Make Every Minute Count

I represent many small companies in my business practice, many owned by a husband and wife or by two or three close friends. Unfortunately, with this close ownership/management relationship it is all too easy to forget to document corporate activity with Minutes of Directors meetings or Unanimous Written Consents without a meeting (UWC). And why not. After all, they see each other every day and often make business decisions over lunch without even thinking about writing something down and placing it in the corporate Minute Book.

The problem is that the corporation is a totally separate entity and, regardless of the close relationships of the owners and managers, established corporate formalities require that actions by the corporation must be documented with Minutes or UWC’s and retained in the corporate Minute Book. As I often tell clients, if I don’t see a corporate action noted in the Minute Book, then it hasn’t happened (officially at least). Having accurate and regular Minutes and UWC’s shows that the managers have been properly documenting material actions taken by the corporation and often times are necessary to show a third party that the corporation, and not Mr. and Mrs. Smith as the owners, took certain actions or is responsible for certain obligations.

A bigger problem can occur if the corporation is ever sued over some business transaction or event. As we all know, doing business in a corporate form, or LLC form, provides the officers and directors with limited liability for corporate actions. However, often Plaintiff’s counsel will attempt to “pierce the corporate veil” by arguing that the owners, Mr. and Mrs. Smith, were actually the “alter ego” of the corporation and should therefore be held personally liable along with the corporation, for the negligence/misdeeds of the corporation. As I have seen from experience, one of the first things the Plaintiff’s lawyer will ask for is the corporate Minute Book. If he/she finds that the last time you had a shareholder meeting was 3 years ago or the last time the Board held a meeting or made a decision was 2 years ago, it’s all too easy for that lawyer to argue that since the owners have obviously been ignoring documenting actions by the corporation, let’s just continuing ignoring the corporation for purposes of this litigation (and the limited liability protection it was meant to provide).

Due to the above, I always counsel corporate clients to literally look for reasons to have a Board meeting (which can be held over breakfast) or prepare a UWC (which can be signed over lunch). Obviously major events such as opening corporate bank accounts or selling a company-owned franchise shop require documented Board action. However, less obvious events like changing accountants, bringing in a new executive level officer or leasing a corporate vehicle should also be documented.

While I draft corporate Minutes and UWC’s for clients all the time, in many cases the Minutes or UWC could be just as easily drafted in-house. There is no specific format required but generally you start with a title of the document like: “Minutes of Board Meeting for XYZ Corp.”. You then want to: (1) note the date of the meeting and how notice was given (personally, by email, etc.); (2) who was in attendance and that a quorum (typically over 50%) of Directors or shareholders were present; and (3) who presided over the meeting (typically the senior officer in attendance) who is then referred to as the Chairperson for the meeting.

Generally, saying less is better with Minutes and UWC’s. A “WHEREAS” clause can state what the issue to be decided is (i.e. “the company is in need of additional capital and wants to raise such capital by issuing addition common stock” or “ due to expanding business the Company is in need of a Chief Operating Officer”). There can be an hour of discussion over the issue but none of that needs to be written in the Minutes. When a decision is reached (i.e. a majority of Directors/shareholders agree) then a “RESOLVED” clause can state what was decided (i.e. “the Company will offer 100,000 shares of common stock for $2 per share” or “the corporation is hereby authorized to hire Ms. Jones as the COO at a salary of $XXXX”). You don’t even need to record the vote so long as a majority has approved (unless a dissenter wants his/her dissenting vote noted for the record). Reflecting the decision made is important not only to show what action was approved but is also necessary to show that the corporation took the action and will be solely responsible for any liability for such action and to invoke the Business Judgment Rule which protects Directors for decisions made. Also keep in mind that, at a duly called Meeting of Directors, an affirmative vote by a majority of the Directors is required to approve an action while a UWC requires all Directors to sign the Consent. The Board/shareholder Minutes of a meeting need be signed only by the corporate secretary.

Lastly, everyone should be aware that the Minutes/UWC is the sole official record of that proceeding so each Director/shareholder should be satisfied with what the written Minutes/UWC actually say so if there is ever a later dispute, the written Minutes/UWC’s duly filed in the corporate Minute Book will prevail.

Lastly, California requires¹ that a shareholders meeting be held annually to, among other things, elect the Directors for the corporation. While there is no practical consequence to not holding an annual shareholder meeting, it is nevertheless a corporate formality that should be observed. It is for this reason that I typically provide in a corporation’s Bylaws the day each year when the annual shareholder meeting is to be held so it can be planned for accordingly.

With regard to a limited liability company (LLC), the manager(s) of an LLC are typically given broad authority to operate the LLC’s business with few required formalities or need for Member approval except in a few extraordinary circumstances. Nevertheless, for all the reasons cited above, I always recommend that Managers regularly record material decisions made on behalf of the LLC (i.e. Manager’s Consent form) and keep a written record of the action taken by the Manager(s).

Article by Roger D. Linn © Barnett & Linn

¹   California Corporations Code §600(b)