As I look back over the issues I have dealt with this year, one recurring theme has to do with my corporate clients and their record keeping – and in particular, their
s (you know, those pretty notebooks you got when the corporation formed – it should contain your Articles, Bylaws, Minutes and stock certificates, among other things). In contexts including arbitrations, litigation, asset sales and mergers, I have been asking clients this year a simple question: Can I see your Minute Book and make sure it is up to date?
The reactions I have gotten have ranged from one client whose Minute Book was up to date – through 1997 – another group who had a few pages of minutes and a lot of blank pages – to several who just looked at me with puzzlement over what was a Minute Book? Yes, I had a few who were pretty current, but the vast majority were pretty hopeless. Why does this matter? There are several reasons, and here are a few:
- Avoiding personal liability for corporate debts – in California, if shareholders have not maintained “corporate formalities” such as the Minute Book, a Judge, in a lawsuit, could decide to disregard the corporation as a “fiction” and hold the shareholders liable personally for corporate debts. Having an up-to-date Minute Book doesn’t make you bullet-proof, but it does help a great deal to gain protection from such liabilities. Third parties may need to be sure the Minute Book is current before extending credit to the corporation, and loan covenants often include continuing to maintain “corporate formalities”.
- Your friendly taxing authorities, including the IRS and the Franchise Tax Board, will want to review your Minute Book in the course of an audit – and could look at the absence of corporate records as a way of trying to make shareholders personally liable for tax debts.
- Your corporate Bylaws (they are worth reading!) will surely call for an annual meeting of shareholders to elect a Board of Directors, and at least an annual Board of Directors to appoint Officers, and for ratification of corporate Director and Officer actions taken during the year. Without such a record, there can be arise as to the validity of corporate actions.
So what do you do if you are not up to date with the Minute Book? Have competent counsel review what you have (if you can find it) and make sure it contains all important documents. The lack of Minutes doesn’t mean that corporate actions were not discussed– it just means that they were not documented, and you can have “catch-up” Minutes prepared to be sure that you have a legally valid record of the approved actions. It can also be an opportunity to make sure that all shares of stock have been both issued to the appropriate shareholders and that any transfers have been recorded.
My suggestion is that the January “to-do list” for every corporation include making sure the Minute Book is located and up to date, and that if it is not, it be made a
. Having a current Minute Book before any issues come up can be very cheap insurance.