MEMORANDUM ON CORPORATE GOVERNANCE
AND RECORDKEEPING
FOR A CALIFORNIA CORPORATION
This memorandum reviews some of the main points concerning the organization and maintenance of corporate records, and is intended to provide some basic guidelines for the corporate Secretary or other person with responsibility for maintenance of corporate documents.
BYLAWS
Bylaws serve as the basic operating rules of a corporation. A corporation’s articles of incorporation provide no administrative guidance and they are typically quite brief if they authorize only one class of stock. While bylaws, by comparison, may seem voluminous, they contain a relatively succinct digest of the California General Corporation Law as it pertains to many aspects -common and unusual -- of corporate operations. It is a good idea to become as familiar as possible with the bylaws for the corporation with which you work. This is true even if you are already familiar with the bylaws of other California corporations, which may be very similar. Specific requirements for each corporation will often vary: as to the number of authorized directors, quorums required for meetings, composition of specific committees, etc. In every instance you should refer to the exact text of the applicable bylaws rather than relying on a general understanding of how things function.
There will inevitably be many instances in which the bylaws seem unclear, or simply do not cover the situation at hand. In such cases, you should consult legal counsel. Whenever practicable, it is simpler to get a question resolved before action has been taken than to rectify mistakes already made.
ACTIONS BY THE BOARD OF DIRECTORS
Keep in mind that legally there are two ways in which the board of directors can act. The board can hold an in-person or telephonic meeting, either regular or special, or it can act by written consent--that is, when the directors give their unanimous written approval of one or more resolutions without the formality of a meeting. A common problem in the minutes of many corporations is the directors acting on less than unanimous written consent but without a meeting; this is an invalid method of adopting resolutions.
If the directors take action at a meeting, certain requirements must be met. Meetings held via a telephone conference call must be set up so that all directors can hear one another. In both in-person and telephonic meetings, voting and notice rules must be followed. The bylaws will typically set the quorum requirements and the requisite vote required to adopt a resolution. If the meeting is a special meeting (that is, one whose regular time and place have not been fixed in the bylaws or by resolution of the board), notice is normally required. In some instances, the bylaws may also require prior written notice of regular board meetings. The Secretary should consult the corporation’s bylaws for detailed requirements governing notice; the bylaws generally will state when notice must be given, and in what form. Directors may also meet by means of electronic communication, such as EMail. In the case of any board meeting held by teleconference or other electronic means, each participant must be able to communicate with all other participants and be able to participate in all matters, including making proposals and interposing objections. In addition, procedures must be adopted to verify that those participants are in fact directors entitled to participate in the meeting and that all actions were taken by directors entitled to participate.
As a practical matter, if notice cannot be properly given, it can (and must) be waived by each director who does not attend the meeting. A waiver is not required from any director who attends the meeting and does not protest the absence of proper notice prior to or at the commencement of the meeting. Each director who does not attend the meeting must sign a waiver of notice and consent to the holding of the special board meeting. (Note that, again, each director’s signature is required on the waiver, lest a special meeting take place without the knowledge of one or more directors.) The waiver of notice can be a single page signed by the entire board, or can be executed, if convenient, by individual directors in multiple copies. In either case, be sure that the waiver is filed in the corporate minute book; normally, it is placed directly before the minutes of the meeting in question.
ACTIONS BY THE SHAREHOLDERS
Actions by the shareholders are taken in essentially the same way as directors’ actions. Both meetings and written consents are permitted, although action by written consent need not generally be unanimous provided certain statutory requirements are met. If it is expected that less than unanimous written consent will be obtained, you should contact us to ensure that the proper formalities have been observed. There are special and detailed requirements pertaining to notice of the annual shareholders’ meeting. The California Corporations Code (“Code”) generally requires that each shareholder entitled to vote be given not less than 10 (or 30 if sent by third class mail) nor more than 60 days, written notice of the meeting; the corporation’s bylaws may provide more specific requirements and should be reviewed well in advance of the meeting. While it is possible for the shareholders to waive notice of an annual meeting, execution of such a waiver may limit the types of decisions that can be validly made at the meeting, unless the waiver states the general nature of the proposals to be voted on. As the next annual meeting approaches, you may wish to send us a copy of the proposed notice to ensure that all requirements have been met. We can also prepare this notice for you; we have a standard set of materials (including proxies, discussed below) available for use at the annual meeting.
Unlike directors’ meetings, meetings of shareholders involve the setting of a record date to establish who is entitled to notice of and voting rights at the shareholders’ meeting. The board of directors may fix, in advance, a record date that is no more than 60 nor no less than 10 days prior to the date of the meeting. If no date is set by the board, the Code provides a default record date. Shareholders’ meetings also may involve voting by shares other than on a one person-one vote basis. For a California corporation, voting for the election of directors can be done on a cumulative voting system if a shareholder gives notice of an intention to do so before the voting begins, unless the corporation becomes a “listed corporation,” as defined in the Code, and amends its articles or bylaws to eliminate cumulative voting. Classes or series of stock other than common stock may contain special notice and voting provisions. Finally, shareholder votes may involve the organized solicitation of proxies by the corporation’s management, which may be regulated by Federal securities laws. These topics are normally dealt with in the corporation’s bylaws and will generally require board action prior to the meeting date (e.g., the setting of record and meeting dates, the approval of agenda, the approval of solicitation of proxies).
