It may seem obvious that corporations in the broadcasting field need to keep their records in order and up to date.
According to communications law experts John A. Knab and Erwin G. Krasnow, it is not only surprising how many fail in this enterprise, but also how much it ends up costing them.
By John A. Knab and Erwin G. Krasnow
Many media companies, regardless of size, worry about their company minute books only on the eve of a major transaction.
That is a mistake.
Waiting to “put the books in order” can cause major headaches and expense, and can even delay or impair the transaction. We recommend that all companies conduct an annual audit of their company books to identify and fix problems in an orderly, efficient, and inexpensive manner. This recommendation applies to corporations; limited liability companies (LLCs), limited liability partnership (LLPs), and any other entity types.
Why the concern?
A company’s minute book (also called the “company records book”) contains the official record of the owners, directors and officers of the company. It also holds the originals of the corporate resolutions. In a transaction involving purchasers, investors, and lenders, a company is typically required to certify the identities of the actual owners of the company; that the company is duly organized and in good standing; that the board resolution to approve the transaction is duly taken and authorized; and that the company is authorized to execute, deliver and perform the agreement. If the company’s owners are selling their ownership interests (e.g., stock in a corporation or membership interest in an LLC), they need to certify that they own the interests. Moreover, many transactions require the company’s lawyers to issue a legal opinion as to all of the above.
Examples of Headaches, Expense and Delays
We’ve had many a late night (at the client’s expense) dealing with the following problems:
* Companies that cannot locate their company minute books or have a blank company book obtained by mail but never opened. In such cases, the company must generate its official records (necessarily informal, given the lack of company records) concerning owners, directors or officers. It may be necessary in important transactions to obtain affidavits from ex-shareholders, ex-directors or ex-officers to verify corporate actions, positions or decisions. If your company is audited, IRS agents can be expected to request your minute books – – – they will look for proper documentation of your company’s business activities (i.e., payment of bonuses or dividends, loans to shareholders, etc.). It is important to keep in mind that representations made in applications and reports filed with the FCC are made subject to the penalty of perjury and therefore, they must reflect the reality of the company’s ownership as reflected in the company’s records.
*Companies not in good standing. We have seen numerous closings put into jeopardy or delayed because a company has fallen out of good standing. To return to good standing, the company’s lawyers must make an expensive, expedited filing with the state and pay the fees for expedited processing, penalties and interest.
* Company boards that have not been duly elected and authorized, which means the company’s officers may legally lack authority to act as officers. Often the company’s lawyers must recreate shareholder resolutions. In one case, the purchaser required the company to prepare shareholder resolutions going back 15 years and track down ex-shareholders to sign the resolutions for the time when they were shareholders. Fortunately, the ex-shareholders were friendly. Can you imagine the consequences if the shareholders were unfriendly?
* Incomplete, outdated stock ledgers and lost stock certificates. A company cannot obtain the requisite consent of its shareholders to a transaction unless the records show the names and addresses of shareholders and their respective share ownerships. An e-mail that “I’ve always owned 51% of the shares” is not sufficient evidence. Purchasers of stock must rely upon the accuracy and veracity of the stock ledgers and typically require that all existing stock certificates be surrendered and cancelled. Lost stock certificates require the selling shareholders or ex-shareholders to execute affidavits of lost stock certificates.
* Undocumented stock transfers. Shareholder Buffett sold 2/3 of his shares to Shareholder Gates in 2007 when Shareholder Buffett retired. There was an agreement documenting the sale, but neither side signed it. A small amount of money was paid. The paperwork is lost. It was never recorded in the stock ledger. For corporate law purposes, until the transaction can be sufficiently documented, Shareholder Buffett still owns those shares. Can Shareholder Buffett be tracked down the day before closing?
Here’s the bottom line: The failure to maintain accurate and current company books can cause unnecessary risk, delay, expense and worry. Do not wait until the last minute. A relatively few hours each year can avoid much trouble later.
This column originally appeared in the December 5, 2014 edition of the RBR+TVBR Daily Headlines E-mail. Krasnow and Knab were attorneys at what is today Foster Garvey. Krasnow is now retired; John Knab may be reached here.
