We have had a number of conversations with growing clients recently relating to the lack of company governance documents. The usual scenario is that we are brought in when they are trying to get some new financing and the bank or financing company wants them to produce the company record books, including minutes of meetings of the governing group. The client then calls us and says “we don’t have any of that, is it really needed or should we just tell them we don’t have any?”
Answering that question usually depends on what kind of entity they have.
As far as entity, if the company is a Colorado corporation, there are indeed some things that must be in the company record book just from a “legal” status point of view. That includes (i) annual meetings/minutes of the stockholders and (ii) a stock ledger.
Colorado’s statutes require a stock ledger. This is simple enough - list out each of the stockholders with their addresses and show the number of shares each of them owns. As far as shareholder minutes, there has been some discussion about whether or not that is needed as some large law firms in Colorado are informing clients that they don’t need them because the failure to have an annual meeting does not dissolve the corporation. We disagree with the first part (that they don’t need them) but acknowledge that the 2nd part is a true statement (the company won’t be dissolved). Colorado’s statutes say that an “annual meeting of the shareholders shall be held … for the purpose of electing the board of directors.” The word “shall” means that it is not discretionary. Annual stockholder meetings are easy, especially for small closely-held companies. If everyone is on the same page, you just prepare some written consent minutes that elect the board of directors for the year, have each of the stockholders sign, and you’re done. If you have a more complex ownership structure, check your bylaws and call a meeting of the stockholders. In most cases, you’ll be able to do that by conference call if not everyone is in the same spot.
So, what happens if the company does not have a ledger or does not have annual shareholder minutes – potential personal exposure to the officers, directors and/or stockholders if something goes wrong. If things go wrong, and insurance is not enough to cover the greedy plaintiff lawyers, those greedy plaintiff lawyers try to figure out how to pierce the corporation’s veil and go after the owners personally. Not having proper governance in place, especially items required by statute, gives them that much more ammunition to take a run at the owners. It does not mean that they will win, but considering how easy it is to do annual stockholder consent minutes for a closely held company and have a stock ledger, why risk the time and expense of that portion of the lawsuit?
What about a limited liability company? While there is nothing in the statutes that requires an LLC to have any particular governance records, other than the operating agreement, we recommend that you have annual meeting minutes of the members in a manager-managed LLC to have the members elect the managers, just to be safe. Since LLC’s are not nearly as old as corporations, and since those same greedy plaintiff lawyers keep pushing to pierce the LLC veil (and, in some cases have now been successful) and since at least a couple of court cases have discussed a lack of governance records on the part of the LLC as a reason to allow the veil to be pierced, it is probably a matter of time before veil piercing in and LLC starts to take on the same scenarios as a corporation. So again, why risk it for something so simple?