Jake Bullen

March 7, 2012The Institute of Law Clerks of Ontario

Minute Book Reviews

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Overview – Due Diligence

Components of a Due Diligence Review

Due Diligence Summary

Due Diligence Request

List

Corporate Searches

Reviews:1. Minute Book2. Contracts3. Other Reviews

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Why Perform a Minute Book Review?

● When do we perform a minute book review?● In advance of a transaction

● Issuing shares from treasury● Sale of the issued and outstanding shares of the

Company● Company is going public

● Regular maintenance● The ordinary course operation of the business requires

meetings, resolutions and the update of the minute book● New client● Lawyer is asked to provide an opinion

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Why Perform a Minute Book Review?

● To obtain an understanding of a target corporation● Structure and history● Shareholders● Registrations, licenses and other qualifications

● To confirm representations and warranties being made by or to your client

● To support a legal opinion● To assist in drafting documents for a transaction

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Why? The Big Picture

● To confirm matters such as:a) Whether the corporation has the requisite power and

capacity to own its property and carry on its business;b) Whether the execution and delivery of one or more

agreements and completion of the transactions contemplated thereby (1) have been duly authorized and (2) do not violate any provisions of the corporation’s articles, by-laws or resolutions; and

c) The number and classes of shares constituting the authorized and issued capital of the corporation, and that the shares have been properly issued as fully paid and non-assessable and issued or transferred to the existing shareholders.

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What Should Be in a Minute Book?

● Canada Business Corporations Act (CBCA), s. 20:● (1)(a) the articles and the by-laws, and all amendments

thereto, and a copy of any unanimous shareholder agreement;

● (1)(b) minutes of meetings and resolutions of shareholders;● (1)(c) copies of all notices required by section 106 or 113;

and● (1)(d) a securities register that complies with section 50.● (2) … adequate accounting records and records containing

minutes of meetings and resolutions of the directors and any committee thereof.

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What Should Be in a Minute Book? (continued)

● Articles of incorporation (and/or amendment, amalgamation, continuance, etc.)

● By-laws● Shareholders’ agreements● Minutes of meetings (directors/

shareholders)

● Registers showing shareholders, and all issuances and transfers of shares

● Share certificate stubs and cancelled share certificates

● Registers showing directors and officers

● Government filings

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How to Commence a Minute Book Review

● Order corporate searches against the corporation, including (as applicable) a microfiche, a Corporation Profile Report or the use of an online search program such as the Industry Canada website

● Certificate of Existence (Industry Canada)● Ensure that your due diligence request list includes all of

the relevant minute book materials as well as related materials such as share certificate books, all applicable shareholder agreements and corporate organizational charts

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How to Commence a Minute Book Review (continued)

● Confirm and apply the applicable corporate statute(s) (including the correct version) for the minute book that you are reviewing

● Start with a good minute book review template● Identify all deficiencies; you can provide your input on the

relative materiality of each once the summary has been submitted

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Articles of Incorporation

● Corporate name ● Registered office● Election and number of directors

● Fixed v. sliding board● Are directors authorized to appoint additional directors?

(s. 106(8))● cumulative voting rights (s. 107)

● Restrictions on powers of the corporation (ultra viresdoctrine for older corporations)

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Articles of Incorporation (continued)

● Description of share capital, including restrictions on issue, transfer and/or ownership of shares

● Share attributes● Participating v. non-participating● Voting v. non-voting● Increases to default percentage of votes to pass resolutions

(e.g. supra-majority voting) (Section 6(3))● Rights to dividends (fixed, cumulative, etc.)

