Preparing a corporation for sale involves more than financial due diligence — it requires ensuring your corporate records are clean, current, and complete. One of the first things a buyer (and their legal team) will look at is how well the corporation has maintained its statutory obligations. Gaps in this area can complicate negotiations and delay closing the deal.
Here’s a practical guide to updating your corporation’s records prior to sale.
1. Annual Resolutions: Make Sure They’re Up to Date
Every corporation governed by the Business Corporations Act (Ontario) or the Canada Business Corporations Act is required to either hold an annual shareholders’ meeting or pass written annual resolutions to deal with certain maintenance matters. In practice, most closely held corporations opt for resolutions instead of holding formal meetings.
Before a sale, ensure that all annual resolutions have been properly prepared and signed for each year. These typically include:
- Approval of financial statements by the directors.
- Confirmation of officers and appointment of the corporation’s accountant.
- Shareholder actions, such as the appointment or waiver of auditors, and confirmation or waiver of receipt of the financial statements.
Incomplete or missing annual resolutions can signal poor governance and lead to questions during due diligence. Cleaning this up early shows buyers that the company is well-governed.
2. Confirm That All Annual Returns Have Been Filed
In addition to internal resolutions, both Ontario and federal corporations are required to file annual returns confirming current directors, officers, and the registered office address.
These filings are straightforward but missing even one can lead to consequences such as late penalties or being marked as “inactive” by government registries. Confirm that all annual returns have been filed accurately and on time.
3. Review and Document All Dividends
If the corporation has issued dividends to shareholders, those must be formally documented by the appropriate resolution, along with a solvency certificate stating that the corporation remained solvent immediately following the dividend declaration.
In some cases, a notice of eligible dividend may also need to be provided to shareholders. These documents are important for confirming the legality of the dividend and can impact tax planning during the sale. If dividend declarations are missing from your records, this is the time to bring everything up to date.
4. Management Bonuses Should Be Documented
If any management bonuses or incentive payments have been issued, they should have been approved by resolution. Buyers will look for clear documentation of any compensation arrangements, particularly those that may carry over after closing or affect the valuation of the business.
Ensure that all bonuses and discretionary payments are accounted for and appropriately authorized.
5. Ensure the Register of Individuals with Significant Control Is Available
Both Ontario and federal law require private (non-distributing) corporations to maintain a Register of Individuals with Significant Control. This register must identify individuals who own or control 25% or more of the corporation, either directly or indirectly. This recent requirement is often overlooked, but it is now a mandatory part of compliance.
6. Review Security Registrations Against the Corporation and Vendors
Prior to the sale of a business, it is essential that all Personal Property Security Act (PPSA) registrations be properly discharged or disclosed. PPSA registrations can indicate the existence of security interests over the business or vendor’s personal property, such as equipment, inventory, or accounts receivable. Discharging PPSA registrations ensures that the business assets are transferred free and clear of any security interests, thereby providing the purchaser with certainty of title and protecting both parties from potential post-sale disputes or liabilities.
For strategic guidance on preparing your corporation for sale, kindly contact our firm and stay tuned for additional posts in this M&A series.
