In last week’s post I covered some unique features of an operating agreement. This week, continuing on our tour of paperwork that startups and small business owners should be familiar with, we go back to corporate paperwork. Today, I will talk about three general documents that you will repeatedly see running a corporation. They are Notice, Minutes, and Consent documents.
The Purpose of Creating These Documents
Recall that bylaws are a series of rules that the owners of the corporation, the shareholders, agree to be bound to when running the corporation. Among these various rules you will discover how meetings are to be announced, what can or cannot be done in a meeting, what constitutes quorum, and a variety of other matters that shareholders and directors must know being a part of the corporation. For instance, recall that shareholders are not directors. The shareholders select directors to run the company. In this vein, the delegated powers between shareholders, directors, and officers may be different from corporation to corporation, and the only way you would know is by reading the bylaws.
Therefore, the bylaws become important for what is considered Notice for Shareholders’ Meetings and Directors’ Meetings. Further, minutes are used to record the meetings. Lastly, sometimes instead of holding meetings may be the group will decide to act through signed consent forms.
Sticking to the rules is important because if you remember way back when I started talking about limited liability these documents are a part of the separate entity feature that shows that the people running the corporation are separate from the entity. The lack of good corporate records and following your bylaws could make the shareholders’ personal assets vulnerable to a creditor or subject to IRS challenges to the legitimacy of the corporation or transactions.
For brevity purposes I will mainly focus on corporate records from the viewpoint of shareholders, as typically in a small startup these shareholders are also the directors that run the company. Let me take each one in turn now.
So bylaws, dictated by state law, will tell you how to give proper notice of a shareholders meeting. Why is it important for you to do this correctly? If proper notice isn’t given to a shareholder, that affected shareholder may have a claim and further the actions taken at the meeting may be null. Meaning you will have to redo the meeting all over again to take the same action. Many small corporations like to play politics when a fellow founder and shareholder is not living up expectations by not giving them notice. This is a big mistake. Like it or not, as a shareholder they are entitled to proper notice of a meeting.
Further, notice that Notice means something particular in corporate law. Generally, it is in writing, and can be delivered through a variety of means, and finally the manner of delivery will change the timing of effectiveness.
At a shareholders meeting the minutes serve to memorialize the actions taken at the meeting. Usually, if there is a position of Secretary, it is their role to record what was said and decided upon so that it serves as a record. What should be noted is what your bylaws say about quorum, if they default to what the law says, then a majority of shares is considered quorum. This need not always be the case, but you want to be familiar with your own bylaws and especially quorum. You may have given proper notice to all the shareholders, but due to unique bylaws the shareholders that show up may not be enough for quorum or to take action. It all depends.
*This is not legal advice, just for practical purposes: For my minutes, for smaller corporations, I like to put the names of the shareholders at the top, how they appeared for the meeting (in-person, phone, or if you allow via internet), and sometimes their share amounts to see if you have quorum. The main thing is accurately recording what took place, which is why the minutes are usually never approved right then and there, as the secretary preps them for a following meeting for approval. Once the minutes are approved they are kept with the other corporate records.
Sometimes, you don’t want to hold a meeting for everything. Thus written consents step in to save your time. This is especially important for startup corporations, where the founders cannot be burdened to call a meeting for every non-controversial issue to act. Moreover, with the advent of Internet and tech companies, there may be shareholders in Hawaii, California, and Washington of a single company. Therefore, it is best to act through written consent, especially when there is agreement among all the shareholders.
However, even if all the shareholders do agree, going back to what I mentioned earlier in this post, you still want to record your acts to be in corporate compliance. Also they are great tools to deal with after the fact that you messed up on Notice, and did not have a proper annual meeting. Having all the shareholders sign a consent form will serve to fill the gap of the messed meeting.
*Disclaimer: This post discusses general legal issues, but does not constitute legal advice in any respect. No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction. Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.