Maintenance and verification of a minute book: Some basic rules - and exceptions
Our clients sometimes ask: "Why do we have to keep the corporate records up to date?"
The quick and easy answer? Because it is mandatory. The real answer? Because it is important.
It is mandatory
Corporate record maintenance is mandatory because the law requires it. The various Business Corporations Acts all require a corporation to keep its corporate records up to date, with some jurisdictions enforcing the rule by severely punishing any breach of this requirement.
Why is it mandatory? Amongst other reasons, for the benefit of the members of the corporation: the directors, the officers and the shareholders. A corporation must make every effort to ensure that it has the latest information on its members, while they in turn have the right to insist their information is accurate and up to date.
A director who has resigned but who still appears on the directors' register may retain important responsibilities relating to employees and/or tax authorities despite his or her departure.
A shareholder who does not appear on the share register may be denied important rights, including the right to vote, to receive dividends and to take advantage of the increase in value of their shares, where relevant. According to the law, members of the corporation must also be permitted to access the corporate records.
In addition, the law requires that key documents, such as the unanimous shareholder agreement, be kept as part of the corporate record. And because a corporation only speaks through the resolutions it adopts, it is important to keep these in the corporate records as well.
It is important
Every corporation has a constructive obligation to comply with all laws, starting with its governing act. Corporate record maintenance is important for the following reasons:
• Every shareholder, every director and every officer has the right to expect that their information remains accurate and up to date;
• Every member of the corporation has the right to access certain registers contained within the corporate record with the expectation that those registers are reliable and up to date;
• Any creditor will ensure that corporate records are up to date before lending a sum of money;
• In the event of a tax audit, the relevant authorities can insist that the corporation’s records are updated and duly completed;
• Any potential buyer will ensure that the corporation complies with all laws governing it, starting with its own enabling act.
And lastly, though certainly not the least, if the corporate records are maintained accordingly, all parties involved in the affairs of the corporation will potentially save a lot of money, time and stress by avoiding costly legal battles. Every year, we see countless court decisions from people seeking recognition of their status as members of a corporation or, on the contrary, seeking to contradict what the registers say, often with respect to issues of personal liability. The reality is that incomplete corporate records, deficient resolutions or missing organizational proceedings are all illegal circumstances which may lead to a legal battle, whether or not it ends up in the courts.
Are there any exceptions?
Only one – when shareholders exercise all the powers that usually vest in the board of directors by way of a unanimous shareholders’ agreement, it becomes the only situation in which the corporation can afford not to have resolutions from the board of directors, the board being powerless in this case. However, in such cases, the shareholders must then adopt all of the necessary resolutions instead.
How do we best proceed with the verification and update of the corporate records?
It is important to determine the current situation of the corporation with respect to its jurisdiction. In order to do this effectively, one should obtain the different certificates and attestations from the public authorities where available, as well as ascertaining the status of the corporation’s information in regard to all the requirements based on its enabling act.
Once you have a good understanding of the corporation’s current situation, one should then conduct a review to ensure full compliance by checking the history of the adoption, issuance and amendment of the following items, amongst others:
• Shareholders and Directors
• Articles of incorporation and their various amendments
At this point, we enter the final stage of the assessment process - the listing of deficiencies. It is necessary to list the deficiencies, irregularities, omissions and errors with respect to each of the points listed in the previous step, taking care to qualify them as material errors in order to decide whether they needed to be corrected or not.
Each step will consist of several sub-steps and related actions that need to be taken. Additional items to be verified include:
• The quorum at meetings of directors and shareholders;
• Shareholders agreement – unanimous or otherwise;
• Preemptive rights;
• Right of first refusal;
• Borrowing power;
• Qualification of subscribers and purchasers of securities;
• Stock options;
• Other outstanding securities;
• Share certificates or notices of detention;
• Annual Meetings that may be missing;
• A listing of all main transactions.
Corporate records analysis requires patience, concentration and an in-depth knowledge of corporate laws. With these attributes in place, and with the aid of effective information management tools, effective corporate records management is an attainable goal.
Originally written October, 2016
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