Your business is incorporated because your accountant or attorney or trusted friend told you that would protect your personal assets from liability.
And now, with a corporation to run comes the housekeeping needed to maintain the corporation’s status.
That means making sure the shareholders hold meetings as required.
Even if there is only one shareholder.
Shareholder meetings can be a problem for many startup corporations because the shareholders or single shareholder do not get around to holding them.
They are busy running their business.
Also, meetings can be a chore to call and undertake. Shareholders must be given prior notice and you have to make sure the quorum requirements are satisfied.
Failure to hold shareholder meetings or to take corporate action with proper shareholder approval can lead to many problems, such as making the corporation illegitimate or a sham.
That could ruin the liability limitation benefits of a corporation.
Fortunately, corporate law gives shareholders some flexibility in how meetings can be convened and held.
For example, if you need the shareholders’ meeting to be held in Florida even though your corporation is organized under California law, the bylaws can provide for shareholders’ meetings to be held in Florida.
If the bylaws are silent on the place where meetings are to be held (it happens, make sure you bylaws are updated regularly), under California law, shareholders’ meetings must be held at the corporation’s executive office.
Suppose the shareholders cannot make it in person to Florida or wherever the meeting is to be held.
There’s a solution for that.
Those shareholders can appear at the meeting by video conference or conference call.
But the bylaws must not prohibit electronic attendance at the shareholders’ meetings. Again, make sure your bylaws are up to date and do not prohibit electronic meetings if you want that option for shareholders.
The shareholders who attend the meeting by electronic means must be able to fully participate in the meeting.
They have to be able to hear and be heard. Their votes must be able to be recorded the same as those shareholders who attend the meeting in person.
A meeting of the shareholders does not need to include all of the shareholders for the shareholders to be able to take valid action.
So long as you have a quorum in attendance (whether in person or by electronic attendance), then the shareholders can take action.
A quorum generally means a majority of the shares are represented at the meeting. This does not mean a majority of the shareholders.
At a meeting that has at least a quorum, you do not need unanimous approval to achieve a valid vote to pass a resolution or for the shareholders to take valid action.
In such event, a simple majority vote of the shares voting at such shareholder meeting is sufficient.
But check the articles of incorporation. If the articles allow a lesser amount of shares to be represented at the meeting for a quorum, then you do not need to have a majority of shares represented at the meeting. But in no event, under California law, can the articles provide for a quorum that is less than one-third (1/3) of the shares.
The point of shareholders’ meetings is to properly have the shareholders vote and take action.
Can shareholders take valid action without meetings? Yes, they can take action even if they don’t meet.
Such action is valid and legal and the shareholders don’t even need to arrange an electronic attendance.
Shareholders can take proper action by merely agreeing in writing to take such action. In other words, shareholders can take action by written consent.
Any action can be taken by the shareholders that could be taken at an annual meeting or special meeting of the shareholders if the right number of shareholders agree, or give consent, in writing.
No meeting is needed for such action and no prior notice of taking action by written consent is needed.
Such written consent must state what the action is that is being taken by the shareholders.
The written consent doesn’t even have to be unanimous. If the proper minimum number of shares approve the action by written consent, that is sufficient.
The required minimum number of shares depends on the percentage of shares (usually majority) that would be required to approve the action if all the shares were in attendance had a meeting been held.
And the articles of incorporation must not prohibit approvals by the shareholders by written consent (they usually don’t, but check your corporation’s articles to make sure they are up to date on this point).
This is a great way to take care of the annual meeting of shareholders. All you would need is to set forth the actions to be approved (e.g. appoint officers) in the shareholders’ written consent and no actual meeting would be necessary.
There are, as always, exceptions to the rules.
Certain actions cannot be approved by a shareholders’ written consent unless prior notice is given of soliciting such consent.
For example, if the corporation needs approval to enter into a transaction with one of its own directors (or a company that is owned by such director) and a written consent of the shareholders is solicited, the request for such consent must be made at least 10 days prior to the transaction closing.
For other actions, if less than all shares consent in writing to a given action, notice of such consent must be given to all shareholders who have not consented.
But if all shareholders consent, you have unanimous consent and there is no need to give any notice because all shareholders are involved in approving the action.
So a corporation’s shareholders can take care of much of their duties as shareholders either by attending meetings via electronic means or they can use written consents to avoid convening a meeting when that is not practical.
The main thing is to check the specific requirements under the law.
And don’t forget to make sure the bylaws and articles of incorporation allow for such shareholder flexibility.
References: California Corporations Code sections 600, 601, 602 and 603.
This discussion is not legal advice, a solicitation of you as a client, nor the engaging in the practice of law in any jurisdiction.
This discussion is merely for information/education and should not be relied upon for legal advice by anyone because the facts discussed may be different from your own situation. If you need legal advice, consult a qualified attorney.
For more information please visit my website at www.palacioslawoffice.com.
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