issues exist that should not be decided by a simple majority vote. A USA can set out a class of material decisions which require supra-majority and/or unanimous shareholder approval to ensure that the majority stakeholder is not able to make unilateral decisions without first obtaining the consent of the other stakeholders involved.
  1. Share Transfer: A USA typically contains a primary rule that no shares can be transferred without the receiver of the shares becoming a party to the USA. This primary rule can be supplemented with a number of additional mechanisms to promote liquidity of the shares:
  • Right of First Refusal: A shareholder who receives a bona fide offer from a third party to purchase his or her shares must first allow the existing shareholders the right to match such offer prior to selling to any third party. This mechanism allows the existing shareholders the option to prevent a third party purchaser from becoming a shareholder and exercising control over the corporation in the future.
  • Buy/Sell or “Shot Gun” Provision: This provision allows one shareholder to offer the other shareholders a price and establish the terms under which he or she is prepared to either purchase the other shareholder’s interests or sell his or her interest to the other shareholders. It is then up to the other shareholders to decide whether they wish to either buy the offered shares or sell their own shares on the same terms and conditions presented. This provision can be very useful in the event of a shareholder dispute where the relationship between the shareholders has broken down and one party wishes to exit.
  • “Piggyback” or “Tag-along” Provision. If a shareholder is able to sell shares to a third-party, a piggyback or tag-along allows the non-selling shareholders to include their shares in the agreement with the third-party buyer. In other words, a shareholder could tag along with the seller and exit the corporation.
  • “Drag-along” Provision. If a majority shareholder decides to sell its shares it can require the minority shareholders to sell their shares to the buyer as well. This allows a majority shareholder to exit the corporation without a minority shareholder blocking the sale.
  1. Funding Considerations: A corporation requires access to capital both upon incorporation and during operation. A USA can prescribe how such capital can be obtained and ensure that each shareholder contributes the requisite amount in conjunction with his or her interest in the corporation or face a penalty for failure to do so. In the case of debt financing, a USA can prescribe how guarantees are to be signed and provide for the sharing of liability among shareholders.

There are several other matters that a USA can address depending on the needs of an organization. We are always happy to discuss how a USA may be of value to your corporation, and answer any question you may have.

Additional Reading:

Canada Business Corporations Act: Unanimous Shareholder Agreements

Chapter 8 – Organizing Your Corporation: The Shareholders

[1] In particular, the Business Corporations Act (Ontario) and the Canada Business Corporations Act