NFIB

Selecting the Best Legal Structure for Growth: Part IV--Meeting Duties of Corporations
10/ 01/ 2002

by Andrew Sherman

Today's Workshop continues last week's discussion of one possible legal structure of a business, the corporation.

Meeting Duties of Corporations

To meet the duties of care, loyalty and fairness to the corporation, follow these general guidelines:

Work with your attorney to develop written guidelines on the basic principles of corporate law as they apply to the duties of officers and directors. Keep the board informed about recent cases or changes in the law.

Work closely with your corporate attorney as a general rule. If the board or any director is in doubt about whether a proposed action is in the corporation's best interests, consult your attorney immediately--not after the deal is done.

Keep careful minutes of all meetings and comprehensive records of the information on which the board bases decisions. Be prepared to show financial data, business valuations, market research, opinion letters and related documentation in case a shareholder challenges the action as "uninformed." Well-prepared minutes also serve a variety of other purposes, such as written proof of the directors' analysis and appraisal of a situation, proof that parent and subsidiary operations are being conducted at arm's length and proof that an officer had authority to engage in the transaction being questioned.

Be selective in choosing candidates for the board of directors. Avoid the nomination of someone whose name lends credibility but who is unlikely to attend meetings or have any real input into the management and direction of the company. This only invites claims by shareholders of corporate mismanagement. Similarly, don't accept an invitation to sit on another company's board unless you're ready to accept the responsibilities that go with it.

In threatened takeover situations, be careful to make decisions that will be in the best interests of all shareholders, not just the board and the officers. Any steps taken to protect the economic interests of the officers and directors (such as lucrative "golden parachute" contracts that ensure a costly exit) must be reasonable in relation to the actual degree of harm to the company.

Any board member who independently supplies goods and services to the corporation should not participate in board discussions or votes regarding his or her dealings with the corporation. This will help avoid conflict-of-interest claims. Proposed actions must be approved by a "disinterested" board after the material facts of the transaction are disclosed and the nature and extent of the board member's involvement is known.

Periodically issue questionnaires to officers and directors regarding recent transactions with the company to assess possible conflicts of interests. Provide incoming board members and newly appointed officers with a more detailed questionnaire. Always circulate these questionnaires among board members prior to any securities issuances (such as a private placement or a public offering).

Provide directors with all appropriate background and financial information relating to proposed board actions well in advance of a board meeting. An agenda, proper notice and mutually convenient time, place and date will ensure good attendance records and compliance with applicable statutes.

A meeting of the board of directors is not valid unless a quorum is present. The number of directors needed to constitute a quorum may be fixed by the articles or bylaws, but is generally a majority of board members.

Board members who object to a proposed action or resolution should either vote in the negative and ask that such a vote be recorded in the minutes or abstain from voting and promptly file a written dissent with the secretary of the corporation.

The advantages of the corporate form of ownership include limited liability for owners and the ability to easily continue the business even if there's a change in the shareholders. However, a corporation can also be more expensive than a proprietorship or partnership to form and maintain, primarily due to the filing and annual fees imposed by state agencies.

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Andrew Sherman is internationally recognized as an authority on the legal and strategic aspects of entrepreneurship and business growth. As a senior partner with McDermott, Will & Emery, he manages a multi-million dollar corporate and transactional practice, representing Fortune 1000 corporations as well as hundreds of technology-driven, netcentric and rapidly growing businesses.

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