About this time each year, The Loftin Firm sends out reminder letters to its business clients reminding them of their upcoming 2016 annual meeting requirement. Far too often, businesses are so focused on driving business-related growth that the simple compliance matters simply fall by the way-side. This, however, is a huge mistake. While annual meeting minutes appear to be an issue of small concern, they are actually much more important than many business people think.
Corporations Code Section 600(b) requires an annual meeting of the shareholders for the purpose of electing directors, and the remaining subsections of Section 600 mandate compliance with specific procedural requirements (e.g., written notice or waiver of notice, quorum present, location of meeting, etc.). The good news is that many small businesses will avoid many of these formalities by executing a unanimous written consent in lieu of the annual meeting. Rather than conducting an actual meeting, each shareholder signs a document that elects the directors and approves major business transactions.
As you can see, both annual meeting minutes and unanimous written consents can easily be completed with proper planning and a quick conversation with your business attorney. Failure to do so can be potentially costly for the corporation because courts treat failure to maintain corporate formalities as a factor in determining “alter ego” liability. In more simple terms, alter ego liability exists when a claimant demonstrates that the shareholders do not treat the business as a separate entity, but instead an “alter ego” of themselves. Claimants allege alter ego liability when they attempt to “pierce the corporate veil” and hold the shareholders personally liable.
While failure to prepare annual minutes is not the sole factor in such an analysis, it is surely one of the factors that the court takes into consideration. As such, we highly recommend that corporations of all sizes adhere to this annual requirement. If you haven’t prepared your 2016 annual meeting minutes yet, or you know that the meeting is on the immediate horizon, we can assist you in preparing that documentation to ensure compliance with the California Corporations Code. Likewise, if you’ve been running your small business for several years and your records require an update to bring them into compliance, this is not uncommon and we would be happy to help you moving forward.
Ariel Bedell is a Shareholder at The Loftin Firm. For questions relating to any other California real estate, corporate governance, land use, or estate planning matter, contact Ms. Bedell at 760-814-9649.