In closely held corporations, it is not uncommon that annual shareholder minutes are not prepared, and financial statements are not audited despite the general legal requirement to do so (absent shareholder exemption) under corporate statutes.
In such cases, where a shareholder demands a back audit for all the years in which one was not conducted, the question arises: how far back can such a demand go? A recent decision of the Ontario Divisional Court finds that a corporation's duties to provide audited financial statements are bound by the two-year limitation period outlined in the Limitations Act S.O. 2002 ("Limitations Act").
Overview
Ontario's Business Corporations Act (the "OBCA") lays out statutory audit requirements for corporations, notably in sections 149 to 154. If shareholders have not unanimously exempted the corporation from appointing an auditor, section 253(1) of the OBCA empowers shareholders to seek court intervention for compliance orders. In the matter of Lagana v 2324965 Ontario Inc., 2024 ONSC 953 the court grappled with the question of whether a shareholder, Carmelo Lagana (the "Shareholder"), could demand audited financial statements for the years 2013 through 2021, or whether such demand was statute barred under the Limitations Act as a "claim" and, therefore, 2324965 Ontario Inc. (the "Corporation") needed to provide audited financial statements for only two years.
Decision and Appeal
In its analysis, the trial judge1 found that the Shareholder's application for a compliance order under the OBCA did not meet the definition of a "claim" under the Limitations Act; rather, it was an entitlement under the OBCA, and the Shareholder had not pursued any broader relief beyond the Shareholder's statutory entitlement. As a result, the trial judge felt that the demand for audited financial statements pre-2019 was not subject to statute-barred limitations. However, on appeal the Divisional court2 agreed with the Corporation that the order for audited financial statements should be limited to two years prior to the date the Shareholder brought the application.
The Divisional court agreed that an application for an order for compliance under section 253 of the OBCA constituted a "claim" and was, therefore, subject to applicable limitation periods under the Limitations Act. In its analysis, the court looked to section 1 of the Limitations Act, which defines a claim as a proceeding brought "to remedy an injury, loss, or damage that occurred as a result of an act or omission".3 The court reasoned that the failure to provide audited financial statements constituted a loss to shareholders, aligning with the definition of a "claim" under the Limitations Act.
Key Takeaway
While Corporations must fulfill their obligation to provide audited financial statements to shareholders under the OBCA or be subject to a compliance order, a shareholders' right to redress in such circumstances is not unlimited. If you are corporate management, a member of a board, or a shareholder and have any questions about the scope or enforceability of shareholder rights under the OBCA, a member of our business law group would be happy to explain and assist.
The author would like to thank our Student-at-Law, Pulkit Sahi, for his assistance in writing this blog.
Footnotes
1. Lagana v. 2324965 Ontario Inc. et al, 2022 ONSC 7286.
2. Lagana v 2324965 Ontario Inc., 2024 ONSC 953.
3. Limitations Act, 2002, SO 2002, c 24, Sched B, s 1.
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