Corporate Check-up.
Most business owners create a corporation for one reason: protection from liability from
the business activities for the owners. This fundamental corporate law principal limits
shareholders’ liability to the actual amount invested in the corporation. Yet, the actions of the
management, directors, or shareholders may very well jeopardize the liability protection they
sought to obtain. The liability protection afforded shareholders is not absolute. The health of
any corporation can be judged by examining two basic areas: (a) the corporation documents
(such as contracts, permits and licenses) and (b) the method of operation of the corporation by
the shareholders, directors and officers of the corporation.
An Internal Document Review.
The following document review and information gathering should be periodically conducted by
management of the a corporation:
Organization And Good Standing
___ 1. Review Certificate or Articles of Incorporation and all amendments thereto
___ 2. Review Bylaws
___ 3. Minute books of the corporation, including minutes of the meetings of the board
of directors, any committees (whether of the board or otherwise), and
shareholders 1
___ 4. Confirm that the corporation is qualified to do business as a foreign corporation in
jurisdictions where is it doing business
___ 5. Confirm that all partnerships or joint venture affiliations of the corporation are
documented
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The corporation’s minutes serve as the official record of the activity of the actions taken by the members of the board of
directors, the shareholders, and the corporation’s committees. In the words of one court, a corporation “speaks” through its
minutes. They are prima facie evidence of the facts they state. Good resolutions and a clear, concise written record will avoid a
future misunderstanding. Generally, a corporation should have a resolution:
(a)
if the matter is one that the statutes or the corporate documents require must be covered by a resolution;
(b)
if an officer will be required to file a certificate requiring evidence of resolution;
(c)
if the decision directs or otherwise specifically controls the management of the corporation;
(d)
if the matter is important and likely will be re-visited; and,
(e)
if the matter amends the corporation’s governing documents.
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Capitalization And Shareholders
•
___ The corporation's stock transfer or stock ledger books exist and are up to date.
•
___ The corporation has financial statements
•
___ The corporation has stock certificates with appropriate legends
•
___ All stock option, bonus, incentive, or pension plans, and other such agreements are in
proper form
•
___ All agreements relating to the beneficial ownership, voting rights, or pledge of the
corporation's common or preferred stock are in appropriate written form
•
___ All agreements under which registration or preemptive rights are granted to
shareholders of the corporation are on file
•
___ The current list of all shareholders of the corporation can be cross-checked against
the stock books disclosing the status of ownership of each (e.g., joint, in trust, minor)
•
___ Written reports to shareholders and correspondence from any shareholders is
properly filed
Contracts
•
___ Review all material contracts (and amendments) currently in effect, including,
without limitation, material leases, loans, sales, purchase, financing, distribution,
franchise, intellectual property, employment, insurance, employee benefit, and jointventure contracts
•
___ Review all “boilerplate” of corporation’s form contracts
Real Property
•
___ Review all leases for properties leased by the corporation
•
___ Keep deeds on file
•
___ Confirm zoning compliance
•
___ Review deed/lease for restrictive covenants that might affect business operations
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Personal Property
•
___ Maintain an accurate and complete list of principal equipment and other tangible
property (excluding inventory) owned or leased, including:
•
•
•
asset type
location
book value
•
___ Maintain an accurate list of inventory, including:
• type
• location
• book and market value
•
___ Maintain a complete record of all leases of personal property
•
___ Conduct a financing statements (UCC-1) search
Tax Matters
•
___ Have all tax filings been timely made?
•
___ Confirm current payment of all taxes (property, employee withholdings, etc.)
•
___ Confirm proper tax elections filed by the corporation
•
___ Review all documents, including option agreements, employment agreements,
and/or deferred compensation agreements, that reflect compensation arrangements with
employees of the corporation that would be deemed to be "golden parachutes" under
Section 280G of the Code to consider proper tax treatment and effect of any severance or
termination arrangements with the corporation's management
•
___ If the corporation is an S corporation, the S corporation election and all documents,
including correspondence with the IRS, relating to the corporation's status as an S
corporation
•
____ Verify that all shareholders are eligible to be shareholders of an S
corporation
•
____ Review the capital structure of the corporation to see if it meets the oneclass-of-stock requirement
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Liability And Property Insurance
•
___ Review insurance policies of the corporation and its affiliates, and all exclusions
and endorsements
•
___ Review insured amounts
Environmental Review
•
___ Have the sites owned or leased been used for other purposes?
•
___ Are you aware of any signs of possible on-site contamination, including: discolored
soil or fill dirt; transformers or fluorescent light ballasts that may contain PCBs;
underground or aboveground storage tanks; odors; unlabeled drums; asbestos; or any
other evidence of possible environmental contamination?
