Sunday, February 24, 2008

Maintaining Your Corporate Status in California - Part 1

This is Part 1 of an ongoing series designed to provide California corporations general information on how to maintain their corporate standing. In this edition, we will review common issues of corporate governance such as holding director and shareholder meetings and keeping proper corporate minutes.

California law requires that an annual meeting of the Shareholders be held each year for the election of directors for the ensuing year and for other business that may come before the meeting. An annual meeting of the Board of Directors is usually held immediately after the annual meeting of the Shareholders to elect officers of the corporation for the next year, approve and ratify proper acts of officers during the current year, approve the compensation of the key employees for the current year, and to approve the corporation's contributions to its retirement plans, if any, for the current year.

The Board of Directors is charged with the management of the corporation and is held accountable for the ultimate direction of the corporation's business and affairs. Although day-to-day management of the corporation is generally delegated to the officers, the directors are responsible for approving major corporate action, setting goals and policy for the corporation, and monitoring the performance of management in achieving these goals. In performing these functions, the directors are fiduciaries for the benefit of the shareholders. The directors will be held liable to the corporation's shareholders if they fail to exercise "reasonable care", or if they fail to act in the best interests of the corporation ("duty of loyalty").

Directors exercising a duty of care are required to act as prudent persons would act in similar circumstances. In doing so, the directors may rely on the advice of independent experts, but they must make a reasonable inquiry into the facts on which such experts base their advice. The directors' duty of loyalty also includes a prohibition against a director profiting from a transaction at the expense of the corporation and its shareholders. A corporate transaction in which a director has a material financial interest will not be invalid if the transaction is fair to the corporation and the material terms and the director's interest are disclosed to and ratified by the shareholders or by uninterested directors acting in good faith.

To meet the fiduciary requirements of directing the corporation, the Board should convene regularly to discuss the corporation's business and to vote on required actions. Such meetings may be conducted by a conference call if all directors can hear each other simultaneously.

California corporation law also requires that shareholders meet at least annually to elect directors and to conduct other shareholder business. a shareholder's vote is required for a number of significant events, including election of directors, most amendments to the articles of incorporation, the sale of substantially all of the corporation's assets, and certain mergers and reorganizations of the corporation. Shareholder action by written consent process satisfies statutory requirements.

Minutes of both Directors' and Shareholders' meetings should be kept. The minutes must identify the issues before the groups together with copies of the notice of the meetings or waivers thereof, should be placed in the corporation's minute book. A copy of these minutes, certified by the secretary, is prima facie evidence that the meeting took place and that the matters stated in the minutes transpired.

California law requires that the accounting books and records, and the minutes of proceedings of Shareholders and Board of Directors, be open for inspection by any shareholder, director, or holder of a voting trust certificate. Further, corporations are required to send an annual report to shareholders not later than 120 days after the close of the fiscal year. This requirement can be waived in the Bylaws by corporations with fewer than 100 shareholders. The annual report must contain a balance sheet, an income statement, and a statement of changes in financial position for the fiscal year, and also must be accompanied by a report thereon by the company's independent accountants or, if there is no such report, by a declaration by an authorized officer of the corporation that the statements were prepared without audit.

Corporations with 100 or more shareholders that are not subject to federal securities reporting requirements also must comply with additional disclosure requirements. These include describing any significant transactions between the corporation and any director, officer, or 10-percent or greater shareholder.

The information provided in this article is general information only and is not intended as legal advice. DO NOT use this information as a substitute for obtaining qualified legal advice or other professional help. If your California corporation requires assistance with any of the topic outlined in this article, please feel free to contact us.

About the Author: Carl H. Starrett II has been a licensed attorney since 1993 and is a member in good standing with the California State Bar and the San Diego County Bar Association. Mr. Starrett practices in the areas of bankruptcy, business litigation, construction, corporate planning and debt collection.

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