Mentors play a unique role in the startup-building ecosystem. As individuals who have been down the path before, you possess critical insights that can help new founders navigate choppy waters, avoid obvious (to you) pitfalls, and help accelerate their businesses.
Designed for MindFrame Connect by Slingshot, a legal service for founders, start-ups, and emerging companies provided through Gilbert’s LLP. This framework seeks to provide founders and entrepreneurs with some key tools and considerations for resilient governance, with a specific focus on corporations. Proper record-keeping and governance in the moment will allow your company to be agile and prepared.
WHAT IS GOVERNANCE?
As we discussed in our previous module, businesses in Canada are typically structured in one of three ways: as a sole proprietorship, partnership, or corporation. Since corporations are the most common business form in Canada, this module will focus on corporate governance and, specifically, healthy record-keeping in a corporation’s minute book.
Corporate governance takes place at three levels:
Shareholders are the owners of the corporation and have the right to elect directors;
Directors form the board of the corporation. They are ultimately responsible for managing the affairs of the corporation and delegate authority to officers to oversee day-to-day matters; and
Officers manage the day-to-day affairs of the corporation within the scope of their delegated authority.
Governance is the ongoing process of managing an entity through which a business is carried on. Corporate governance provides a framework for managing risk, ensuring accountability, and maximizing value. At its most basic level, governance is the process of:
abiding by the rules regarding how corporate decisions are made and records are kept; and
formalizing the approval of such decisions through corporate records to empower directors and officers to act on behalf of the corporation.
SOURCES OF GOVERNANCE RULES
Corporate governance rules come from several sources: the corporation’s governing legislation and common law, the corporation’s articles and by-laws, and any agreements between the corporation and its shareholders (e.g. shareholders agreements, voting trusts, etc.).
GOVERNING LEGISLATION
Corporations are a creature of statute. Statutes are the formal written laws of the federal, provincial, and territorial governments of Canada.
The corporate statue applicable to your corporation depends on where you incorporate. If you incorporated as a federal corporation, the Canada Business Corporations Act is applicable. If you incorporated as a provincial or territorial corporation, the relevant statute for that province or territory will apply (e.g. the Business Corporations Act (Ontario) or the Companies Act (Nova Scotia)).
Corporate statutes in Canada typically grant shareholders the right to elect directors and make other decisions relating to fundamental changes to the corporation. The statute will generally set out whether an ordinary or special resolution of the shareholders is required. Ordinary resolutions typically require a simple majority, while special resolutions typically require a two-thirds majority.
Corporate statutes in Canada are usually less helpful in understanding where formal director approval is required. You might instead need to consider whether the action being taken is in the ordinary course of a corporation’s business.
For example, for a corporation running a clothing business, ordinary actions could include buying inventory from suppliers and selling that inventory to customers. These actions taken in the ordinary course are overseen by officers, not directors, and typically do not require formal director approval. However, the board might set budgets or other limitations, beyond which officers require director approval to act.
COMMON LAW
Corporations are also subject to the laws created through common law (i.e. laws created through our court system). Determining applicable rules requires a review of case law with respect to a specific legal issue. As such, the rules and principles applicable to corporate governance will not be reviewed here, but may be relevant to consider from time to time.
ARTICLES OF INCORPORATION AND BY-LAWS
The constating documents of a corporation usually include articles of incorporation and by-laws. The articles of incorporation are issued by a federal, provincial or territorial government and bring a corporation into effect. The articles of incorporation establish high-level, foundational rules and parameters within which a corporation must operate.
The by-laws are also a source of rules regarding corporate governance but do not require approval from a government. Rather, by-laws are created and approved by the directors and shareholders of a corporation. Unlike the articles of incorporation, the by-laws are typically more detailed rules, including requirements of directors, director meetings, shareholder meetings, and more.
While incorporators and directors typically enjoy flexibility in the drafting of constating documents, a corporation’s governing legislation will provide rules and regulations and should be consulted prior to preparing either document.
AGREEMENTS
Certain agreements, such as shareholders agreements, voting trusts or voting agreements, and investor rights agreements, may also be a source of corporate governance rules. Voting trusts or voting agreements can empower certain directors and officers of a corporation to vote shares held by certain shareholders for or against various corporate decisions and actions. Shareholders agreements and investor rights agreements can transfer power typically held by directors and officers to certain shareholders. For example, such agreements may restrict normal-course director and officer decision-making and action on particular matters unless and until shareholder approval is obtained.
