Anonymised, illustrative composite. The minute book was immaculate, a national firm had maintained it, and the auditors had accepted the entry for a decade. That is exactly why nobody looked at it.
At a glance
A private-equity buyer agreed to acquire all 1,500 issued common shares of a CBCA-incorporated specialty food manufacturer for $9,100,000. Three vendors: the founder with 600 shares, and two investors from a 2019 round holding 900 between them.
Corporate diligence looked like a formality. The minute book had been maintained continuously by a national firm, the securities register reconciled, annual resolutions were complete and signed, and the corporation had been audited every year since 2018. This is the profile that gets a records review scoped down to two hours.
The 2016 directors’ resolution authorising the founder’s 600 shares recorded the consideration as $600,000, satisfied by a demand promissory note from the founder to the corporation. The note was in the minute book. It was on the balance sheet as a subscription receivable, in the notes to the audited financial statements, and had been carried unchanged for ten years.
Nothing about that is hidden. It is documented, disclosed and internally consistent, which is why it survived a decade of professional review. This is not the case where nothing was paid — compare shares issued but never actually paid for — because something was tendered, recorded and accepted. The statute simply does not recognise it as consideration.
The buyer was therefore proposing to pay $3,640,000 for 600 shares that may never have come into existence — and every shareholder vote and every resolution passed on the strength of the founder’s 40% since 2016 sat on the same footing.
600 of 1,500 shares, exactly 40%. A $600,000 note. At $9,100,000 for the whole, $3,640,000 of the purchase price was allocated to the affected block.
The founder had also been relying on those shares for his own tax planning on exit, which made him a motivated party rather than an obstructive one.
The fix cost $22,000 in legal fees and three weeks of the timetable. The founder funded the $600,000 by directing that amount of his own closing proceeds to the corporation immediately before the share transfer, so no outside money was required.
Two subsections, and the operative one is not the one usually cited.
CBCA s.25(3) is the rule: “A share shall not be issued until the consideration for the share is fully paid in money or in property or past services that are not less in value than the fair equivalent of the money that the corporation would have received if the share had been issued for money.” Three permitted categories, and payment must be complete before issue.
Section 25(5) then removes the only category the note could have fallen into: for the purposes of that section, “property does not include a promissory note, or a promise to pay, that is made by a person to whom a share is issued, or a person who does not deal at arm’s length, within the meaning of that expression in the Income Tax Act, with a person to whom a share is issued”. The founder’s own note is the paradigm case.
Section 25(4) is the provision most often quoted alongside, and it does not decide this. It gives directors latitude in valuing property or past services — they “may take into account reasonable charges and expenses of organization and reorganization and payments for property and past services reasonably expected to benefit the corporation”. That is a valuation rule. Here there was nothing to value, because s.25(5) says the note was not property in the first place.
The remedy against the directors was already gone. Section 118(1) makes directors who vote for or consent to a resolution authorising the issue of a share under s.25 for a consideration other than money jointly and severally liable to make good the shortfall — but s.118(7) provides that an action to enforce that liability “may not be commenced after two years from the date of the resolution authorizing the action complained of”. On a 2016 resolution, that door closed in 2018.
And the fix is not retroactive. Section 25(3) conditions the issue. Paying the note in 2026 does not turn a 2016 issue into a valid one; it removes the impediment to a new one.
The parties did not attempt to cure the 2016 issuance. On the closing day, and in a fixed sequence: the founder directed $600,000 of his sale proceeds to the corporation, the note was cancelled and marked paid, the directors passed a fresh resolution issuing 600 common shares to the founder for that money, the securities register was updated, and the founder then transferred all 600 shares to the buyer as part of the same closing.
The vendor gave a specific, separately capped indemnity covering anything turning on those 600 shares having been treated as outstanding between 2016 and closing — dividends paid on them, votes cast on them, and the founder’s own holding-period position on exit. The buyer took a bring-down of the capitalisation representation at closing rather than relying on the signing version. See the corporate minute book entry and registering share transfers and updating records.
The buyer would have paid $3,640,000 to someone who had never acquired what he was selling, and acquired 900 shares of a corporation with 900 shares outstanding — which is 100% ownership, but not the 100% the price was struck on.
The second cost is worse because it is not fixable with money. Ten years of shareholder resolutions carried on 40% of a register that was wrong become open to challenge, including the 2019 investment round and every subsequent authorisation that depended on it. A buyer discovering that after closing is litigating its own company’s history.
A subscription receivable on the balance sheet of a private company.
That single line is the tell, and it sits in the financial statements rather than the minute book — which is why a records review scoped to the minute book will not find it and a financial review that is not looking for it will read it as an ordinary receivable. Trace it: if the receivable is owed by the person the shares were issued to, or by anyone not at arm’s length from them, s.25(5) has already decided the question. The fork is worth stating because it produces the opposite answer on identical paper: a note from a genuinely arm’s-length third party is not excluded by s.25(5), so it can be property, and the issue can be valid. The document is the same; the relationship decides.
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