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By-Laws

● By-laws “regulate the business or affairs of a corporation”● Section 103(1): subject to the articles, by-laws or a

unanimous shareholder agreement, the directors may make, amend or repeal any by-laws

● Section 103(2): the directors must submit by-laws to the shareholders at the next meeting thereof to be confirmed, rejected or amended

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By-Laws (continued)

● Review to confirm that the Company is governing itself in accordance with the by-law requirements concerning:● Election of directors, notice of and operation of directors

meetings● Notice of and operation of shareholders meetings● Titles and duties of officers● Execution of instruments/documents● Shares● Directors’ and officers’ insurance and indemnification

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By-Laws (continued)

● Some important points to consider:● Does by-law address the Securities Transfer Act (Ontario)?● Does by-law permit electronic participation by a director at

a meeting of the board or a committee thereof?● Does Chairman have a casting vote?● Does by-law address a conflict of interest with respect to a

director or officer? ● How broad are the indemnity rights in favour of a director,

officer or former director/officer?● Can a shareholders meeting be held by electronic means?● What is quorum for a shareholders meeting?

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Excerpt from By-law No. 1 ofFancy Widgets Inc.

● Contracts, documents or instruments in writing requiring the signature of the Corporation may be signed on behalf of the Corporation by any two officers or directors and instruments in writing so signed shall be binding upon the Corporation without any further authorization or formality. The board shall have power from time to time by resolution to appoint any officer or officers or any person or persons on behalf of the Corporation either to sign contracts, documents and instruments in writing generally or to sign specific contracts, documents or instruments in writing.

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Resolutions

● Organizational resolutions of Directors and Shareholders should typically be passed at the time of incorporation● Directors’ Resolutions

● Share issuances and form of share certificates● Enactment of by-laws● Appoint accountants (if applicable)

● Shareholders’ Resolutions● Elect directors● Approve by-laws● Appoint auditors (or waive the appointment of auditors)

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Resolutions

● The review of share issuances and transfers is critical:● Do the number of common or preference shares

purportedly issued exceed the number authorized?● Was proper consideration received for each share issuance

in compliance with Section 25 (i.e., is there evidence in the minute book that sufficient consideration was received)?

● Were all share transfers made with the appropriate approval of directors and/or shareholders?

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Resolutions

● The review of share issuances and transfers is critical (continued):● Do the share registers match the resolutions approving

share issuances and/or transfers?● Is there evidence of share transfers in the form of endorsed

certificates or stock powers of attorney?● Compliance with restrictions on the issuance or transfer of

shares (such as pre-emptive rights, rights of first refusal and similar rights or limitations) contained in the articles or a unanimous shareholder agreement?

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Resolutions

● Section 25(3) of the CBCA:● A share shall not be issued until the consideration for the

share is fully paid in money or in property or past services that are not less in value than the fair equivalent of the money that the corporation would have received if the share had been issued for money.Section 118(1) of the CBCA provides that directors who vote for a resolution that issues a share for consideration other than money are jointly and severally liable to the corporation to make good any amount by which the consideration received is less than the fair equivalent of money that corporation should have received.

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Resolutions (continued)

● Many corporate actions require the authorization, by resolution, of the directors and/or the shareholders

● Subsection 117(1) (Directors) and Subsection 142(1) (Shareholders) provide that a resolution in writing signed by all of the directors or shareholders entitled to vote thereon is as valid as if it had been passed at a meeting of such directors or shareholders

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Resolutions (continued)

● With respect to meetings, confirm:● Has notice of the meeting been given, or notice waived (or

deemed to be waived by the presence of those entitled to notice)?

● Were the directors or shareholders given, in the notice of meeting, a sufficient description of the matters to be voted on at the meeting?

● Were any persons included in the quorum who were not authorised to be present at the meeting?

● Were at least 25% of the directors present at the directors’ meetings resident Canadians?

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Resolutions (continued)

● A very common deficiency:● The failure to meet the annual requirements prescribed by

the CBCA:● The approval of financial statements by the directors ● The appointment of officers by the directors● The election of directors by the shareholders ● The appointment of an auditor or waiver of auditor by

the shareholders

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Other Matters

● Registers● Directors’, officers’ and shareholders’

● Government filings● Unanimous Shareholders’ Agreement

● Directors (size, nominees, filling vacancies)● Restricting powers of the directors● Increase in voting requirements ● Issuing/transferring shares● Restrictions on how changes can be made to by-laws and

articles

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Unanimous Shareholders Agreements

● The taking of any of the following decisions or actions or the implementation of any of the following matters by the Corporation shall, in addition to any other approval required by Law, require the [unanimous] approval of [both the Directors and] the Shareholders [by Extraordinary Resolution]:● Amending the Articles● Amending or repealing by-laws● Allotting, reserving, setting aside or issuing shares or

granting any rights, warrants or options to purchase shares

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What Should the Minute Book of Fancy Widgets Inc. Indicate?

