The importance of maintaining a minute book
THE IMPORTANCE OF MAINTAINING A MINUTE BOOK.
There will be instances when a corporation, may be required to prove that it was duly incorporated, or provide evidence that specific corporate actions received proper director and shareholder approval. Examples of these situations can be Government reviews and audits or even certain financial activities such as opening a bank account or applying for a loan or line of credit in the name of the corporation. Therefore, Canadian corporations, whether incorporated federally or provincially and regardless of their size, are excepted and required to adequately maintain their corporate records in a minute book.
Often, individuals will try to save on legal expenses by incorporating on their own or with the assistance of other third parties such as accountants or online incorporation companies. While saving money is understandable, often these individuals are not aware or do not receive appropriate advice with respect to the necessity of maintaining of a properly organized corporate minute book, resulting in the organization of the corporate minute being overlooked entirely following an incorporation. Whether the corporation has only one shareholder or numerous shareholders, one director or numerous directors, maintenance of the corporate minute book is a must.
For corporations incorporated in Ontario, these record-keeping requirements are mandated under the Ontario Business Corporations Act, R.S.O. 1990, c. B.16, and for corporations incorporated Federally under the Canada Business Corporations Act, R.S.C., 1985, c. C-44. While the proper maintenance of a corporate minute book is mandated by statue, there are numerous practical business reasons to ensure that your corporate minute book is kept up do date.
What is A Minute Book?
A minute book is typically a loose-leaf binder that holds and organizes the essential incorporation documents, and other key corporate documents, including but not limited to, the corporate by-laws, as well as directors and shareholders resolutions. Although recently virtual minute books have also become popular allowing for access to a corporation minute book virtually without the need for the original physical minute book. A corporation’s legal status can be viewed by conducting a thorough review of the minute book and the documents contained therein, and it should also keep tracks of all important corporate documents and corporate decisions that have been made such as issuance of shares, loans and mortgages, shareholder agreements, major financial transactions, and payment of bonuses and dividends.
Why keeping a Minute Book is Important?
Here we have numerated the some of the reasons that help to explain how a properly maintained minute book shelters a business from potential complications and contributes to the effective operation of a business.
The Legality of the Corporations Actions
In order to make shareholder’s and director’s decisions effective and valid, their decisions should be recorded by way of passing a resolution. At each meeting of the shareholders and the directors of a corporation, one individual will typically transcribe notes (a.k.a. "minutes") of the outcome of discussions of the meeting (i.e., the resolution), should be placed in the corporation minute book. This ensures that the corporation complies with applicable legislation such as Canada Business Corporations Act, and Ontario Business Corporations Act, its by-laws and the articles of the incorporation. Therefore, any significant decisions by the directors and shareholders should be recorded by keeping resolutions in the minute book; otherwise, these decisions could be considered invalid.
Opening a Bank Account
To open a bank account, the bank requires to ensure that the corporation is legally incorporated and has proper corporate authority and authorization to open a bank account. An adequately documented and updated minute book will ensure the corporation is permitted to open a bank account.
Obtaining a Loan
In providing a loan to a corporation, a bank will take more precautions compared to opening an account and will examine whether the borrower corporation has the legal standing to borrow the funds. A lawyer, acting on behalf of the bank normally addresses this concern by inspecting the corporation's minute book to ensure that the corporate by-laws permit the corporation to borrow money and whether the proper corporate authority has been given for same. In providing their legal opinion, the lawyer will determine whether the corporation has the requisite power, capacity, and authority to borrow from the bank and whether the security agreement granted by a bank conflict with the corporation's articles and bylaws. It should be noted that reviewing a corporation's minute book is a mandatory part of a lawyer's due diligence in connection with the mortgage or loan transactions involving a corporation.
Selling Company and Raising Capital
For those corporate stake holders who intend to sell their business or raise the funding for the corporation from a financier, holding an updated and organized minute book plays a crucial role.
In a share or asset purchase or sale transaction, it is an ordinary course of practice that the counsel of the potential buyer reviews the corporate minute book. In her/his assessment, if the minute book is disorganized, the transaction may be delayed or even not move forward.
Moreover, if the company moves to raise capital from external investors by issuing shares, it is expected that the financer will want to thoroughly inspect the corporate minute book. Usually, a lawyer on behalf of the financier will conduct this due diligence to ascertain who is the major shareholder and who has a casting vote in the subject corporation. Also, investors, typically by inspecting the minute book, will scrutinize what rights are attached to each particular class of shares.
With respect to decisions such as the issuance of shares, dividends, and shareholder loans that are confirmed by the shareholders, if the appropriate shareholder resolution has not been reduced to writing and not signed, this could lead to disputes and challenges by dissatisfied shareholders claiming that proper corporate authority was not given for said actions. These types of disputes could cause legal expenses and practical headaches for corporation.
Finally, when business holders urgently need to organize their corporate minute book, such as when a corporate transaction is pending, the time and expense of having the minute books reviewed and fixed by lawyers is expensive. Appropriately, it is prudent for businesses to organize their minute book following incorporation constantly updated and on-point.
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