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:
- 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.
- 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.