Focus On...

spring 2003 vol. 8 no. 4
---------------------------------------------------------------------------------------------------------------------------------------------------

Corporate Governance
From an In-House Paralegal Perpective

By Glenda K. Barber, RP

In a post-Enron environment, it is critical that corporations and their outside counsel be diligent in addressing corporate governance issues. A corporate paralegal plays a key role in ensuring that the legal entities that he or she has responsibility for maintain adequate records that accurately reflect the actions taken by the legal entity during the course of its existence.

Formation: Once it has been determined as to the type of legal entity to be formed (corporation, limited partnership, limited liability company, etc.), the first step in the process of creating the new entity is to determine that the name to be used is available for use in its state of formation, and in any state in which it will need to transact business. I generally form a Delaware corporation and qualify it to do business in whatever state the field office, project or property is located in. I contact the Delaware Secretary of State at (302) 739-3073, and request confirmation of name availability. As a hypothetical example, for instance, I might inquire if the name “TC Florida Investments, Inc.” is available for use in Delaware. If they indicate that it is available, I would then contact the Florida Secretary of State to see if that name is available for use there by a foreign corporation. If the answer is yes, then I proceed to prepare the articles of incorporation to be submitted to the Delaware Secretary of State for filing and formation of the new corporation. Each state has its own requirements as to the language requirements in the formation document). A note of caution: some states (such as Texas) require that any entity that will hold real property located in that state must be a domestic entity (meaning you would have to form the entity in that state). Applying that criteria to our hypothetical new corporation, and assuming the entity would be holding property located in Florida, I would check the Florida corporate statutes to see if they required that the entity be a domestic Florida entity. If I determined that to be the case under our current scenario, I would probably form a Florida limited partnership (TC Florida Investments, LP), and have my Delaware corporation be its general partner. I would qualify the general partner corporation in Florida as well, just to be prudent.

If you are forming a new legal entity in Texas, you can go to the Secretary of State’s website at http://www.sos.state.tx.us/corp/ forms.shtml and download forms to use in the formation of various types of legal entities. The website also provides information on fees and how to file the formation document. One of the selections on the left side of the web page is Filing Guide. This is an excellent source for all kinds of formation, amendment, correction and change forms that you might need to file. As an example, you might decide after formation to change the general partner and need to file an amendment to the formation document. Many other states also have forms available on their websites, as well as the relevant statutes addressing formation of entities and requirements for the content of the formation documents.

For purposes of our current hypothetical scenario, we will only address the formation of a corporation that will not own property located in a state that requires that a domestic entity hold the property.

Accordingly, once the entity has been formed in Delaware, I would then complete an application for a certificate of authority for the new entity to transact business in Florida, and submit it to the Florida Secretary of State. Now my corporation has been formed as a domestic corporation in Delaware, and qualified to do business as a foreign corporation in the State of Florida.
My next step is to obtain a Federal employer identification number for the new corporation by filing Form SS-4, Application for Employer Identification Number, with the Internal Revenue Service. It may also be appropriate for a small business (must have no more than 75 shareholders) to file a Form 2553, Election by a Small Business Corporation, with the Internal Revenue Service seeking to afford the new corporation Subchapter S Corporation status for tax purposes. Subchapter S election allows “pass through” of income, expenses, depreciation, profits and losses directly to the shareholder(s) without taxation at the corporate level. This form must be filed within 90 days of the formation.

In the interest of avoiding a piercing of the corporate veil, it is important that you consult with the chief financial officer for the corporation (or a CPA) to ensure that the corporation is properly capitalized (usually not less than $1000 initially), and that a bank account for the corporation is established. Depending on the business objective and principal purpose of the corporation, it may be necessary to provide additional capitalization in the event that any bonds, licensing or insurance coverage are necessary for the operation of the corporation.

Record-Keeping. A corporate minute book containing the corporate seal, stock certificates and transfer ledger should be ordered once the corporation has been successfully formed in Delaware. Some of the other items that should be kept in the corporate minute book include: the articles of incorporation, any qualifications to transact business in another jurisdiction, the bylaws (among other things, the bylaws govern how the corporation is managed, establish when the annual meeting electing the directors and officers will be held, and may also address indemnification of the directors and officers); organizational minutes (these elect the officers of the corporation, establish the fiscal year, address the issuance of stock and also contain bank depository resolutions); minutes of the meetings of the shareholders and directors; stock subscription agreements, and any business licenses, assumed name or qualification documents.

