The Importance of Maintaining Good Corporate Records

There are many situations when a business will need to prove its books and records are in proper order.  These include government agency audits, inspections and investigations; financing transactions such as loan, grants and investors; and corporate due diligence involved with mergers, separations, sales and joint ventures.

Here is a list of documents you should keep in one location (usually at your place of business) for access on demand by various agency officials:

  • Certificate/Articles of Incorporation or Organization and filing receipts (certified copy as filed with the relevant Secretary of State), including all filed amendments
  • Bylaws and all amendments
  • “Foreign” Filings (registrations to do business in states other than the state of incorporation)
  • Organizational consents and organizational meeting minutes by the incorporator and initial stockholders and directors that, among other things, appoint initial Board members, adopt the Bylaws, appoint initial officers and authorize any other actions that require formal approval such as issuance of shares to founders
  • Founder Vesting Agreement, voting agreements, shareholder agreements, operating agreements, and any other agreements among owners, voters or key employees
  • Copies of minutes from all Board meetings and stockholder (member) meetings
  • Copies of all Board and stockholder resolutions, adopted either at meetings or by written consents
  • Stock Ledger and Option Ledger listing status and ownership of all shares and options
  • Copies of all issued stock certificates (member unit certificates)
  • IP Assignments (trademark, copyright and patent)
  • Evidence of IP filings/registrations (for any trademarks, copyrights, patents and domain names)
  • All contracts, leases and amendments, including NDAs, non-compete agreements, employment agreements and contractor agreements (fully signed and complete copies)
  • Option or equity incentive grant documentation (including Board approvals)
  • Financial statements, tax records and documents related to value of the company
  • Annual or biennial reports or statements of information filed with the state and any other government agency
  • Appraisals of stock value or key asset/property values
  • Deeds or title documents to important business assets
  • Permits and licenses for operating

Failure to maintain your corporate books and records can render you personally liable

The equitable theory of veil piercing, intended to serve as a rectifying mechanism against certain fraud, dishonesty or wrongdoing, is of particular import in the case where the corporate entity has no assets to pay a judgment but the principals do have assets to pay the legal damages awarded by a court. This was recently used by Burberry is its effort to stop a counterfeiter and recover $2.5 million in damages.. Burberry Limited and Burberry USA v. RTC Fashion Inc., d/b/a Designers Imports t/a Fashion58.Com and Asher Horowitz (Index No. 110615/14) (N.Y. Sup. Ct. 2014).

Burberry, believing that an affiliate of the judgment debtor intended to frustrate Burberry’s efforts to collect the $2.5 million judgment against Designers Imports and to ensure that Horowitz maintained continuity in the marketplace, commenced an action in the New York State Supreme Court against both the affiliate RTC Fashion and principal Horowitz. In the state court action, Burberry sought to pierce Designers Imports’ corporate veil in order to hold Horowitz personally liable for the judgment entered in the federal action. Under New York state law, and it is well established in New York that piercing the corporate veil generally “requires a showing that the individual defendants (1) exercised complete dominion and control over the corporation, and (2) used such dominion and control to commit a fraud or wrong against the plaintiff which resulted in injury.” Courts in New York have considered the following factors in determining whether the two-part showing has been met and the corporate veil may be pierced: (i) failure to adhere to corporate formalities; (ii) inadequate capitalization; (iii) commingling of assets; and (iv) use of corporate funds for personal use.

The following facts were important to piercing the corporate veil (there were other facts considered by the court): The principal was the sole shareholder, officer and director of both companies; (2) the corporate entity had no by-laws, no stock transfer ledger, no minutes of its shareholders meetings, and no minutes of its board of directors meetings; (3) the principal’s only meetings were with his accountant on a yearly basis for the purpose of preparing his tax returns; (4) the principal comingled funds by paying personal expenses with company money for his personal use.

The take-away is that is important to properly keep corporate books and records. Don’t forget to do your annual meeting minutes and properly document other major corporate transactions. Failure to do so may result in personal liability and not receiving the protections of the corporate entity.