Your bank manager asks for a certified copy of a borrowing resolution. Your accountant says the $40,000 you took out last spring needs a dividend resolution. Your business partner insists that he can sign the warehouse lease alone because he is “the president.” All three moments raise the same underlying question: how does a corporation actually make a decision?
A corporation is a legal person with no hands, no voice, and no memory. It acts through people, and those people have authority only because of its articles, its by-laws, its resolutions, and the statute that created it. Many owners of small Brampton companies have never read their by-laws and have signed few resolutions since the day they incorporated. Most of the time, no one notices. When a sale, a loan, or an argument among owners comes along, those missing pieces can suddenly decide who was entitled to do what.
This is general information about corporations under Ontario’s Business Corporations Act (OBCA), not legal advice. Federal corporations under the Canada Business Corporations Act follow a similar pattern with differences in the details, and your own articles or shareholder agreement may change the answers below.
Four Documents, Four Different Jobs
It helps to see where by-laws and resolutions sit among the corporation’s governing documents.
Articles of incorporation are filed with the province and form part of the public record. They set the company’s name, the classes of shares, any restrictions on share transfers, and the number of directors or a range for that number.
By-laws are private internal rules. They usually deal with how meetings are called and run, who signs documents, what officers exist, how directors are protected, and how the corporation banks. They are not filed anywhere.
Resolutions are individual decisions, such as approving a loan or electing a director. Each one is a record of something the board or the shareholders decided.
A shareholder agreement is a contract among the owners. A unanimous shareholder agreement can go further and take powers away from the directors.
When these documents conflict, the general order is the statute first, then the articles, then any unanimous shareholder agreement, then the by-laws, and then resolutions. So a by-law cannot give the president a power the articles or statute deny, and a resolution cannot simply ignore a by-law. Check the whole stack before relying on any one document.
What a General By-Law Usually Covers
A newly formed company commonly adopts a general by-law, often called By-law No. 1, shortly after incorporation. Many are taken from a standard precedent and are never looked at again, which can be a mistake because the defaults may not suit the company’s actual situation. A typical one addresses:
- How much notice is needed for director and shareholder meetings, and how it may be given
- Quorum, meaning how many people or what share of votes must be present
- Who chairs a meeting and whether the chair has a second or “casting” vote
- The officers the company will have and what they can do
- Who may sign contracts and other documents on the company’s behalf
- Indemnification of directors and officers, within the limits the statute allows
- Share certificates and transfers
- Banking arrangements and the company’s fiscal year
Two of those items cause the most trouble in practice. A casting vote can quietly hand control to one owner in a company that was supposed to be 50/50, since a tied vote is then broken by whoever chairs. And a signing clause that allows “any one officer” to bind the company can let a single owner commit it to large obligations. Owners who expect shared control should read those two paragraphs first.
Quorum is also worth a look. Under the OBCA, unless the articles or by-laws provide otherwise, a majority of the directors generally forms a quorum at a directors’ meeting, and any quorum cannot be fewer than two-fifths of the number of directors. Shareholder quorum defaults to holders of a majority of the shares entitled to vote, unless the by-laws say otherwise.
How By-Laws Are Made and Changed
Unless the articles, the by-laws, or a unanimous shareholder agreement say otherwise, the directors may make, amend, or repeal by-laws by resolution. They must then bring the change to the shareholders at the next meeting. The by-law is effective from the date of the directors’ resolution until it is confirmed, confirmed as amended, or rejected by the shareholders. If it is rejected, or if it is not submitted to them, it ceases to have effect, and a substantially similar by-law generally cannot be revived without shareholder approval.
The practical result is that a small company’s by-law change should be accompanied by two resolutions: one from the directors, and a shareholders’ confirmation. Keep both in the minute book with the text of the by-law attached. An unsigned draft in a filing cabinet is not a by-law at all.
The Three Levels of Decision
Most of what a small company does falls into one of three categories, and mixing them up is a common source of invalid decisions.
Directors’ resolutions
The directors manage or supervise the business and affairs of the corporation. Their resolutions typically deal with issuing shares, declaring dividends, appointing officers, approving financial statements, authorizing major contracts, and arranging bank credit. Directors vote per person, not by shares, so a director who holds 90 per cent of the company still has one vote at the board table.
A directors’ written resolution generally has to be signed by every director entitled to vote. If one of two directors refuses to sign, the only route left is a properly called meeting, where the quorum and voting rules take over.
Directors must also disclose conflicts. Where a director has an interest in a material contract with the corporation, such as a lease of a building he owns personally, the OBCA requires disclosure and generally bars that director from voting, subject to exceptions. The minutes should record that this was done. This small step can be very useful if another owner later challenges the deal.