•
___ Are you aware of any activities on adjacent or other nearby properties that could
represent possible environmental contamination?
•
___ Are you aware of any past use of the sites in question (or adjacent or nearby sites)
that would be likely to cause environmental contamination?
Intellectual Property
Trademarks, Service Marks, and Trade Names
•
___ Identify all registered and unregistered trademarks, service marks, and trade names
used by the corporation
•
___ Does the corporation have procedures for policing the use of trademarks, service
marks, and trade names
•
___ Are there any known impediments to use or transfer of any trademark, service mark,
and trade names
Copyrights
•
___ Maintain a list and copy of all the corporation's registered copyrights, if any
•
___ Ensure copies of any employment agreements designating "works for hire" or
otherwise transferring intellectual property from the employee to the corporation
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•
___ Compile a list of the corporation's derivative works, whether or not registered as
such, and works from which they were derived
•
___ Compile a list of any copyrights used by the corporation and held jointly with
another party
Computer Software
•
___ Identify all computer software configurations and rights used or owned by the
corporation and agreements pertaining to the same
•
___ Identify the natural persons who are authors of, or who made a substantial
contribution to the development of, the software and identify any such person's thenemployer
Trade Secrets
•
___ Identify and review the procedures the corporation employs for trade secret
protection
•
___ Review the list of all persons, whether or not employed by the corporation, to whom
any trade secret information has been disclosed
•
___ Review all confidentiality agreements for:
• ___ employees
• ___ third parties (consultants, suppliers, beta test customers, etc.)
Labor And Employment Matters
Labor Matters
•
___ Does the corporation have written personnel manuals, employee handbooks,
supervisor's guides, and general personnel policies and procedures of the corporation?
•
___ Are all significant employment agreements to which the corporation is a party
written down?
•
___ Are all of the corporation’s consulting agreements and other agreements with
independent contractors, whether oral or written, to which the corporation is a party
•
___ Does the corporation have noncompetition, confidentiality, and trade secret
agreements to which the corporation or its key employees are a party?
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•
___ Does the corporation have an affirmative action programs? Is it required to have
one?
•
___ Does the corporation have a wage scale?
•
___ Does the corporation have a salary schedules for salaried employees?
•
___ Does the corporation have policies and procedures for drug and substance abuse
testing, treatment, and discipline; documents to evidence compliance, if necessary, with
the Drug-Free Workplace Act of 1988
•
___ Does the corporation provide COBRA notices? Can it produce a list of the persons
to whom notices were furnished during the past eighteen months?
•
___ Does the corporation have Forms I-9?
• ___ Does the corporation have copies of Material Safety Data Sheets (MSDS), OSHA
200 reports, and workers' compensation records
Employee Benefit Matters
Tax-Qualified Plans
• ___ Are there qualified plans and trust agreements (whether union, non-union, or multiemployer), annuity contracts and custodian agreements relating thereto and all
amendments to such documents (collectively, the "qualified plans")
• ___ Have any IRS determination letters been issued for the qualified plans?
• ___ Are Form 5500 annual reports (with all related schedules and exhibits) on file?
• ___ Are all actuarial reports (for all defined benefit and corporation benefit plans
described in (a) above), accountants' reports, trustee reports, insurance corporation
reports, and financial reports for the qualified plans on file?
• ___ Is the funding of the plans current?
• ___ Full information concerning "prohibited transactions" within the meaning of the
Internal Revenue Code and ERISA and "reportable events" within the meaning of ERISA
with respect to the qualified plans that occurred at any time during the preceding five
plan years
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Nonqualified Plans
• ___ Review all nonqualified pension plans and other deferred compensation plans,
programs, or arrangements and all amendments thereto (including complete descriptions
of all oral deferred compensation arrangements) (collectively, the "nonqualified plans"),
election forms beneficiary designation forms, and available summaries of all such
nonqualified plans
• ___ All trust agreements (e.g., Rabbi trust documents), insurance contracts, and other
documents that provide a reserve of assets to discharge the obligation to pay benefits
• ___ All disclosures and reports provided to participants in such nonqualified plans
• ___ A statement, certified by the chief financial officer, of the total amount accrued for
the benefit of each participant under the nonqualified plans, along with all records and
accounting information supporting such statement
Stock-Based Plans
• ___ Are all qualified stock option plans, incentive stock option plans, employee stock
purchase plans, restricted stock purchase plans, phantom stock plans, and other stock
plans described in Code Sections 421-425 (collectively, the "stock plans") in proper
form?
