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Whatever is the size of the business, corporations are required to have annual resolutions to comply with the laws. In addition, annual resolutions can be signed in lieu of an annual meeting of shareholders, which is often used by smaller businesses.
These documents are an essential part of corporate governance and compliance. Although smaller organizations sometimes treat the process of approving annual resolutions as simple as "changing the dates," such an approach overlooks essential compliance issues and can lead to negative consequences. Below we get into more details about why annual resolutions are important, the consequences of failure to have them approved for each year and review the best practices and tools for corporate compliance.
In addition to the legal requirement to have annual resolutions, there are many other reasons why they are important and shouldn't be viewed as a mere formality. Annual resolutions are required for transactions, regulatory checks, filings, and having all decision-makers confirm that everyone is on the same page.
The importance of having annual financial statements approved by both directors and shareholders cannot be overestimated. First, directors need to approve financial statements before a tax return is filed. Second, shareholders should be provided with financial statements, acknowledge their receipt and approve them, confirming the transactions, dividends, salaries and bonuses and all other payments indicated in the statements.
Meanwhile, if shareholders do not sign the annual resolutions, some of them can always claim that they were uninformed of certain transactions reflected in annual financial statements or did not approve them. This can create risks of receiving claims from shareholders or even rescinding the transactions.
During annual meetings, shareholders must appoint an auditor to audit the annual financial statements. Meanwhile, many companies skip appointing an auditor to save costs and have the financial statements prepared by an accountant. Those shareholders who choose this path should execute and sign a written waiver from having audited financial statements.
If shareholders do not sign a written waiver and later have a dispute with the company, they can always demand audited financial statements for several years if their other interests are not satisfied. These risks can only be avoided if shareholders sign corresponding annual resolutions waiving the requirement for audited financial statements.
In most jurisdictions, annual resolutions are required for various corporate filings. For example, the federal government of Canada will not accept an annual tax return which doesn't include the date of the last annual meeting or annual resolutions. Meanwhile, the federal government may start the process of dissolving the corporation which failed to file its annual returns.
Besides, it is against the law in Canada to fail to maintain a minute book. Such failure violates Canada Business Corporations Act and can lead to significant monetary fines.
Having shareholders and directors review and approve annual resolutions helps to address issues which can be harder to rectify at a later date. If some directors or shareholders have any concerns, it is always easier to address such issues early and have their signatures on annual resolutions confirming that the matter was settled.
Likewise, any disputes with directors and shareholders can make it difficult, if not impossible, to bring corporate records and annual resolutions in order for the previous years. Meanwhile, the absence of annual resolutions or incomplete corporate records can be an obstacle to a transaction or a merger and deter investors or purchasers.
Given the importance of maintaining corporate records and the practice of forming multiple legal entities, businesses need to employ legal technology to ensure the safekeeping of corporate data, effective collaboration and compliance work.
When companies digitize their minute books, they create a single source of truth for all their corporate records. There is no switching back and forth between paper and scanned documents since the electronic versions serve as the original. Digitization saves space needed to store a physical minute book and protects businesses from the risk of having paper documentation lost or destroyed.
Digitizing corporate records allows shareholders and directors immediate access to all corporate data, including annual resolutions. There is no need to turn to a lawyer to retrieve some documents or data from a physical binder or wait for scanned copies to be sent by email.
Unlike physical documents or archived scanned copies, which take time to source and access, the virtual minute book allows organizations to use their data in real time, keeping all corporate records immediately available.
When legal teams can easily access annual resolutions for each year for all their legal entities, they can work more efficiently and speed up filing and transaction work. With a virtual minute book, all shareholders can retrieve any annual resolutions to follow the trail of decisions at click of a button.
When corporate records are digitized, they are stored on a secure cloud and can be accessed from anywhere on any device without the need to share them by email. This saves time for requesting or retrieving scanned copies and eliminates the risk of hacks or accidental exposure of corporate records.
Annual resolutions are important legal documents required by regulations and are necessary for many corporate actions. A failure to have annual resolutions addressing all the essential aspects of corporate governance and compliance signed by all shareholders can lead to delayed transactions, financial losses and regulatory penalties.
Business owners, law firms and in-house legal teams interested in applying best practices and tools for annual resolutions are advised to leverage legal technology and entity management software like Athennian to improve their processes. For more information, please don't hesitate to request a customized demo with an entity management expert.
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