● Initial shareholders were John, Jamie, Frank and Mary● Initial subscription documents● Other organizational matters (directors, officers, by-laws, etc.)

● Shareholders’ agreement● Restrictions on share issuances, share transfers, approval of

corporate actions, size and composition of board of directors, etc.● John transferred half of his shares to Jamie Accountant

● Purchase documents● Authorizations re: transfer of shares● Cancellation of Joe’s share certificate and issuance of new share

certificates● Lost share certificate?

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What Should the Minute Book of Fancy Widgets Inc. Indicate? (continued)

● Name change● Special resolution passed? Section 173(1)● Articles of Amendment filed?● By-laws, resolutions, contracts updated to show new name?

● Extra-provincial registrations● Carrying on business in provinces other than in Ontario?

● John Widget no longer a director● resignation or removal?● was vacancy filled properly?● is Jamie Accountant a Canadian resident/citizen?

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Identifying Deficiencies:Residency Requirements for Directors

● CBCA requirements:● Subsection 105(3) - Subject to [the exception for certain

prescribed businesses], at least twenty-five per cent of the directors of a corporation must be resident Canadians. However, if a corporation has less than four directors, at least one director must be a resident Canadian.

● Subsection 114(3) - Directors …shall not transact business at a meeting of directors unless,

● (a) …at least twenty-five per cent of the directors present are resident Canadians or, if the corporation has less than four directors, at least one of the directors present is a resident Canadian;

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Identifying Deficiencies:Fundamental Changes to Articles by Shareholders

● CBCA s.173: … the articles of a corporation may by special resolution (of the shareholders) be amended to:● (a) change its name; …● (d) change any maximum number of shares that the

corporation is authorized to issue; …● (m) increase or decrease the number of directors or the

minimum or maximum number of directors …;● (n) add, change or remove restrictions on the issue,

transfer or ownership of shares; or● (o) add, change or remove any other provision that is

permitted by this Act to be set out in the articles.

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Identifying Deficiencies: Restrictions in Unanimous Shareholders Agreement

● CBCA s.146(1): An otherwise lawful written agreement among all the shareholders of a corporation, or among all the shareholders and one or more persons who are not shareholders, that restricts, in whole or in part, the powers of the directors to manage, or supervise the management of, the business and affairs of the corporation is valid.

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Identifying Deficiencies: Restrictions in Unanimous Shareholders Agreement (continued)

● Examples:● Subsection 6(3) - if the articles or a unanimous shareholder

agreement require a greater number of votes of directors or shareholders than that required by this Act to effect any action, the provisions of the articles or of the unanimous shareholder agreement prevail.

● Subsection 25(1) - Subject to the articles, the by-laws and any unanimous shareholder agreement and to section 28, shares may be issued at such times and to such persons and for such consideration as the directors may determine.

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Deficiencies Identified – What next?

● Confirming or ratifying resolutions● Amendment of articles● Statutory remedies ● Other alternatives:

● Indemnity from Vendor ● Reduction or withholding of purchase price● Affidavit or other evidence of authorization being provided

● Transfer shares to Newco and amalgamate or wind up (see next 2 slides)

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Step 1: Transfer of Shares

Unknown Shareholder

Shareholder

NewCoOldCo

Issuance of NewCoSharesTransfer

of OldCoshares

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Step 2: Winding-Up or Amalgamation

