US COMPANIES AND CORPORATE GOVERNANCE

A US company has been formed. The company has a name, has been registered in the desired US state, and has issued share certificates to its shareholders in accordance with their shares. The main corporate positions have been filled (that is, the officers – such as president, vice president, treasurer, and secretary), and the members of the board of directors have also been appointed. So, everything has been done, and the company documents can be filed, right? Far from it – now it’s time to think about corporate governance!

What is corporate governance?

This subject becomes relevant as soon as a US company is established. The term “corporate governance” describes the implementation of the requirements under corporate law based on the laws of the respective US state and the company’s internal regulations, as set out in its articles of association, or bylaws.
This area is critically important because compliance with corporate governance provisions can not only prevent liability on the part of the company itself in the course of its day-to-day business – it is also crucial in avoiding piercing the corporate veil and subsequent liability on the part of the parent company.

The minute book

a. What is a minute book?
In practical terms, corporate governance is implemented by means of the company’s minute book. Because there is no commercial register in the US, unlike in Germany or Austria, US companies are required by law to prepare and manage all relevant company documentation themselves. These documents are managed and filed in a document holder known as the minute book.

b. What should be kept in a minute book?
First of all, the original incorporation documents created during the incorporation process should be stored in the minute book. This includes:
(1) The Articles of Incorporation. This is the company’s confirmation of registration. It is usually prepared and sent by the office of the secretary of the state in the state where the company is founded.
(2) The By-laws. These are the company’s articles of association. Depending on the form of the company, they may also be called the operating agreement.
(3) The IRS letter. This is the letter from the Internal Revenue Service (IRS) confirming the issuance of the company’s federal tax ID.
(4) The (original) founding resolutions of the company. The initial director(s) of the company must be named in the registration form when incorporating the company. After the company is incorporated, corresponding resolutions are passed confirming and ratifying the formation of the company as well as the appointment of the initial directors. The same applies to the designation of the shareholder(s), who are also confirmed by resolution. These resolutions are referred to as board of directors’ or shareholder resolutions.
(5) In most cases, the designation of the shareholders also includes corresponding subscription agreements in which the conditions of participation for the shareholder(s) are specified. Such documents will also be kept in the minute book.
(6) The shareholder(s) is/are issued stock certificates in accordance with the subscription agreement once they have been appointed as shareholder(s). The original stock certificate is given to the shareholder(s). A copy of the stock certificate(s) goes into the minute book.
(7) A stock ledger – or stock transfer ledger – is kept in order to monitor the number of shares issued and the names of the shareholders. It also documents any subsequent transfer of shares. This register is also kept in the minute book.
The documents mentioned above are all original corporate documents prepared shortly after incorporation.
Once the company is active, other company documents are created over time. These are usually corporate resolutions, which are intended to document and ratify relevant company transactions, such as changes in officers (e.g., the president, vice president, treasurer, or secretary), the appointment of additional officers, or the admission of new shareholders. The above steps are typically taken by passing board of directors’ resolutions. Resolutions concerning important company decisions are usually passed in the form of shareholder resolutions.
If the corporation will be doing business in states other than the state of incorporation, registrations in those states are an option. The confirmations of these registrations – known as “foreign qualifications” – are then kept in the minute book as well.

c. Liability issues
Ongoing monitoring and maintenance are necessary for proper keeping of the minute book. Registrations have to be renewed or updated on an ongoing basis, new resolutions need to be passed, and so on. These processes involve a certain amount of time and costs as well. It’s important not to neglect this maintenance work, as this may otherwise become significant for the company in terms of its own legal liability and even its legal position concerning the piercing of the corporate veil.
In the event of a dispute, there may be an obligation to present the minute book to prove that the company has kept its accounts correctly. This minute book maintenance has a significant impact on the question of whether there are grounds for liability on the part of the company or even whether the parent company’s corporate veil is pierced.

d. Relevance of corporate transactions as a basis for resolutions
The question of when a corporate transaction is classed as “relevant” is usually decided by the shareholders themselves. However, a “generous” view should be taken because it concerns the documentation of the company’s transactions. The resolutions that are adopted and filed in the minute book are of particular importance for corporate governance, as they reflect the history of the company. For this reason, all relevant steps within the company should be taken in the form of resolutions and then documented, from the company’s first resolutions to its ongoing development. This may seem tedious and cumbersome, but it is essential for orderly keeping of the minute book. Who will be able to remember years later whether this or that decision was also approved by the board of directors or the shareholders? A glance at the minute book will suffice, and the written record of the resolution serves as proof that the decision was approved.

Who is responsible for compliance with corporate governance?

The company is naturally responsible for compliance with corporate governance rules. Within the company, this task is usually performed by the corporate secretary – an officer of the company. The corporate secretary also serves as an important link between the parent company and its US subsidiary, thereby ensuring, among other things, that no potential for liability arises. Due to the (not insignificant) potential for liability in the event of any omissions, this role is very often assigned to a lawyer. The cost of this is in no way proportionate to the company’s potential liability in the event of omissions.