The Importance of Having Your Company's Legal Documents in Order

During our combined 60-plus years of experience as business attorneys, we have seen countless transactions that were made more expensive and time consuming simply because of failure to have basic corporate documents in order. It's amazing how much money and time can be saved by "dotting the I's and crossing the T's" along the way, rather than having to do so in the middle of a significant transaction.

Of course, entrepreneurs tend to be dynamic, fast-moving people, and when they get caught up in the excitement of building their businesses, it can seem like a poor use of time and money to attend to what seem to be legalistic formalities. But take it from us, putting it off can lead to higher costs and delays, at the worst possible time.

Take something as simple as maintaining a stock ledger, which is the record of the company's owners. We worked on a transaction involving the sale of a company in which a meeting of the shareholders was necessary in order to obtain their approval of the transaction.

Click here to view image.

Over the years many changes had taken place: some shareholders had transferred their shares; some had died and their shares had transferred to the beneficiaries of their estate; and others had moved with no record of their new address. The company did not maintain a record of its shareholders, and as is the case with many closely held companies, shareholders' meetings had not been held for years, nor had dividends been paid. So when it came time to send notice of the shareholders' meeting to approve the sale, there was no record of shareholders to send the notice to. We had to find out who the shareholders were, where they lived, and what they owned (including resolving some disagreements on ownership). We then had to prepare the appropriate paperwork to confirm everything. Needless to say, this delayed the transaction for weeks, and added significantly to the legal costs in getting it done.

Another common problem: no Shareholders' Agreement. We've seen transactions where a buyer wanted to buy all the outstanding shares of a company and a majority of the shareholders wanted to sell. But there was no Shareholders Agreement requiring all shareholders to sell their shares if an agreed-upon percentage of shareholders wanted to sell (commonly known as a "drag-along" right). This led to protracted negotiations to get the company's minority shareholders to go along with the transaction. Here again, more time and more cost.

Now, in case you're thinking, "We're not going to sell our company for several years, so I won't worry about this now," keep in mind that there is a whole spectrum of other transactions in which missing paperwork can cause problems. Suppose you want to take a secured loan for your business. If you paid off a prior secured loan but didn't file terminations of the recorded liens, your new lender will likely require that to happen before granting the new loan. And if the repayment of the old loan happened years ago, it may not be that easy to get your prior lender to pay attention to what you need done now, when they would have done so simply as a matter of course if you had requested it back when the loan was repaid. And yes, we've had to deal with this as well.

Click here to view image.

Do you have any concerns about employees soliciting customers, or other employees, after they leave your employment? If so, you should consider having non-solicitation agreements with those employees. Do you have contracts with key customers or suppliers that have been informally modified over the years without being documented? If you do, you might want to consider whether the agreement as it currently exists can be put in writing.

There are many other areas where addressing the formalities now, while you have the luxury of time, can save time, money and trouble. Even if your company has been operating for years without addressing these issues, it is still better to address them now than to wait for a critical juncture down the road. In our experience, the sooner they are addressed and cleaned up, the smoother future transactions will go and the lower your legal costs will be.

Here are several key documents we recommend your company develop, or if they already exist, reevaluate to see if they are still up to date, accurate and reflective of the current business condition:

  • Board resolutions
  • Shareholder records
  • Shareholders Agreement
  • Major contracts
  • Employment Agreements
  • Employee Handbook
  • Non-compete/Non-solicitation Agreements

Addressing these will take some time and money, to be sure, but it will be time and money well spent. Simply put: "Pay Me Now or Pay Me (More) Later."