Winding Up

Shareholder

NewCo

OldCo

UnknownShareholder

Dissolution of OldCo

Assets andLiabilities

Amalgamation

Shareholder

NewCo

OldCo

AmalCo

Unknown Shareholder

X Cancelled

X Converted

Shareholder

AmalCo

Unknown Shareholder

Cancelled after date of redemption

Assets & Liabilities

Assets & Liabilities

Conversion into redeemable

shares

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Sample Rectifying LanguageElection of Directors

BE IT RESOLVED THAT:1. The shareholders hereby ratify and confirm that the number of directors to be elected to the

board as of the date of incorporation to and including December 1, 2008 was determined to be one (1) director;

2. The shareholders hereby ratify and confirm that John Widget was elected as the first director of the Corporation on October 1, 2008;

3. The shareholders hereby ratify and confirm that the number of directors to be elected to the board was increased from one (1) director to two (2) directors on December 1, 2008;

4. The shareholders hereby ratify and confirm that Jamie Accountant was elected as director of the Corporation on December 1, 2008;

5. The shareholders hereby ratify and confirm that the number of directors to be elected to the board was decreased from two (2) to one (1) on December 1, 2008, as a result of the resignation of John Widget;

6. The shareholders hereby ratify and confirm that the sole director of the Corporation as of the date hereof is Jamie Accountant.

Signed - all the shareholders of the Corporation

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Sample Rectifying LanguageGeneral Security Agreement

WHEREAS the Corporation entered into a general security agreement (the “GSA”) with Big Bank on July 5, 2009 and the transaction was not documented in the records of the Corporation; AND WHEREAS in this regard, the directors of the Corporation wish to ratify and confirm the following resolution:BE IT RESOLVED THAT:

1. The entering into of the GSA is hereby ratified, confirmed and approved;

2. Any officer or director may sign the GSA and all documents necessary to effect the transaction on behalf of the Corporation and the same is hereby ratified, confirmed and approved.

Signed - all the directors of the Corporation

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Sample Rectifying LanguageNumber of Shares

● CBCA s. 52(2): When an issuer amends its articles … to increase its authorized securities to a number equal to or in excess of the number of securities previously authorized plus the amount of the securities overissued, the securities so overissued are valid from the date of their issue.

BE IT RESOLVED THAT:1. It is hereby confirmed and acknowledged that there were a total of 1,100 issued

and outstanding common shares in the capital of the Corporation as at December 1, 2008 notwithstanding that only 1,000 common shares were authorized to be issued pursuant to the Articles of the Corporation; and

2. It is hereby confirmed and acknowledged that Articles of Amendment were filed and dated December 1, 2009 increasing the number of common shares that the Corporation was authorized to issue from 1,000 to 3,000.

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Rectification by Court Order

● CBCA Section 243(1) - If the name of a person is alleged to be or to have been wrongly entered or retained in, or wrongly deleted or omitted from, the registers or other records of a corporation, the corporation, a security holder of the corporation or any aggrieved person may apply to a court for an order that the registers or records be rectified.

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Rectification by request to Director of Corporations

● CBCA Section 265(3) - The Director may, at the request of the corporation or of any other interested person, accept a correction to [the articles, a notice, a certificate or other document] … ifa) the correction is approved by the directors of the

corporation … ; andb) the Director is satisfied that the correction would not

prejudice any of the shareholders or creditors of the corporation and that the correction reflects the original intention of the corporation or the incorporators, as the case may be.

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Conclusion

● A thorough minute book review is an integral part of the due diligence process

● There are deficiencies that can be fixed or at least ameliorated (by resolutions, amending articles, repealing by-laws, use of Newco, statutory remedies), and deficiencies that cannot be fixed

● Opinions may be difficult, or impossible, to give● Consider creative solutions (e.g. indemnities, reduction in

purchase price, holdbacks in purchase price)

© 2011–2012 CASSELS BROCK & BLACKWELL LLP. ALL RIGHTS RESERVED.

This document and the information in it is for illustration only and does not constitute legal advice. The information is subject to changes in the law and the interpretation thereof. This document is not a substitute for legal or other professional advice. Users should consult legal counsel for advice regarding the matters discussed herein.

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Minute Book Reviews