Are you thinking of selling your business or buying a business? As part of the pre-transaction due diligence process, one of the first items potential buyers and their advisors will want to review is the target company’s corporate minute books. This applies to both asset and share transactions, but is particularly the case when a potential buyer is going to buy the shares of the target company.  In more cases than not, corporate minute books need to be updated prior to the actual closing to address outstanding matters, filings and deficiencies in the records. While this often results in more pre-closing costs than would have been the case had the minute books been properly maintained all along, there are more reasons than just avoiding the added costs for keeping proper minute books and corporate records. Here are a few considerations:

• In virtually all transactions, vendors are required to make representations and warranties to the purchaser about the state of the corporate records and minute books of the company and that the records have been maintained in accordance with applicable laws.  If this is not the case and vendors make these representations without first addressing the issues or properly qualifying the representations, then this will give the buyer an opportunity, post-closing, to make a claim for breach of the representation and seek damages. The end result, if the claim is successful, is that the buyer has clawed back a portion of the purchase price from the vendor(s); a result that can be avoided by proper records maintenance!
• In the purchase agreement, buyers will generally require vendors to make representations and warranties about who the shareholders of the target company are and that the shares have been properly issued. Buyers will want to ensure that the shares they are buying have been duly issued and paid for.  It is important that the issuance of shares is properly recorded in the corporate records in order to avoid delays in the proposed transaction and for Vendors to be able to make the required representations and warranties. Again, if the representations and warranties end up being false, the vendor risks potential liability and loss that could have been easily avoided.
• Buyers will want to ensure that a purchase and sale transaction is properly authorized by the directors and shareholders of the target company or of the vendors, as applicable.  An underlying requirement for these authorizations is that the shares of the company have been properly issued to the shareholders and the rightful shareholders have properly appointed or elected the directors of the company who are authorizing the transaction. In order to avoid the risk of a potential claim that the whole transaction was not properly authorized, vendors will want to ensure the proper authorizations are in place and the back-up documents are properly maintained in the corporate records of the company.
• If a buyer is borrowing money to complete the purchase and sale of a business, it will be important for the buyer’s minute books to be complete as well. Lenders generally, and institutional lenders in particular, will invariably require the borrower’s counsel to provide an opinion about the due execution, authorization and delivery of credit documents.  Borrower’s lawyers will not provide the required opinion unless and until the corporate records are complete and accurate. The same applies in the case of the target company if the target company is entering into credit documents in connection with security for the loan.
• If the Canada Revenue Agency (CRA) decides to initiate an audit of a company’s books and records, CRA officials will likely request access to the records to carry out a review. Failing to keep adequate records or failing to provide access to CRA officials because the records are not properly maintained can result in penalties.
• If a company has not complied with applicable corporate filing requirements, after a period of non-compliance, the default can result in the company potentially being struck from the corporate registry for failure to file. The unnecessary cost, effort and time required to restore the company can be avoided by timely and proper maintenance of the corporate records.

The foregoing are just a few scenarios that arise in the course of M&A transactions that illustrate how added costs, delays and potential liability can be avoided if a company’s minute books and corporate records are maintained properly in the ordinary course of business. While the records become particularly important leading up to and during a financing or purchase and sale transaction, seeking timely advice about your corporate records and being ready for these events in advance can contribute to a much smoother transaction.