Holder of Canadian shares has right to audited results

By Derek Bell and Jason Woycheshyn, Bennett Jones LLP
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Shareholders in Canada have some rights that are unique to Canada. Commentators most frequently point to the “oppression” remedy, which has been described as “the broadest, most comprehensive and most open-ended shareholder remedy in the world”. But other shareholder rights are viewed as being just as fundamental.

Derek Bell
Derek Bell
Partner
Bennett Jones LLP

In January, the British Columbia Court of Appeal declared that the rights to have an auditor and to receive audited financial statements were two such fundamental shareholder rights. In the case of Li v Global Chinese Press Inc, the court held that any company incorporated under the federal Canada Business Corporations Act (CBCA) must appoint an auditor, and thereafter produce annual audited financial statements. A court has no discretion in this respect, and the particular financial circumstances of the company are irrelevant.

The CBCA provisions

Section 162 of the CBCA states in mandatory terms that shareholders of a corporation “shall”, by ordinary resolution, at the first annual meeting of shareholders and at each subsequent annual meeting, appoint an auditor to hold office until the close of the next annual meeting. If an auditor is not appointed at the meeting of shareholders, the incumbent auditor continues in office until a successor is appointed.

The only way to avoid appointing an auditor at an annual meeting is by shareholder resolution, as provided in section 163. Under the CBCA, such a shareholder resolution has to be passed unanimously, and such dispensation only applies to companies that are not “distributing corporations”, which in general means that only private companies can rely on this provision.

Section 155 of the CBCA, relating to annual meetings of shareholders, also speaks in mandatory terms. It says that the directors of a corporation “shall” place before shareholders at every annual meeting, comparative financial statements, “the report of the auditor, if any”, and “any further information respecting the financial position of the corporation required by the articles, the by-laws or any unanimous shareholder agreement”.

‘If any’?

As noted above, the directors of a company are required to produce to shareholders the report of the auditor, “if any”. This has resulted in Canadian companies arguing that the requirement to produce audited financial results is discretionary – sometimes there would be audited financial statements, sometimes there would be none: it is all up to the business judgment of the directors.

Canadian courts have consistently rejected that argument, holding that the words “if any” in section 155 of the CBCA do not affect the requirement for shareholders to appoint an auditor at the annual meeting (see Michael Merrill v Afab Security, Chrisger Systems Inc and Gerald Savage, 2007). Rather, courts have held that the words “if any” only apply to the situation where the shareholders by unanimous resolution consent to dispense with the appointment of an auditor.

Financial position irrelevant

Corporations in difficult financial circumstances have argued that engaging an auditor and obtaining audited financial statements are unreasonably cost prohibitive. Canadian judges have consistently found that the financial circumstances of the company are simply irrelevant, given the lack of discretion conferred on the court by the legislation.

The bottom line

The CBCA and other corporate statutes in each of Canada’s provinces set out comprehensive legislative schemes to provide financial information to shareholders. The schemes require the appointment of an auditor and the production of audited financial statements unless the shareholders of a company unanimously determine otherwise. If a company fails to comply with the statutory requirements, the legislation empowers the court to appoint an auditor and order production of the required documentation.

Jason Woycheshyn
Jason Woycheshyn
Partner
Bennett Jones LLP

This reasoning accords with the practical reality that consideration of the financial statements and auditors’ reports is a key element of the business conducted at an annual general meeting of shareholders. Indeed, courts have repeatedly allowed annual general meetings to be delayed pending the completion of an auditor’s report (see Re Imax Corp, 2007).

Where a company is insolvent and has filed for insolvency protection, it will often not file audited financial statements during the insolvency proceedings, even if it is a public company. However, the disclosure requirements of a company subject to the federal Companies’ Creditors Arrangement Act tend to be more current and detailed, at least as they relate to cash flow, than anything found in an audited financial statement.

Short of insolvency, if a Canadian company wishes to dispense with the auditor requirements, it can only do so by a unanimous shareholder resolution.

Derek Bell and Jason Woycheshyn are partners at Bennett Jones LLP, a law firm with offices in Calgary, Toronto, Edmonton, Ottawa, Dubai and Doha, and representative offices in Washington DC and Beijing.

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