If you have ever hired a lawyer to incorporate your company you have probably been asked the question as to whether you would like your lawyer to keep and maintain your minute-books for you. Typically, this request comes with a price-tag payable every year, and often clients will just agree and pay the annual fee so that they don’t have to worry about maintaining their corporate records year over year. But other more discerning clients will question just what is it they are getting for that annual fee, and is it really worth paying for? This article explains the importance of keeping your minute book up to date, whether you do it yourself, or delegate to your lawyer.
1. Validity of Corporate Actions and Access to Credit
One of the key reasons that you want to keep your corporate records up to date is to ensure that the actions taken by your company are valid and binding. This may not seem meaningful to the directors or shareholders of a closely held company, but can quickly come to a head when the company is seeking a loan from a bank or speaking to a potential investor. Banks will often ask for a lawyer’s opinion that the company has validly taken certain actions, which the lawyer will not provide unless the minute book has been properly maintained. Investors on the other hand will typically insist that the company make certain representations and warranties when issuing shares, which the company will not be able to provide if it hasn’t properly documented its actions.
2. Penalties
Maintaining a minute book and filing annual returns are actions that tend to go hand-in-hand, as they are the key legal record-keeping aspects of maintaining a corporation. It is vital to a corporation that it file annual returns on a (you guessed it) annual basis. Failure to do so can result in strict penalties depending on the jurisdiction of the company, which can even include dissolution of the company.
3. Future Disputes
Corporate record keeping may seem largely superficial to directors and shareholders in a small company. After all, why pay a lawyer every year when you can just pay them to rectify the minute books if and when needed? As it turns out there are two very good reasons. The first is cost. Even in the aggregate, regular maintenance of a minute-book will certainty cost less than the work required to rectify a delinquent minute-book. The second and far more important point however, is that you may not be able to rectify your minute-book when you need to. If there is a breakdown in the relationship between directors, shareholders or other stakeholders of a corporation, those parties will often use everything at their disposal to leverage their bargaining position versus the company, including withholding their consent from much needed rectifications, or even bringing actions against the corporation or its directors and officers personally. In order to avoid being put in this potentially crippling situation, and to indemnify against any future claims, a corporation should properly document every action while it is able to do so. Individuals in small companies always balk at the idea that their strong relationships with their fellow directors or shareholders could turn sour, because when things are going smoothly it’s hard to imagine your friends and business partners turning against you, but it does happen, and probably far more often than you would like to believe.
In business it is usually the case that staying on top of matters and proactively addressing issues as they arise makes for a more efficient and productive company, and corporate record-keeping is no exception. By keeping your minute-book up to date, you can be confident that your company’s activities are valid and that you are avoiding potential difficulties down the road.