Shareholders’ Rights To Corporate Records

One of the first things to happen when the relationship between a minority shareholder and the majority goes bad is that the minority is often denied information about the business. This may include being denied access to corporate records that are essential for any shareholder to know what is going on in their company.

It is very common in oppression cases for a minority shareholder to be, or claim, that he or she has been “excluded” from the business. Being cut-off from corporate information can certainly be a form of exclusion. When the minority shareholder is not part of management, or has been excluded from management, the lack of information concerning the business can leave the shareholder completely in the dark about what is happening at the business and how it is performing financially. This is untenable for someone who has an ownership stake in the business – it is also contrary to the law.

In the case of an Ontario corporation, the Ontario Business Corporations Act¹ requires a corporation to prepare and maintain specific records.² Section 140 of the Act provides:

Records, duties of corporation

140. (1) A corporation shall prepare and maintain, at its registered office or at such other place in Ontario designated by the directors,
(a) the articles and the by-laws and all amendments thereto, and a copy of any unanimous shareholder agreement known to the directors;
(b) minutes of meetings and resolutions of shareholders;
(c) a register of directors in which are set out the names and residence addresses, while directors, including the street and number, if any, of all persons who are or have been directors of the corporation with the several dates on which each became or ceased to be a director;
(d) a securities register complying with section 141; and
(e) a register of ownership interests in land complying with section 140.1. R.S.O. 1990, c. B.16, s. 140 (1); 2015, c. 38, Sched. 7, s. 44 (2).

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(2) In addition to the records described in subsection (1), a corporation shall prepare and maintain,

(a) adequate accounting records; and
(b) records containing minutes of meetings and resolutions of the directors and any committee thereof,

but, provided the retention requirements of any taxing authority of Ontario, the government of Canada or any other jurisdiction to which the corporation is subject have been satisfied, the accounting records mentioned in clause (a) need only be retained by the corporation for six years from the end of the last fiscal period to which they relate.  R.S.O. 1990, c. B.16, s. 140 (2).

The failure of a company to prepare and maintain the above records is a breach of the Act. But a refusal to let a shareholder examine the records is also a breach of the Act. Section 145 provides:

Examination of records by shareholders and creditors

145. (1) Registered holders of shares, beneficial owners of shares and creditors of a corporation, their agents and legal representatives may examine the records referred to in subsection 140 (1) during the usual business hours of the corporation, and may take extracts from those records, free of charge, and, if the corporation is an offering corporation, any other person may do so upon payment of a reasonable fee.  2006, c. 34, Sched. B, s. 27.

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(2) A registered holder or beneficial owner of shares of a corporation is entitled upon request and without charge to one copy of the articles and by-laws and of any unanimous shareholder agreement.  2006, c. 34, Sched. B, s. 27.

The courts have interpreted the above right to examine corporate records as being “unconditional”.³ Aside from what is referred to in the Act, the corporation is not permitted to impose any conditions on the right of inspection. As such, it has also been held that these rights include the right of a shareholder to retain agents or representatives, such as accountants, to examine the corporate records on the shareholder’s behalf. ⁴

It is important to note that the Act only gives shareholders the right to inspect the documents listed in subsection 140(1) of the Act. It does not give a shareholder the right to inspect the accounting records listed in subsection 140(2) or the information pertaining to directors meetings that is also referred to in subsection 140(2). In order to access those records, a shareholder may have to get a court order (which would be routinely granted in most shareholder disputes).

However, in the case of a shareholder who is also a director of a corporation, the right to inspect documents under the Act is even broader. Pursuant to s. 144 of the Act, a director has the right to examine all of the records referred to in s. 140, including subsections (1) and (2), as well as s. 141 (which deals with information on shareholders, and debt holders, etc). Section 144 provides:

Records open to examination by directors

144 (1) The records mentioned in sections 140 and 141 shall, during normal business hours of a corporation, be open to examination by any director and shall, except as provided in sections 140 and 143 and in subsections (2) and (3) of this section, be kept at the registered office of the corporation.  R.S.O. 1990, c. B.16, s. 144 (1).

Financial Statements

You may have noticed that the above sections do not address access to financial statements of the corporation. The section of the Act dealing with the obligation to produce financial statements is s. 154 and it applies in the context of annual shareholders meetings. It provides:

Information to be laid before annual meeting

154. (1) The directors shall place before each annual meeting of shareholders,

(a) in the case of a corporation that is not an offering corporation, financial statements for the period that began on the date the corporation came into existence and ended not more than six months before the annual meeting or, if the corporation has completed a financial year, the period that began immediately after the end of the last completed financial year and ended not more than six months before the annual meeting;

(b) in the case of a corporation that is an offering corporation, the financial statements required to be filed under the Securities Act and the regulations thereunder relating separately to,

(i) the period that began on the date the corporation came into existence and ended not more than six months before the annual meeting or, if the corporation has completed a financial year, the period that began immediately after the end of the last completed financial year and ended not more than six months before the annual meeting, and
(ii) the immediately preceding financial year, if any;

(c) the report of the auditor, if any, to the shareholders; and

(d) any further information respecting the financial position of the corporation and the results of its operations required by the articles, the by-laws or any unanimous shareholder agreement.  R.S.O. 1990, c. B.16, s. 154 (1).

The fact that the Act requires financial statements to be produced for use at an annual shareholders meeting, but does not generally allow shareholders to simply attend at the registered office to review them, is, in my view, a gap in the Act. Very often when there is a break down in the relationship between the shareholders the corporation does not have an annual shareholders meeting, or does not include a minority shareholder in such a meeting.

Obviously the failure to hold annual shareholders meetings or the failure to include minority shareholders in such meetings would be a breach of the Act, but the remedy for such a breach would still require litigation. A shareholder or director could not just show up at the registered office of the corporation and insist on having access to the financial statements pursuant to the Act. An aggrieved shareholder would have to commence a court proceeding seeking relief relating to the corporation’s failure to hold an annual meeting, or any other relief that may be applicable.

Once you reach the point of litigation, however, generally the courts will make broad orders for production of corporate records including financial statements and other financial or accounting records. The courts understand the importance of financial statements for shareholders. In the Pandora decision of Justice Lax, Her Honour considered the statutory obligations to produce financial statements and stated:

12. The OBCA sets out certain core obligations of a corporation to its shareholders, chief among which is the obligation to provide shareholders with an annual report card of the corporation’s financial position in the form of audited financial statements. This obligation is entrenched in Part XII, sections 149 and 154 of the OBCA, which includes the appointment of an auditor and the delivery of audited financial statements.⁵

The court also recognized in Pandora a shareholder’s statutory right to know the financial health of the business in which he or she is a shareholder.⁶

Unfortunately, in order to enforce the above rights, it may be necessary for a shareholder to resort to litigation. Whether it is in the context of an oppression proceeding or just a proceeding to compel access to information, the courts recognize the rights of shareholders to obtain access to records, including the records referred to in the Act. But it is important to note that the courts are not limited to ordering production of the records referred to in the Act. Production orders in oppression and other shareholder litigation can be extraordinarily broad.

If you or your business is facing the issues set out above, do not hesitate to seek legal advice.