MINUTES
Minutes of directors’ and shareholders’ meetings should accurately reflect what actually occurred at the meeting. While minutes need not contain detailed description of what each participant in the meeting said, the minutes should identify the issues before the respective groups and should state the result of the vote on each issue. While this undoubtedly seems self-evident, the point is emphasized because of another persistent problem. From time to time, corporate records may contain an officer’s certificate setting forth the text of resolutions adopted at a board meeting on a given date; a review of the minutes for that date, however, shows no record of such a resolution. Whenever an officer’s certificate is prepared, the Secretary should be sure that the resolutions referenced in the certificate were actually adopted as described. If a bank, corporation, or other institution requires the adoption of certain resolutions as a prerequisite to the closing of a loan or other transaction, and if a meeting of the board cannot be held within the necessary time frame, the resolutions can, as described above, be adopted by unanimous written consent and their adoption so certified by a corporate officer.
The minutes, together with copies of the notice of the meetings or waiver thereof, should be placed in the corporation’s minute book. Detailed minutes do not validate corporate action, but minutes serve as a valuable record that action taken was properly considered and approved.
APPROVAL REQUIRED BY THE BOARD OF DIRECTORS
As a general rule, the board is ultimately responsible for all corporate decisions and actions. In ordinary cases, the board, through the bylaws and through resolutions, delegates to the president and other officers most of its responsibility for day-to-day operations. However, the board still should set the corporation’s goals and policies, it must monitor management, and it should approve major corporate actions, particularly those that do not arise in the ordinary course of business. If the officers act on such matters without board approval, their actions may be voidable. For this reason, banks and certain other parties dealing with corporations often require a directors’ authorizing resolution for specific transactions.
Proper authorization by the board of directors is important for other reasons, too. In a tax audit, a corporation may not be able to sustain its position without minutes or signed consents reflecting board authorization for important transactions. Failure to hold regular board meetings, keep accurate minutes, and observe other corporate formalities can be important considerations where creditors attempt to “pierce the corporate veil” and impose personal liability on shareholders. If a corporation should for any reason become involved in litigation, proper minutes and other records can be indispensable evidence. The corporate Secretary’s certified copy of the minutes is solid evidence that the action reported in the minutes was indeed taken; otherwise, such evidence can be extremely difficult to obtain.
COMMITTEE APPROVAL
The board of directors may establish committees of board members to exercise board authority in various areas; however, the Code reserves certain authority to the full board only. The bylaws will typically include a procedure for establishing such committees. Generally, you can assume that committee meetings are subject to the same procedures as board meetings with respect to notice, voting, resolutions, and minutes.
SHAREHOLDER APPROVAL
California law requires that shareholders meet (or act by written consent) at least annually to elect directors and conduct other shareholder business. A shareholder vote is required to approve a number of significant corporate actions— a list of which is included below.
RECORDKEEPING
California law requires that each corporation keep a record of its shareholders, adequate and correct accounting books and records, and minutes of the proceedings of its shareholders, board, and committees thereof. The minutes of proceedings must be kept in written form, but other records can be kept in any other form capable of being converted into written form. Records of the corporation are available for inspection by shareholders upon certain conditions, as outlined more fully in the bylaws. Further, corporations are required to send an annual report to shareholders not later than 120 days after the close of the fiscal year. This requirement can be waived in the bylaws by corporations with fewer than 100 shareholders. The bylaws should be consulted for additional details in regard to annual reporting requirements and requests for record inspections.
CHECKLISTS
While the above guidelines cannot possibly anticipate every question arising on a daily basis, they serve as basic operating principles for a variety of situations. The following checklists are intended to supplement these guidelines.
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CHECKLIST FOR ORGANIZATION OF
CORPORATE MINUTE BOOKS AND FILES
I. Minute books should contain the following documents, in the order listed:
A. Articles of Incorporation and all amendments thereto; copies should be certified by the Secretary of State.
B. Bylaws, including all current amendments and the dates of adoption, certified by the corporate Secretary.
C. Minutes of all directors’ and shareholders, meetings, and minutes of board committees, signed by the corporate Secretary or acting secretary of each meeting. If notice was given as required by the bylaws, the minutes should so state; if no notice was given, a waiver of notice must be signed by each director or shareholder (not attending the meeting) and filed with the minutes. For examples of actions requiring director approval, see the “Checklist of Corporate Actions Requiring Board Approval” set forth below.
D. Actions by unanimous written consent of directors or consent of shareholders (to be filed with the minutes, in chronological order).
E. Stock ledger and journal.
II. Files should contain the following types of documents, in any convenient order
A. Certificate of Authority or other documents authorizing the corporation to do business outside its state of incorporation.
B. Duplicate original copies of all filings with regulatory authorities (e.g., the Securities and Exchange Commission, the California Department of Corporations).
C. Employment contracts.
D. Loan and other credit agreements.
E. Agreements of purchase or sale.
F. Leases.
G. Investment management agreements.
H. Partnership agreements.
I. Tax returns and other tax filings.
J. Accounting books and records.
Note: The above is obviously an incomplete list and is intended merely to give you examples of the types of documents to be included in your files. Records retention requirements will vary by category of document, and may be dictated by specific statutes and regulations affecting the corporation.
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CHECKLIST OF CORPORATE ACTIONS
REQUIRING BOARD AND/OR SHAREHOLDER APPROVAL
Note: It would be impossible to compile a complete list of all corporate actions requiring board and/or shareholder approval. The following list contains only examples of the kinds of actions that are typically considered not in the ordinary course of business and, thus, normally require such approval. In some (but not all) instances, board committees may be validly delegated the responsibility for board approval, which should be memorialized in the minutes and resolutions. Actions that usually cannot be delegated by the board are indicated with an “ (*). “