It is important to review and consider these agreements to ensure that any corporate decision and action is compliant.
EMPOWERING ACTION
A corporation is seen in the eyes of the law as a separate person, with its own rights and obligations. However, the decisions of a corporation are ultimately made by humans and documented in a corporation’s written records.
Shareholders’ and directors’ decisions are formalized in written records called resolutions. Decisions can be made entirely in writing, called written resolutions, or at meetings of shareholders or directors, in which case the resolutions passed are recorded in written meeting minutes.
DO YOU NEED A RESOLUTION?
Since shareholders do not control the day-to-day affairs of a corporation, their rights are protected by law through certain approval rights over a corporation’s conduct. As mentioned under SOURCES OF GOVERNANCE RULES, such approval rights can be found in the applicable corporate legislation, at common law, and in shareholder and investor rights agreements.
Shareholders elect directors to manage the corporation. The directors then make decisions that result in actions taken by the corporation. The directors therefore need to be accountable to the shareholders for the actions they take and need to document the decisions that give rise to corporate action. This kind of relationship of accountability is described in legal terms as a fiduciary relationship – directors are fiduciaries of the corporation and are legally required to act in its best interest.
To ensure they comply with their fiduciary obligations and to make clear what the corporation has been properly empowered to do, directors should document the decisions they make in resolutions. This helps demonstrate to shareholders and other stakeholders that any decisions of directors were made in accordance with sound business judgement, applicable law and the rules of the corporation.
ANNUAL RESOLUTIONS
Shareholders and directors also pass annual resolutions. An annual directors resolution generally approves the financial statements, appoints officers and the corporation’s accountant, and approves filing of the annual return. An annual shareholders resolution generally confirms receipt of financial statements, elects directors, and may waive audit rights in respect of a financial year.
GOOD GOVERNANCE
In addition to passing resolutions, good governance takes form in various other ways. There are several filings that a corporation is required to make with the government to ensure that it is in good standing. Corporations are also required to maintain certain registries. Along with resolutions, these corporate records form part of the corporation’s minute book. The minute book is a central source of information on the history and activities of the corporation.
INITIAL AND ANNUAL FILINGS
Required filings for a corporation may include initial and annual corporate returns filed with the government. An annual corporate return confirms certain information (e.g. the corporation’s registered address, directors, and officers) or disclose any such changes in the corporation. A corporation must file an annual return to remain active and in good standing.
NOTICES OF CHANGE
Notices of change are filed on an as-needed basis when certain changes occur in a corporation, such as a change of registered address, change of directors, and change of director address. While these changes can sometimes be disclosed in an annual corporate return, corporations are required by law to report such changes within a certain period of time following its effective date.
EXTRA-PROVINCIAL REGISTRATION
An extra-provincial registration permits a corporation to conduct business in a jurisdiction other than its home jurisdiction (e.g. an Ontario corporation that wishes to operate in British Columbia must obtain an extra-provincial registration to do so). This filing requires name search to ensure the corporation can conduct business using the same name it uses in its home jurisdiction.
TRADE NAMES
A trade name permits a corporation to conduct business using a different name. For example, if a corporation incorporated as “ABC Inc.” wishes to drop its legal suffix (i.e. the “Inc.” portion of its name), then it must register ABC as a trade name to do so. Corporations may also incorporate as a numbered company (e.g. 123456 Ltd.) and wish to register a trade name to market, build brands and do business using a different name.
Many corporations often drop the legal suffix, shorten their legal names (e.g. using acronyms), or change the spelling of their legal name without amending their articles or registering a trade name. This creates liability for a corporation. The legal suffix serves as notice to the public that they are doing business with a corporation and ultimately provides protection to the corporation. Shortening or changing the spelling of a corporation’s legal name creates confusion in the public as a corporation is doing business under an unapproved name.
REGISTERS
A corporation is required to maintain certain registers in its minute book. These registers may include a director register, officer register, shareholder register and ledger, land register and significant holder register. These registers record certain historic and current information regarding the corporation’s directors and officers, shareholders and property. Corporations should review their governing legislation to determine their record-keeping requirements with respect to such registers.
Slingshot | Gilbert’s LLP
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