The Second Opinion: Mandatory Audit Rights and the CBCA
Can a private corporation decline to provide audited financial statements to its shareholders without their unanimous consent on the ground that it is too expensive for it to do so? The British Columbia Court of Appeal recently addressed this question in Li v. Global Chinese Press Inc, 2014 BCCA 53, and held that the answer is no, at least for companies that are incorporated under the Canada Business Corporations Act ("CBCA"). The decision in Li is an important appellate clarification of this point, and is one that private corporations should bear in mind in their dealings with shareholders.
The issue arises this way. Under s. 155(1) of the CBCA, the directors of a corporation are required to provide its shareholders with financial statements at every annual meeting, together with the report of the auditor "if any". These final words suggest that the provision of audited as opposed to unaudited financial statements is a matter for the company's discretion. Further, s. 167(1) of the CBCA states that a court "may" appoint an auditor, on the application of a shareholder, where it does not have one. Since s. 167(1) does not say that the court "shall" appoint an auditor, it leaves the impression that there is no mandatory requirement for an auditor, at least in the case of private (or "non-distributing") corporations, which are expressly permitted to operate without an auditor under s. 163(1) of the CBCA.
At the same time, this interpretation of the CBCA neglects to consider s. 163(3). It states that a private corporation may only resolve not to appoint an auditor if the resolution is consented to by all shareholders, including those shareholders who are not otherwise entitled to vote. Accordingly, s. 163(3) makes unanimous shareholder consent a pre-requisite to dispensing with an auditor for private companies under the CBCA. This suggests that companies, and indeed the courts, should have no discretion in deciding to appoint an auditor if one or more shareholders refuse to agree that an auditor is unnecessary.
In Li, the Court of Appeal opted for the latter interpretation. In doing so, it affirmed a lower court ruling which granted the respondent shareholder's application under s. 167(1) of the CBCA to compel the appointment of an auditor and the provision of audited financial statements by the appellant company. Although the company argued that the application should be rejected, since it could not afford the costs of an audit, the Court of Appeal held that judges have no discretion to dismiss a s. 167(1) application where, as on the facts of Li itself, there is no unanimous shareholder resolution dispensing with an auditor. As Goepel J.A. concluded:
I do not accept the submission that the use of the word “may” in s. 167 indicates the court has a discretion as to whether to appoint an auditor. The appointment of an auditor is mandated by s. 162 and s. 167 does not give the Court the power to ignore that mandate.
The CBCA sets out a comprehensive legislative scheme to provide financial information to shareholders. The scheme requires the appointment of an auditor and the production [of] audited financial statements unless the shareholders of a company unanimously determine otherwise. If a Company fails to comply with the statutory requirements, the legislation empowers the Court to appoint an auditor and order production of the required documentation. (paras. 12 and 14)
In light of Li, private CBCA companies should be aware that they are required to provide audited financial statements to their shareholders unless there is a unanimous shareholder resolution deciding otherwise. The fact that the company cannot afford the costs of the audit does not relieve it of this statutory obligation.
The McCarthy Tétrault Opinions Group consists of members of the firm’s litigation department whose practices focus on written advocacy and the provision of strategic advice and opinions in the context of complex business disputes and transactions. The members of the Opinions Group are Anthony Alexander, Martin Boodman, Brandon Kain, Hovsep Afarian and Kirsten Thompson.
Li v. Global Chinese Press; CBCA; Canada Business Corporations Act; audit; auditor; financial statements; mandatory; discretion