If during the course of its legal existence, the corporation enters into any agreements which legally bind it (such as loan agreements, employment agreements, purchase agreements, lease agreements, etc.), it is important to document the approval of these transactions by the board of directors

of the corporation through preparation of a board consent containing resolutions approving the transaction and ratifying any past acts taken on behalf of the corporation by its directors or officers (I like to state that such acts are ratified from the date of the last annual consent through the date of the consent being prepared). It is also a good idea to attach a copy of the document evidencing the agreement being entered into by the corporation as an exhibit to the consent approving the transaction. This is prudent for many reasons, not the least of which is the possibility of an audit by the Internal Revenue Service or other regulatory agency. Unless specifically provided otherwise in the bylaws, organizational minutes or other corporate authority document, only a duly-elected officer of the corporation should sign any agreement or document legally binding the corporation. If your corporation has more than two directors, it might also be a good idea to have a provision in the consent allowing for multiple counterpart execution. Minutes should be kept in the minute book in chronological order by date with the most recent minutes being first under the minutes tab. Any documents evidencing amendments to the corporation’s charter (such as an amendment to its certificate of formation, change of registered agent, or merger documents) should also be kept in the minute book. Think of the minute book as a journal for the corporation that “tells the story” of its life or legal existence.

Due Diligence in Transactions. If you are a corporate paralegal working on an acquisition of a legal entity, you will likely be looking for evidence that the corporation you are acquiring has a legal existence in its state of formation (and in any state it is qualified to do business in), that it is also in good standing (in its formation state and any state it is qualified to do business in), and that it has paid its franchise taxes. For a Texas corporation, you can call the Texas Secretary of State Corporation Section at (512) 463-5555 and obtain a Texas certificate of existence for the corporation. There are many document retrieval services such as LexisNexis Document Solutions which can obtain these documents for you for a fee. You can also go to the website for the Texas Comptroller of Public Accounts (http://ecpa.cpa.state.tx.us/coa/coaStart.html) and print out a Certification of Account Status (reflecting its good standing in Texas). You will also want to ensure that the individual signing any acquisition or transaction documents on behalf of the entity has the requisite corporate authority to bind the corporation. In this instance, you might request a copy of the board consent appointing such individual to office and/or a certificate from the secretary of the corporation certifying as to the individual’s signing authority (sometimes referred to as an incumbency certificate). You might even request that the certificate reflect a specimen signature for the individual. So, to recap, you need to confirm that the corporation has a legal existence, is in good standing in both its state of formation and any state it is qualified to do business in, and that the individual executing transaction documents on behalf of the corporation has the requisite corporate power and authority to legally bind the corporation. Space limits for this article preclude addressing additional corporate authority due diligence issues.

Withdrawal and Dissolution. Once the decision has been made to dissolve a corporation, the first step is to prepare a shareholder consent approving the dissolution of the corporation. A prudent paralegal should also review the governing document of the corporation (bylaws) for any requirements for dissolving and winding up the affairs of the corporation. Next will be the withdrawal of the corporation’s certificate of authority to transact business in a state other than its state of formation. Some states (such as California) require that you obtain tax clearance prior to withdrawal.

As an aside, if you are dissolving a limited partnership or limited liability company, you would check the entity’s governing document (partnership agreement or operating agreement) to determine authority and restrictions on dissolution or cancellation). This document will dictate whether all partners (or members, in the case of a limited liability company) must sign the dissolution agreement, or just the general partner or managing member.

Once you have withdrawn from any foreign jurisdictions in which your entity has a certificate of authority, you then go ahead and file a certificate of dissolution or a certificate of cancellation (limited partnership or limited liability company) in the entity’s state of formation. Many states have their own dissolution forms which can be found on their website.

This article is not meant to encompass the full spectrum of the duties of a corporate paralegal, but merely to provide some insight from my perspective as an in-house corporate paralegal. A final observation: The corporate paralegal will find it very helpful to maintain a checklist of items to be addressed during the life of the corporation (such as formation, capitalization, qualification, significant corporate events (such as changes in officers or directors, loans, purchases or sales of corporate property, etc.), stock ownership history, withdrawal and dissolution).

[The author is a paralegal with Trammell Crow Company in Dallas, Texas, is a LAD member, and also chairs the Real Estate Specialty Section of the Dallas Area Paralegal Association]

Texas Paralegal Journal © Copyright 2003 by the Legal Assistants Division, State Bar of Texas.

Top of Page