By-laws are the rules pursuant to which a corporation conducts business. Many of those rules will be the same as outlined in the statute governing the company. However, in some cases the statute may provide that the by-laws can override certain standard statute provisions. Ontario operating by-laws are the main rules for the corporation.
Ontario Operating By-law
The Ontario operating by-law is the first by-law to be enacted by a company upon incorporation and every company must have an operating by-law. The rules outlined in the operating by-law are with respect to the number of directors, directors’ duties and meeting requirements, the appointment of officers and the rules relating to shareholders including meeting requirements, how many shareholders must be in attendance for it to be a valid meeting, etc. These are just a few of the provisions outlined in a standard Ontario operating by-law.
“(1) Unless the articles, the by-laws or a unanimous shareholders agreement otherwise provide, the directors may, by resolution, make, amend or repeal any by-laws that regulate the business or affairs of a corporation.
(2) Where the directors make, amend or repeal a by-law under subsection (1), they shall submit the by-law amendment or repeal to the shareholders at the next meeting of shareholders, and the shareholders may confirm, reject or amend the by-law, amendment or repeal.
(3) Where a by-law is made, amended or repealed under subsection (1), the by-law, amendment or repeal is effective from the date of the resolution of the directors until it is confirmed, confirmed as amended or rejected by the shareholders under subsection (2) or until it ceases to be effective under subsection (4) and, where the by-law is confirmed or confirmed as amended, it continues in effect in the form in which it was so confirmed.
(4) If a by-law or an amendment or repeal of a by-law is rejected by the shareholders, or if the directors do not submit the by-law, amendment or repeal to the shareholders as required under subsection (2), the by-law, amendment or repeal ceases to be effective on the date of such rejection or on the date of the meeting of shareholders at which it should have been submitted, as the case may be, and no subsequent resolution of the directors to make, amend or repeal a by-law having substantially the same purpose or effect is effective until it is confirmed or confirmed as amended by the shareholders.”
Amending or Repealing a By-Law
If the officers of an Ontario company wish to amend an Ontario operating by-law or another by-law, which has been approved by the directors and shareholders, the manner in which to approve the amendment to the by-law is to create a new by-law providing for the amendment. For instance the officers will create a new by-law no. 2 which repeals all or certain sections of operating by-law no. 1, and includes the new replacement sections to be approved. The officers would present by-law no. 2, being an amendment to by-law no. 1, to the directors for approval. If the directors approve the by-law then the directors shall present the by-law to the shareholders for approval at the very next meeting of the shareholders.
Approving a By-law
When the directors approve a by-law it is said that the by-law has been “enacted by the directors” and the shareholders of the company are said to have “confirmed the by-law”. All directors and shareholders of a corporation must have an opportunity to review the by-law and approve it for the by-law, amendment or repeal to be considered to be properly approved in accordance with the requirements under the Business Corporations Act (Ontario).
Below is an detailed explanation of what goes in a minute book. When a new company is incorporated there is a three step process: (1) obtaining a Certificate of Incorporation, (2) setting up a minute book and, in some cases, (3) filing an Initial Return.
Many new business owners do not want to pay to set up a minute book for their company. Since they are able to open up a bank account without showing a minute book they will forego having a book prepared. This can be problematic in the future. For more information refer to Why a Company Needs a Minute Book.
Setting Up Your Minute Book
The very first documents that are included in the minute book are called the “organizational documents of the company”. The documents that will be prepared and inserted in the minute book will be:
General Operating By-law – A by-law is a list of rules. Some of the things that you will find in a by-law are:
How many people must attend at directors and shareholders meetings for the meeting to be validly called
What the procedure is for calling directors and shareholders meetings to ensure it is a valid legal meeting
How many votes are required to approve an item of business at a directors or shareholders meeting
Which directors and officers can sign agreements on behalf of the company and obligate and bind the company under those agreements
What is the procedure for removing a director or officer of a company
How is an officer or director replaced or new officers and directors appointed
Who can borrow money upon the credit of the company
A general operating by-law in most cases sets out the provisions of the statute governing the company but some of those provisions can be varied for the particular circumstances.
All companies must have a general operating by-law which is enacted by the directors and confirmed by the shareholders. If you obtain a general operating by-law for your company you will be able to determine how to conduct business properly.
If meetings are held that violate the legal requirements for a meeting you could have issues with this in the future and in particular, in the case where a director or shareholder is objecting to an approval that was put through. If the approval at a meeting was not documented or documented incorrectly it could invalidate that approval and you may be forced to set aside that resolution.
In some provinces the general operating by-law provisions are included as part of the Articles of the company in a document called a Memorandum of Association.
