Anonymised, illustrative composite. The numbers in the data room were never in dispute. What was missing was the corporate act behind them — a board approval the CBCA requires to be evidenced by signature, and an auditor dispensation that needed every shareholder's consent and a fresh vote every year.
At a glance
A buyer agreed to acquire the shares of a federally incorporated specialty packaging manufacturer in southwestern Ontario for $6,400,000. The company had four shareholders and had never been a distributing corporation. The data room opened with three years of comparative financial statements from a regional accounting firm, matching tax returns and a management pack. The numbers reconciled, and nobody has ever disputed them.
The corporate-records leg of diligence ran in parallel, and that is where the file came apart. The request was routine: produce the directors' resolutions approving each set of statements, and the shareholders' resolutions appointing or dispensing with the auditor for those years. Neither existed in a form the Act recognises. See the corporate minute book for what a complete record should hold.
Two separate corporate acts were missing, and they are missing for different reasons.
First, no director had ever signed the statements. The accounting firm issued them, the controller circulated them, and the bank was given copies every year in support of its covenants. No approving resolution was ever passed and no signature appeared on the statements. Approval was assumed to have happened somewhere in the annual cycle, as it is in most closely held companies.
Second, the auditor question had been settled once and never revisited. In 2019 the founder implemented an estate freeze: the two active shareholders took voting common shares, the founder and his spouse took non-voting preferred. A resolution dispensing with the appointment of an auditor was signed the same week — by the two voting holders only. The spouse never signed, and the resolution was never put to the shareholders again.
That matters because the share purchase agreement was going to carry the ordinary representation that the statements presented fairly. The buyer was not asking whether the numbers were right, but what corporate act the representation would be made about.
Three fiscal years of statements, covering revenue of $18,100,000, $19,700,000 and $21,300,000. Four shareholders. One dispensing resolution, signed by two of them, in 2019. Five annual meetings since, at none of which an auditor was appointed or a fresh dispensation passed. Zero director signatures across nine sets of statements, every one issued to the lender.
Three provisions do the work, and each governs a different unit. Confusing them is how this defect survives diligence.
The statements. CBCA s.155(1), Annual financial statements, requires that “The directors of a corporation shall place before the shareholders at every annual meeting” comparative statements for the periods it describes. Section 158(1), Approval of financial statements, then says: “The directors of a corporation shall approve the financial statements referred to in section 155 and the approval shall be evidenced by the manual signature of one or more directors or a facsimile of the signatures reproduced in the statements.” The unit is the board, not the accountant. An engagement report is the accountant's product; approval is a corporate act only the directors can perform.
The circulation. Section 158(2) is headed Condition precedent, and it is a prohibition, not a formality: “A corporation shall not issue, publish or circulate copies of the financial statements referred to in section 155 unless the financial statements are…approved and signed in accordance with subsection (1)” and accompanied by the auditor's report, if any. Nine unsigned sets had gone to the bank. On the face of the Act that is what the provision forbids. See condition precedent for the drafting sense of the same phrase.
The auditor. This is the part most often misread. Section 162(1) requires that “Subject to section 163, shareholders of a corporation shall, by ordinary resolution, at the first annual meeting of shareholders and at each succeeding annual meeting, appoint an auditor to hold office until the close of the next annual meeting.” The escape route is s.163. Subsection (1) allows it — “The shareholders of a corporation that is not a distributing corporation may resolve not to appoint an auditor” — but two subsections then limit it, and the company satisfied neither.
Subsection (3), headed Unanimous consent, provides that “A resolution under subsection (1) is not valid unless it is consented to by all the shareholders, including shareholders not otherwise entitled to vote.” The founder's spouse held non-voting preferred shares. She is precisely the holder that phrase is there to capture, and she did not consent. Subsection (2), headed Limitation, adds the second failure: “A resolution under subsection (1) is valid only until the next succeeding annual meeting of shareholders.” A dispensation is an annual act. The 2019 resolution could not have covered 2020 even if every shareholder had signed it.
The unit for s.163 is one shareholder body, one year at a time — not one decision taken at a reorganisation. So the company had been required to appoint an auditor at each annual meeting from 2020 onward, and had not.
Nothing about the numbers changed and the price did not move; the closing agenda did. The board passed approving resolutions for each year and signed the statements, so the representation had a corporate act to attach to. The shareholders passed a fresh dispensing resolution executed by all four holders. A specific representation that no auditor had been appointed and that the shareholders had not validly dispensed with one moved the issue from hidden defect to disclosed one, and let the buyer price it at nil.
The exposure is not that the statements are void — nothing in the Act says that. It is that a share buyer steps into a company whose shareholders failed to do something the Act requires, in a way a departing minority holder can later characterise as conduct disregarding her interests. The non-voting holder was the founder's spouse. Nine unsigned packs had also gone to a lender under a covenant that almost certainly described them as approved.
The tell is in the minute book, not the financial file, and it is one question: who signed. A data room holding statements but no approving resolution, and a minute book whose last shareholder resolution predates the last three annual meetings, describe the same gap from two directions. The second tell is non-voting shares issued in a freeze, because s.163(3) catches exactly the holder nobody circulates resolutions to. See what a notice-to-reader engagement proves for the accounting half.
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