• ___ Are all summary plan descriptions and annual reports provided to participants
relating to the stock plans in proper form?
Welfare Benefit Plans
• ___ Review all health, medical, dental, vision, disability, or other health plans (funded
and unfunded) or policies of the corporation and each related entity for active employees
and retirees, along with summary descriptions delivered to participants and beneficiaries,
all Form 5500 annual reports for the immediately preceding five plan years, copies of any
related trust agreements, agreements with third-party administrators, claims summaries
for self-funded arrangements, notices and forms utilized to comply with continuation
coverage requirements applicable under federal or state law, and certified statements
concerning compliance with such continuation coverage requirements
•
__ Review all group term life insurance policies of the corporation and each related
entity for active employees and retirees, along with all disclosures and summary
descriptions delivered to participants and beneficiaries, all Form 5500 annual reports for
the immediately preceding five plan years, all related trust agreements, and any
agreements with third-party administrators
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• ___ Review all severance pay plans, vacation pay plans, group legal service plans, and
other "employee welfare benefit plans" or "welfare plans" (within the meaning of
Section 3(1) of ERISA) of the corporation and each related entity for active employees
and retirees, along with all disclosures and summary descriptions delivered to participants
and beneficiaries, all Form 5500 annual reports for the immediately preceding five plan
years, all related trust agreements, and any agreements with third-party administrators
Securities Laws
•
___ Have there been any stock repurchases or redemptions by the corporation, including
shares purchased, price paid, shareholders participating, and any other pertinent data?
•
___ Are all securities filings, mailings to shareholders, regulatory filings, and disclosure
documents supporting or soliciting stock or debt on file and in proper form?
Antitrust Laws
The Corporation's Relationship with Competitors
General inquiries:
•
•
•
•
___ How does the corporation make its pricing/rates decisions known?
___ How does the corporation obtain information regarding the rates of
competitors?
___ Does the corporation send to or receive price lists (rates) from
competitors?
___ Are there any unusual or suspicious patterns in the pricing/rate activity
within the industry that would be difficult to explain in the absence of
collusion?
Inquiries relating to trade association activities:
•
•
•
•
•
___ What is the purpose of the trade associations to which the corporation
belongs?
___ Which personnel go to trade association meetings?
___ Does the corporation receive the minutes and agenda of association
meetings?
___ Does the trade association have a lawyer, and does the lawyer attend the
meetings?
___ Are data on prices/rates collected or exchanged?
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•
•
•
•
___ What, if any, cost-reporting, product-standardization, or other
arrangements regarding common or joint action have been entered into or
discussed?
___ Do contacts or conversations take place between corporation personnel
and competitors outside the formal meetings?
___ Has the trade association or any of its members recently been involved in
antitrust litigation or investigations?
___ Have other companies who desired to join the association been excluded
from membership?
•
___ Is the corporation involved in any joint ventures? If so, please explain
•
___ Has the corporation joined any competitors to petition the government or
engaged in any other joint activity before any government agency?
•
___ Have there been boycotts or concerted refusals to deal among competitors or
between suppliers and customers, either by the corporation or by another organization
or trade group to which the corporation belongs?
The Corporation's Relationship with Customers and Suppliers
• ___ How does the corporation set rates? Does it refuse to deal with lenders who do not
adhere to those rates?
• ___ Are there written or oral agreements or understandings with other competitors
limiting the territory or customers to which they may lend?
• ___ Are their any distributorship agreements? Are they in writing?
Price Discrimination
• ___ Does the corporation provide identical services at identical rates to competitors who
are in competition, either directly or indirectly?
• ___ If functional discounts are given, confirm that they are based on valid differences in
the actual business functions of customers or other pass-throughs
• ___ Have any advertising or sales promotional materials or allowances been provided to
one customer but not to all competing customers in the same class?
• ___ Identify any deviations from current lending rates or from promotional plans
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Monopolization and Attempted Monopolization
• ___ Are there any markets in which you maintain a commanding percentage of business?
• ___ Has the corporation engaged in conduct calculated to injure or discipline specific
customers (e.g., actions to deny specific competitors of a customer access to scarce
resources, or price cuts affecting particular firms or segments of the market)?
• ___ Have any such predatory actions driven one or more competitors from the market?
• ___ Has the corporation engaged in activities that essentially raise its competitors' costs
without lowering its own, or that will be profitable only if competitors are eliminated or
competition is reduced?
Interlocking Directorates and Officers
• ___ Confirm that no director or officer of the corporation serves as a director or officer of
any corporation that competes with the corporation
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