Borrowing By-law – This by-law provides who has authority to borrow on behalf of the company and normally provides for the directors and officers to have this right. Banks frequently wish to see this by-law if the company wishes to borrow money.
First Directors Resolutions – The individuals who agreed to be the first directors on the articles of incorporation have a legal obligation to approve certain things right after incorporation including:
Appointing the officers
Allotting shares and confirming the amount paid for those shares
Enacting the general operating by-law
Once the first director has approved these matters he can then resign if he wishes or he can continue as a director of the company.
First Shareholders Meetings – There cannot be a first shareholders meeting until the shares have been allotted. As indicated above the first directors allot the shares to the shareholders. A shareholder (owner of a company) does not have to be a director and a director does not have to be a shareholder, however, frequently the owners of a company also wish to manage the company so they will be both a shareholder and a director. Some of the items approved at the first shareholders meeting are:
Determine how many directors there will be
Appoint the Auditor or the Accountant
Accept any resignations of the first directors and confirms the appointment of all directors
Consent to Act of directors – Directors need to consent to act as directors and this consent must be signed and inserted into the minute book of the company. This ensures that a director is not elected to the board of directors and his name is not put on the public record without his or her consent.
Exemption from Appointment of an Auditor– Most private companies are not required to have audited books. However, in many cases the statute governing the Canadian company will require that the shareholders approve an audit not being performed.
Registers – All statutes have a requirement that registers be prepared for a company. The registers you will find in a minute book are:
Directors Register – lists the dates of appointment and resignation of each of the directors and their addresses
Officer Register – lists the dates of appointment and resignation of each of the officers, the positions they hold in the company (i.e. President, Secretary, Vice-President) and their addresses
Shareholder Register – lists all of the individuals or companies that hold shares in the company, the number of shares they own and the date they received those shares. It also records when shares are returned to the company or transferred to other individuals or companies
Shareholder Ledgers – Each shareholder will have a ledger showing the date upon which he or it received shares, how many shares were allotted and the reason why those shares were allotted. It will also show when those shares are transferred to others, if applicable.
Forms – All companies must file returns with the particular Canadian government under which they are incorporated. When changes to directors and officers occur the government will expect you to provide them with an amended form showing all current addresses. This section of the minute book contains a record of all filings made to the government. It does not typically contain tax returns but you can store any documents you wish in a minute book.
Share Certificates – Every shareholder has a right to a share certificate. This certificate evidences ownership. If you have not set up a minute book for your company you will not have any proof of ownership.
Maintaining a Minute Book for a Company
After the initial “organization of the company” there may be circumstances where there may have to be changes to the structure. Some of the circumstances where changes may occur are:
A new by-law may need to be enacted such as a by-law to vary the borrowing rights of the company
New investors may be needed to move the company forward and those investors may wish to hold shares in the company
A director may resign and a replacement may need to be elected or new directors may be brought on because a new shareholder wants to be a director as well
The company may wish to enter into a major transaction and the directors may need to approve the form of agreement respecting same
A shareholder may wish to leave the company and will want to transfer his shares back to treasury or transfer the shares to the other shareholders on a prorated basis
The company may wish to conduct business in other jurisdictions in Canada or countries outside of Canada and those governments may request the directors to approve the registration
We all like bargains. There are services on the market which claim to provide you with a completed minute book for a reduced price. What you are given is a book with a number of blank resolutions, blank registers and blank share certificates.
In some cases you will be provided with the resolutions and the by-law but they will not be filled out and you will be left with trying to figure out how to complete them properly. In many cases there will be no instructions for this.
When you purchase a minute book be sure to ask what you are getting. The organization and set up of a company does cost a bit of money because it takes a number of hours to put together. The questions you should ask are:
Will there be a by-law?
Are there resolutions in the package which will show the actual names of the directors or officers or do the resolutions have blanks in them for insertion of the names?
Are you provided with a questionnaire which asks (1) who will the officers be, (2) who will the shareholders be and how many shares will be held which would indicate the company is setting up the company properly?
Will the registers be filled in with the proper individuals’ names?
If the resolutions will have blanks for names and numbers of shares will there be an instruction sheet included?
Depending on what you feel confident about doing, price shopping should be considered to ensure that the product you are receiving warrants the price paid in comparison to the different types of packages you can buy. i.e. the price of a blank minute book should be much lower than the price of a personally completed minute book.
If you are provided with no by-law and no resolution templates then you will need to understand how to complete the documents from scratch.
If you are provided with a by-law and resolutions with blank spaces for names, then you will need to be confident enough to fill in those blanks.
In the long run it is easier to have someone skilled at completing the documents for you.