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Challenging role is well-suited to legal professionals, lawyers say

By: Jane Pribek//August 22, 2013//

Challenging role is well-suited to legal professionals, lawyers say

By: Jane Pribek//August 22, 2013//

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Like flossing, staying up-to-date with corporate governance requirements isn’t something that’s particularly exciting, but it’s necessary to avoid bigger problems down the line.

Companies that neglect corporate formalities such as maintaining records of meeting minutes and shareholders put themselves at risk.

At worst, bad bookkeeping can be used by creditors and others who want to try and pierce the corporate veil to get access to shareholders’ assets. It also can make the company more difficult to sell, said Jim Friedman, a partner at Quarles & Brady LLP, Milwaukee.

“The better you have your house in order, the more attractive your business can be,” he said, “and the more certain the buyer can be that there’s a limited risk.”

For example, if a company issued 50 shares to someone in 1972, and now no one knows what became of that person’s shares, the potential buyer will ask that the company’s price be lowered accordingly. Or the deal might not go through at all, depending upon the extent of the missing information.

And in the event that a company’s owners claim officers or directors breached their fiduciary duties, the accused had better hope the corporate records are current, Friedman said. Those battling such claims are better able to show there was no such breach when there are complete corporate minutes reflecting what went into making difficult decisions.

Companies similarly will wish they’d kept up with year-to-year records maintenance when the IRS comes knocking, said Waukesha lawyer Stuart Schroeder of The Schroeder Group, Attorneys at Law.

Staying motivated

Given all the above reasons to keep the corporate books current, why do some companies still fail to do so? According to Schroeder, it’s easy to make excuses whether the company is doing really well or struggling.

When businesses are stressed, he said, the last thing its owners want to do is open the books and examine the hard facts. Conversely, if a company is doing well, its staff members might be too busy with core operations to give corporate governance a second thought.

“When we rely on the client,” said Beth Zimmerman of The Schroeder Group,” to remember every year to do consents, annual minutes and annual reports, a lot of times it won’t happen, because the day-to-day operations of the business take precedence.”

But companies don’t need to spend a ton of money to stay current, Schroeder said.

“And if you let it fall behind,” he said, “it can get extremely expensive for the business owner.”

If the lawyer is listed as the registered agent, an appropriate time to nudge the client, Zimmerman said, is when the firm receives notice from the Wisconsin Department of Financial Institutions that the corporation’s annual report is due.

After filing an annual report, companies need to update their corporate book with minutes from the annual meeting.

This becomes problematic if the client has no idea where the corporate book is. In those instances, Zimmerman said copies of the articles of incorporation and annual reports are available from the WDFI. But if no one has copies of the bylaws, consent resolutions or minutes, it can very difficult to backtrack and repaint the picture.

“The hardest part is if someone has died in the interim,” Schroeder said. “As long as everybody’s breathing, you can still come up with minutes, consent resolutions, minutes and adopted articles, etc.”

Attorneys’ involvement in keeping corporate records current can vary, Friedman said. Sometimes a client simply needs guidance on what the minutes should contain, while others request an attorney be present to draft minutes.

Some clients simply want a brief record of the action taken, he said, while others want a more detailed narrative of the discussions leading up to a decision.

And some clients, when major actions are on the table, will ask that an attorney draft the resolution under consideration, in addition to the minutes. This might happen when the business is borrowing money, for example, and the lender requires specific language within the resolution.

Zimmerman said she often has clients complete a detailed questionnaire about significant changes within the past year: new officers, financing or leases, or changes in benefits, contributions to 401(k) plans, etc. Then she prepares consent resolutions approving all of these acts, which become part of the corporate book, in lieu of the annual meeting and minutes. Consents typically are drafted with a catch-all provision at the end, to cover actions that weren’t noted specifically.

In maintaining current records, Friedman advised, don’t forget to periodically review company bylaws. He said he’s seen companies with very dated bylaws that don’t reflect the company’s growth. For example, a bylaw might state that the president and CEO is the same person, but in practice there are two people holding those positions. A quick bylaw amendment can clarify that.

Finally, it’s also wise to ask whether the business remains sufficiently capitalized.

Having adequate capital is one of the more significant factors, Friedman said, when a company faces a claim that the corporate veil should be pierced. And businesses within highly regulated industries, such as banking, are required to maintain an adequate level of capitalization or face administrative penalties.