When Jones & Haley incorporates a business for a client, we always inform them of the importance of having annual shareholder’s meetings. Some clients are conscientious and make sure they have shareholders’ meetings every year, while others ignore the requirement. Why is it important for the corporation to have an annual meeting after all?
Every state requires that a corporation formed under the laws of the state to conduct annual meetings. In Georgia, that requirement can be found in O.C.G.A.14-2-701(a), which states that: “A corporation shall hold a meeting of shareholders annually at a time stated or fixed in accordance with the bylaws.” The state has no enforcement mechanism to require annual meetings, and there are no state penalties that may be imposed for failure to conduct annual meetings. However, the Georgia Code and the corporate codes of most states provide an enforcement mechanism through the shareholders of the corporation. Under those code sections a shareholder of the corporation may apply to the courts to order an annual meeting if one is not held within certain time frames. Obviously, an annual meeting forced in a manner such as this could wreak havoc on the relationships of the shareholders.
One of the most important advantages of operating a business in a corporate structure is to provide limited liability to the shareholders. That is, the shareholders’ exposure to liabilities for the debts and acts of the corporation is limited to the amount of money they invested in the corporation. This protects the shareholders’ other assets from exposure in the face of potential massive liability. Thus, the importance of limited liability to the corporate structure cannot be over emphasized.
If a corporation does not meet certain requirements, it can lose its limited liability protection. One of the requirements of maintaining limited liability is that the corporation must carefully observe certain corporate formalities. These corporate formalities generally involve dealing with the corporation as a separate legal entity. This is accomplished by the corporation maintaining separate books, maintaining a separate checking account and brokerage account, by signing contracts and other documents in the name of the corporation, and by conducting a regular annual meeting of shareholders. Accordingly, when a corporation fails to hold its annual meeting, it runs the risk of losing its limited liability or at least it endangers its limited liability status.
In addition to the foregoing, and as a more practical matter, a corporation that fails to maintain its annual meetings can jeopardize its ability to engage in certain transactions that may be to its benefit in the future. For example, we have represented many business owners who have bought and sold their corporations. I can tell you of many situations where my clients were preparing to purchase a corporation and when we asked for a copy of their annual minutes, they did not have them. In these situations, the deal was not always destroyed for this reason alone, but the failure to conduct annual meetings, is seen as a red flag and consequently there was a fear that there may be other problems with the deal. This, in turn, causes the due diligence team to dig deeper to see if there are other problems with the corporation. Likewise, we have represented sellers of corporations who do not maintain their annual minutes, and one of the first things we did in order to make sure the transaction is not endangered was to examine their annual shareholder meetings to make sure to document those meetings that had not previously been documented.
Accordingly, for state law purposes and as a matter of good corporate practice, it is important for the corporation to carefully observe the requirement of an annual meeting of shareholders. It is also important that that meeting be documented and a written record of the meeting retained. In that meeting, the shareholders should take action to elect the directors of the corporation on an annual basis. The Board should also approve any fundamental corporate acts that have occurred that year, such as the establishment of an employment benefit plan, execution of major contracts, execution of employment agreements, and other fundamental corporate actions.
Conducting these meetings will aid the corporation in complying with its legal requirements, and will improve the position of the corporation later on when it seeks to engage in major corporate transactions. For these reasons, it is very important that all corporations, no matter their size, make sure that they conduct shareholders’ meetings on a regular basis, and at least annually.
Richard W. Jones is an Atlanta business lawyer and an Atlanta securities lawyer with the Atlanta, Georgia law firm of Jones & Haley, P.C. He has over 30 years experience representing clients in securities and corporate matters. For more information please see our website at http://www.corplaw.net/.
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