Ordinary resolutions of shareholders
An ordinary resolution passes with a simple majority of the votes cast at a meeting. Shareholders use this to elect directors, for example, and to confirm by-laws. A private OBCA corporation has an additional option here. A written ordinary resolution can take effect when signed by holders of a majority of the shares entitled to vote, instead of all of them. The corporation must then send written notice to the shareholders who did not sign, within 10 business days, including the text of the resolution and a description of the business and the reasons for it. The articles, by-laws, or a unanimous shareholder agreement can change this.
A minority owner in a Brampton company may therefore learn about a decision only after it has been made. A majority owner, on the other hand, should diarize that notice period, since skipping the notice is a mistake that can be raised later.
Special resolutions
Fundamental changes need more. A special resolution requires at least two-thirds of the votes cast at a meeting, or a written resolution signed by all shareholders entitled to vote on it. Common examples are amending the articles to change the company’s name or share structure, selling all or substantially all of the property outside the ordinary course of business, and winding up voluntarily. Some of these changes also give dissenting shareholders the right to be paid fair value for their shares, and may require separate class votes.
Here the arithmetic matters a good deal. A person with 35 per cent can block a special resolution at a meeting if they attend and vote, even though they cannot control the board. A person with 67 per cent can pass it at a meeting but cannot do so by written resolution if the minority owner refuses to sign. A meeting then has to be called with proper notice.
Decisions That Usually Need a Paper Trail
No law says everything needs a resolution. A shop manager does not need board approval to order stock. In a small business, though, these items should have a record:
- Issuing or transferring shares
- Declaring dividends, which also requires that the company meet the solvency tests
- Electing directors and appointing officers
- Approving annual financial statements and dealing with auditor appointment or exemption
- Borrowing, granting security, or guaranteeing someone else’s debt
- Signing or renewing a major lease
- Buying or selling a business or significant assets
- Contracts between the company and an owner or relative
- Setting or changing pay and bonuses for owners
- Opening a bank account or changing signing authority
Banks and lenders often ask for their own form of resolution, sometimes together with an officer’s certificate confirming it was properly passed and has not been changed. Before you sign one, compare it with your by-laws and any shareholder agreement. An agreement may require another owner’s consent to borrow above a set amount even if the board resolution looks fine on its face.
Can an Outsider Rely on What You Signed?
The law offers some protection to people dealing with a corporation in good faith. Under what is often called the indoor management rule, reflected in section 19 of the OBCA, a corporation generally cannot escape a contract by saying that its internal rules were not followed, unless the other side knew or ought to have known about the problem because of their relationship with the company.
That rule mostly protects the outsider. It does not protect the officer who overstepped. If your partner signs a five-year equipment contract without the approval your shareholder agreement requires, the company may well be bound, and the real dispute then moves inside the company. Those disputes can lead to claims against the partner, or even an oppression application. Our business litigation page discusses where these disagreements tend to end up.
Sole Owners Still Have to Do This
A one-person corporation can feel like an extension of its owner, and signing resolutions in favour of yourself can feel a bit silly. The legal separation is exactly why it matters. A dividend paid without being declared may end up being treated differently by the Canada Revenue Agency. A personal withdrawal with no record may be recharacterized in a less favourable way. A court or creditor examining whether you have respected the corporation’s separate existence will look at how you behaved.
For a sole owner, the work is modest: a set of annual resolutions, plus any others for major decisions during the year, often prepared when the year-end statements are finished. The two hats do need to be separate on paper, since you sign once as director and again as shareholder.
Fixing Gaps Honestly
Suppose you have just realized your company has no resolutions for the past six years. Do not sign documents and date them as if they were completed back then. Prepare current resolutions that state what happened on the earlier dates, confirm and ratify those actions, and are dated when they are actually signed. A backdated document can create a far more serious problem than the gap, especially if a tax auditor, buyer’s lawyer, or opposing party starts asking questions.
Ratification also has limits. Directors and shareholders can usually approve past acts within the company’s power, but they cannot fix everything after the fact. An unpaid share, an unlawful dividend, or a transaction that needed a third party’s consent may require something more.
Who Can Help, and What to Bring
If you are unsure whether a decision was made properly, gather the articles, the by-laws, any shareholder agreement, the registers, and the last few years’ financial statements. A lawyer can compare these against what actually happened and prepare what is missing. The firm’s business formation and organization work includes this kind of tidying up, and you can contact us if a lender or buyer has put a deadline on it.
Small corporations rarely need elaborate governance. They do need a clear answer, on paper, to the question of who decided and whether they had the power to do so.