PERSONAL ASSETS AT RISK: THE IMPORTANCE OF CORPORATE MINUTES
It is important for a corporation to keep adequate minutes of shareholder and director meetings. Without them, the shareholders' personal assets may be at risk in any litigation. (See, e.g., Temple v. Bodega Bay Fisheries (1960) 180 Cal.App.2d 279.)
Usually shareholders' personal assets are protected in lawsuits against a corporation. After all, that's a major reason for incorporating a business. However, if the corporate formalities such as keeping adequate minutes–are not followed, the shareholders' assets may be at risk. (There are other ways shareholders may be at risk, such as using a corporation for fraud or commingling corporate and personal money, but here we are talking just about corporate housekeeping problems.)
California law requires a corporation to have an annual shareholders' meeting to elect directors. (See, e.g., Corporations Code Section 301.) Also, the bylaws of many corporations require their board of directors to have an annual meeting. In addition, each "corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board" although "the board may delegate the management of the day-to-day operation of the business...." (Corporations Code Section 300(a).) Although there are exceptions, actions that generally require approval of the board of directors include the following:
- Electing officers of the corporation (Corporations Code Section 312);
- Adopting business policies and plans (see Corporations Code Section 300(a) generally);
- Designating committees and allocating authority to them (Corporations Code Section 311);
- Issuing and selling stock (Corporations Code Section 409);
- Approving the sale, lease, conveyance, exchange, transfer, or other disposition of all or substantially all corporate property and assets (Corporations Code Section 1001);
- Approving mergers and reorganizations (Corporations Code Sections 1101, 1200);
- Approving the adoption of pension, profit-sharing, other employee benefit plans and stock-option plans (Corporations Code Sections 207(f), 300, 315(b), 408);
- Approving corporate borrowing and loans (Corporations Code Sections 207(g), 300; but see Corporations Code Sections 310, 315-316, 1501 regarding restrictions on loans to insiders or secured by the corporation's shares); i. Entering into joint ventures (Corporations Code Sections 207(h), 300(a)).
In addition, the board generally should also approve the following types of transactions:
- Designating corporate bank accounts and authorized signatories.
- Changing an officer's compensation (unless this has been expressly delegated);
- Entering into a major lease of premises;
- Entering into any other major contractual agreement or venture.
This list is not exhaustive, and some corporate actions require shareholder approval as well. (Note also that Corporations Code Section 313 makes many contracts signed by certain corporate officers binding even if there is no board approval.)
Of course, small corporations in particular often have informal "meetings" where these matters are decided. However, it is important to subsequently prepare meeting minutes or unanimous written consents (signed by all the directors in lieu of a meeting) that approve the actions.
If your corporation has not kept adequate records of shareholder and board meetings, these records–with care–can be reconstructed. We have worked with clients in the past in accomplishing this, and are happy to help in this regard. If you have questions, please contact us!