The current digital age has made it easier for companies to retain an enormous volume of documents – significantly more than a company could have afforded to keep before the advent of electronic record-keeping. In response, companies have sought to upgrade their IT systems to digitize their paper records and to allow for increased storage. These upgrades, however, are inadequate without the adoption of a comprehensive formal policy to guide a company's record-keeping process.
Why have a document retention policy?
Besides general organization purposes, there are a few other good reasons why a company should adopt a document retention policy:
1. Legal compliance
First and foremost, having a document retention policy enables a company to fulfill its legal obligation to preserve documents that may be relevant to pending or potential litigation (i.e., its "litigation hold" obligation).
Second, there are legislative requirements to retain certain documents for a mandated period of time. For example, for the purpose of tax auditing, the Income Tax Act generally requires that "records" and "books of account" be retained for a period of six years from the end of the last taxation year to which the records and books of account relate.1 The Canada Business Corporations Act requires that corporate records, which include a company's articles and bylaws, meeting minutes or resolutions, copies of meeting notices and a securities register, be maintained at the registered office of the company and available for inspection by the company's shareholders and directors. 2
A document retention policy is a good tool that can be used to facilitate legal compliance with any legislative record-keeping requirements.
2. Litigation and M&A preparedness
Having a document retention policy enables a company to stay on top of the documents it has stored. If the policy is renewed and audited (which it should be), the supervisor(s) of the policy should have a good understanding of where documents are being stored and which documents the company actually has. This would come particularly in handy in the event where a company becomes engaged in litigation or becomes a potential M&A target, where in both cases, a company would be tasked with finding specific documents and often finding those documents quickly. With a document retention policy, a company is able to hit the ground running in both scenarios.
A document retention policy prescribes a time period for when documents must be retained. Documents that have been retained in excess of the prescribed time period can be discarded, thereby ensuring that digital space is not wasted and limiting the everyday costs associated with storing documents. Moreover and as discussed above, a document retention policy allows a company to save costs in the event where it becomes engaged in litigation or becomes a potential M&A target, during the discovery phase of a litigious dispute and during the diligence phase of a M&A transaction, respectively.
What should be included in a document retention policy?
A good document retention policy should list the types of documents that are to be retained, the length of time those documents should be retained for and where or how those documents should be stored (i.e., which folder should each type of document be saved to; should documents be saved to a hard-drive or to a network, etc.), taking into account the company's business needs and its legal compliance obligations. General counsel (or whoever is designing the policy) should engage the IT department to assist with preparing the policy. The policy should also make clear who has responsibility for supervising compliance with the policy and whose role should include periodically updating and conducting a formal audit of the policy, the frequency of which should be laid out in the policy. In addition, the policy should advise employees of the company's litigation hold obligation and address any connected protocol.
Besides M&A preparedness, what are the benefits of having a document retention policy in the context of a M&A transaction?
It is standard for the target of a M&A transaction to provide a representation and warranty with respect to the condition and maintenance of its "books and records". A target should carefully review the language specific to this representation and warranty in order to ensure it can be given without breach. For example, a target that is not in compliance with legislative record-keeping requirements may find itself in breach of a representation and warranty that provides that "the books and records are fully, properly and accurately kept". In addition to the language of the representation and warranty itself, the target should review the definition of "books and records", and if necessary, narrow it to the point where it is comfortable that the definition only relates to those documents which have been retained in compliance with legislative requirements. Having a document retention policy will provide a company with greater comfort that it has met all legislative record-keeping requirements and can safely give this "books and records" representation and warranty.
1 Income Tax Act, RSC 1985, c 1 (5th Supp), s 230(4)(b).
2 Canada Business Corporations Act, RSC 1985, c C-44, s 20-21.
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