ONTARIO – Shareholder’s Right to Audited Financial Statements – The court does not have discretion to refuse a shareholder’s request for the corporation to produce audited financial statements. A shareholder’s right to information or material, including audited financial statements, under the OBCA is clear and mandatory.

Lagana v. 2324965 Ontario Inc. et al. 2022 ONSC 7286
2022 ONSC 7286 (December 23, 2022)
ONSJ (Muszynski J.)

A shareholder of the corporation brought an application to compel the corporation to produce audited financial statements and to appoint an auditor under sections 140, 149 and 253 of the Ontario Business Corporations Act (“OBCA”). While the parties agreed on production of the financial statements and appointment and remuneration of the auditor, they did not agree on the scope of the audit. (para. 4)

The applicant requested that the audit include years 2013 to present. The respondents argued that the audit should only be for fiscal years 2020 to present on the basis that: a) no earlier request to appoint an auditor was made and thus, the shareholder was estopped from requesting it now; b) the shareholders’ agreements had no provision requiring the appointment; c) the request for audits prior to 2020 was statute barred by the Limitations Act, 2002; and d) given the OBCA only required retention of records for six years, financial statements may no longer be available that would be required for earlier audits. (para. 5)

In its analysis, the court relied on the Court of Appeal decision in Packall Packaging Inc. v. Ciszewski, 2016 ONCA 6 where the Court held that: “A shareholder’s right to information or material, including audited financial statements, as granted to her under the OBCA is a clear, mandatory right, and it is not necessary for a shareholder to give any reason in exercising her directly held rights under the OBCA.” (para. 17)

Justice Muszynski rejected the respondents’ submission that the court had discretion to reject an “unreasonable” request for production of audited financial statements going back a number of years. Instead, Muszynski J. followed Packall and held that there was no discretion to exempt the corporation from compliance with its obligation to provide annual audited financial statements. (paras. 21-22)

The fact that the shareholders’ agreements made no mention of an auditor was not material to the court’s analysis. Muszynski J. also found that this was not a basis to exempt the corporation from the requirements of the OBCA. (para. 23)

Justice Muszynski further held that the applicant’s request for compliance with the OBCA was not a “claim” within the definition of the Limitations Act, and accordingly, that the request for pre-2019 audited financial statements was not statute-barred. As part of this analysis, the court found that the applicant had not sought any broader relief than its statutory entitlement under the OBCA as a shareholder. (para. 27)

Finally, the court held that the applicant recognized that the corporation may not have retained records that were older than six years and that it may be limited in what it can produce for the preparation of audited financial statements. (paras. 28-29)

Editor’s Note:

Shareholder disputes frequently arise because one or more shareholders, typically the majority, is abusing the finances of the business by taking disproportionate amounts out of the company for salary, dividends, bonuses or expenses. When the dispute arises, the aggrieved shareholder usually lacks the documentary evidence to support their allegations.

This is an important decision because the issue it addresses arises in many shareholders’ disputes involving closely-held corporations. It is rare that the shareholders of a closely-held corporation provide for a yearly audit when the business is formed. Typically, the shareholders trust one another at the start of the relationship, especially if they are relatives. Audits are much more expensive than Notice to Reader or Review Engagement financial statements.

Supported by this decision that the Court lacks discretion to refuse a shareholder’s demand for an audit, an aggrieved shareholder has a foolproof strategy to demand immediate oversight of the corporations’ financial affairs. The demand for an audit may produce results without a motion.

The proposed auditor should not be from the same accounting firm as the corporation’s current accountant but rather, an independent firm, unconnected with the shareholders.

As with nearly everything in corporate litigation, nothing is absolute. While demanding an audit is an important weapon in the minority shareholder’s arsenal, it may still take several months to get a motion date if the majority shareholder balks. Moreover, when the auditor is hired, the auditing process is labour intensive, time-consuming, and expensive (even if the corporation pays for it, which the Court typically orders). All of these factors must be taken into account and described to the minority shareholder in advance of it pursuing this strategy.