Regulatory framework

While companies are generally under a statutory obligation to prepare audited financial statements, the  Business Corporations Act (Ontario)  (the “OBCA”) sets up an exception to the audit requirements for non-offering corporations if all of the shareholders, including non-voting shareholders, unanimously consent in writing to the exemption. It is to be stressed that written consent is required for each particular past and current year in which the exemption is being sought. A written consent for future years is likely not valid. In practice, the preparation of audited financial statements by qualified auditors can be very costly and many closely held corporations may choose not to incur that expense. Consequently, a central issue emerges when corporations neglect to produce audited financial statements in the absence of a shareholder resolution waiving their rights to receive such financial disclosure: do shareholders retain the right to request past records indeterminately or does the Limitations Act, 2002 (the “Limitations Act”) in Ontario impose a statutory time constraint on their claims?

Judicial interpretation

In Lagana v. 2324965 Ontario Inc., 2025 ONCA 607, the Ontario Court of Appeal affirmed that shareholder applications for audited financial statements under section 253(1) of the OBCA are subject to the two-year limitation period under section 4 of the Limitations Act. Lagana who, following the death of his father, inherited shares in a private real estate corporation, sought in 2021 audited financial records dating back to 2013. The corporation had never appointed an auditor nor obtained shareholder consent to waive the audit requirement since its inception. While the trial judge ordered full disclosure, the Divisional Court overturned the decision, holding that enforcing a statutory obligation that benefits a shareholder amounts to a claim for a remedial order limited in time to two years from (reasonable) discovery. The Court of Appeal unanimously upheld this view, emphasizing that, when a corporate statutory obligation corresponds to an individual shareholder right, a claim arises and therefore attracts the application of the Limitations Act. However, the court cautioned against overgeneralization and highlighted that, where the obligation serves a public interest and not a private right, a different analysis may apply.

Legal ramifications for shareholders and corporations

The appellate decision underscores a critical risk for minority shareholders in closely held corporations because their statutory financial disclosure rights are subject to the Limitations Act if they are not formally and timely enforced. To safeguard their interests, shareholders should document communications and take legal steps without delay when informal avenues prove unsuccessful. From a corporation’s point of view, the decision provides a defence in proceedings for past non-compliance with the OBCA requirement to prepare audited financial statements.

To learn more about a corporation’s obligation to prepare or a shareholder’s rights to receive audited financial statements, please reach out to Momentum Law LLP at  +1 (416) 594-0791 or email us at info@momentumlaw.ca.