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By D. Brian Reider

Looking back at the year, one recurring theme emerges with corporate clients and their recordkeeping.

In particular, the issue is with their Minute Books — those pretty notebooks you obtained when the corporation was formed that should contain the corporation’s articles, bylaws, minutes and stock certificates, among other things. In connection to arbitrations, litigation, asset sales and mergers, I have asked clients this year a simple question: Can I see your Minute Book and make sure it is up to date?

The reactions have ranged from one client whose Minute Book was updated — through 1997 — to another who had a few pages of minutes and a lot of blank pages to most who just looked at me puzzled, having no idea what I meant by a “Minute Book.” Yes, a few were somewhat current, but the vast majority were pretty hopeless.
Why does this matter? There are multiple reasons, and here are a few of the most key:

Avoiding personal liability for corporate debts. In California, if shareholders and directors 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 bulletproof, but it does help a great deal to gain protection from such liabilities.

Lenders care about Minute Books. Lenders often need to be sure a Minute Book is current before extending credit to a corporation, and loan covenants often include continuing obligations to maintain “corporate formalities.”

The taxing authorities care about Minute Books. Your friendly taxing agencies, including the Internal Revenue Service 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.

Buyers care about Minute Books. If you are looking to sell the stock in the corporation and get your best return, the buyers are going to want to see a Minute Book to ensure the company has maintained records properly and that there are no hidden liabilities that would pass to them.

Your corporate bylaws must be in your Minute Book (they are worth reading!) and will call for an annual meeting of shareholders to elect a board of directors, and at least an annual board of directors meeting to appoint officers and to ratify corporate director and officer actions taken during the year. Without such a record, questions can arise as to the validity of corporate actions, which can cause a director or an officer to lose valuable protection against claims that they acted without proper authority.

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. “Catch-up” minutes can be prepared to ensure a legally valid record of approved actions exists. It can also be an opportunity to make sure that all stock shares were both issued to the appropriate shareholders and that any transfers were recorded.

The January “to-do list” for every corporation should include making sure the Minute Book is located and up to date. If it is not, this should be made a high priority. Having a current Minute Book before any issues come up can be very cheap insurance.

This article first appeared in The Press-Enterprise and other Southern California Newspaper Group publications online on Dec. 29 2019. Republished with permission.

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