Corporate Recordkeeping: A Dull But Necessary Task
Corporate recordkeeping is right up there with knife sharpening for chefs and annual physicals for the rest of us: not very exciting. The good news, among the humdrum, is that keeping up with your recordkeeping requirements could be better than some alternatives.
In many states, the corporation statute requires a corporation to keep certain information and make it available for inspection by shareholders. Failing to comply could result in monetary penalties in some states, a court order to comply, or, in the event of a lawsuit, imposition of attorney’s fees.
The types of records that a corporation may have to keep include:
- Articles or restated articles of incorporation and any amendments
- Corporate bylaws or restated bylaws and any amendments
- Annual reports and financial statements
- Shareholder lists (including full name and address of shareholders and number and class of shares held by each)
- Records of shareholder and director meetings, plus adopted resolutions or actions taken
- Documentation supporting actions taken pursuant to consent in lieu of a meeting
States with rules on electronic storage generally allow digital records as long as the information can be converted to a readable hard copy within a reasonable period of time.
The required format and specific list of information to be retained varies by state, so be sure to consult your advisor.
Generally the corporation has to store the records at its principal place of business. If a business incorporates in one state and qualifies to transact business in other states, the other states may also impose recordkeeping requirements. For example, a state may require a foreign corporation to maintain copies of certain documents at its registered office or transfer agent’s place of business within the state.
Various state and federal laws may impose additional recordkeeping requirements on corporations. For example, the corporation may be required to retain certain employment records or certain information to support the tax treatment of items on the corporation’s income tax return. These requirements should be reflected in the company’s record retention program.
Shareholder’s Rights to Inspect Corporate Records
A corporation’s shareholders may be able to examine corporate records. To make an inspection request, the shareholder must generally have a proper purpose. A proper purpose includes, for example, investigating specific acts of mismanagement or determining share value. The shareholder’s right of inspection generally includes a right to make copies.
If you are considering transferring a small amount of ownership rights to a valued employee or other person, the shareholder’s right of inspection is something to consider. Giving someone the status of “shareholder” provides them with additional rights that may not immediately come to mind (also, some rights may not be able to be waived). Consult your advisor ahead of time for the implications involved in transferring ownership to others.
Typically, the inspection request must be in writing and the time of inspection must be reasonable (e.g., during normal business hours). It must provide the time and date proposed for inspection, the requestor’s full name and address and membership interests in the corporation, and the reason for the request in sufficient detail. Also, it must specify the documents covered by the request (or include a statement that the request is for all statutorily required documents).
A shareholder involved in a legal action against the corporation generally has the same discovery and litigation-related rights as other parties.
Shareholders also have an additional right to obtain a shareholder list. Corporations generally must provide a shareholder list within a reasonable time before the annual meeting. The shareholder list typically includes the names and addresses of all shareholders and the number and type of shares held.
A director of a corporation also has inspection rights. These are generally broader than those of shareholders.
Complying with Inspection Requests
A best practice is for the corporation to have in place a standard, documented policy regarding how information requests will be handled. The corporation’s compliance with any inspection requests should be documented, especially since penalties may be imposed for failing to comply.
If a shareholder makes an inspection request, it is likely not without reason. As soon as the request is received, consider consulting legal counsel immediately to confirm that the request, and the corporation’s response, complies with all necessary requirements.
The corporation’s policy for handling information requests should be periodically reviewed. This will help ensure that it is still current.
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