As a corporate lawyer representing small businesses here in San Jose and throughout Silicon Valley, I often need to walk my clients through the process of forming a corporation, whether in California, Delaware, or another state, but also the ongoing requirements of maintaining their corporation. It is important to remember that California law provides limited liability to shareholders, so long as the corporation is treated appropriately. When corporate formalities are not followed, creditors and claimants can “pierce the corporate veil” to allow for a judgment against shareholders for a liability that should only have been an obligation of the corporation. One of the most important corporate formalities is the shareholder meeting.
Every California corporation is required to have an annual meeting of the shareholders, and can have additional ‘special’ meetings at any other time when properly called. In order to hold a proper meeting, the meeting must be properly called, noticed, and held. This is a general roadmap on how to do that, but any corporation is subject to the specifics of its corporate documents and should only rely on legal counsel familiar with its documents for requirements specific to its company.
When should the annual shareholder meeting be held?
The annual meeting should be held on a date and time that is stated in the bylaws. Recently I began representing a client that controlled multiple different corporations formed by his previous corporate attorney. Each of the corporations had a different annual meeting date, making it much more difficult for the client to remember to hold his meetings on time. We held a special meeting of the shareholders to amend the bylaws of each corporation to have the meetings on the same date, and then held the meetings back to back in his office. In this case, the shareholders and the board of directors were essentially the same people, so we actually noticed and held a joint annual meeting.
What action is required at the annual shareholder meeting?
The only action required to be taken by the shareholders at an annual meeting is the election of the board of directors. Any other proper business may also be acted upon, so long as it was included in the meeting notice.
Required Notice – What should the notice say?
All shareholders who are entitled to vote are entitled to written notice of the annual meeting (and any special meeting). The bylaws cannot override this requirement. However, most of the time, my small business clients with closely held corporations hold their meetings without formal notice, and we just have the shareholders sign a written waiver of the notice requirement at the meeting. Of course, you should not depend on this if there is any hint of a potential disagreement between the shareholders. Otherwise, a disagreeable shareholder could refuse to waive the notice requirement, and delay or block the shareholders from taking any action at the meeting.
The notice to shareholders must include the date, time and place of the meeting, and whether shareholders can attend by telephone or electronic meeting. For annual meetings, or any other meetings where directors will be elected, the notice must also state the names of the persons nominated for the election. Any other matters the board intends to present to the shareholders for any action at an annual meeting must also be stated in the notice. Although at an annual meeting the shareholders may still be able to act on a matter that was not included in the notice, certain matters may require the unanimous vote of the shareholders, including those not attending the meeting, if the shareholders were not given notice of them in advance.
At a special meeting, the shareholders are not allowed to act on business not included in the notice unless all shareholders provide written waiver of notice for that matter. For this reason, if the corporation has any adverse interests among its shareholder, I recommend that a very specific agenda be provided with the notice of any special meeting. The safest method is to provide the actual language of proposals the board will be presenting to the shareholders at the meeting.
In addition to providing notice before the meeting, in California the corporation must provide an annual financial report to the shareholders at least 15 days before the annual meeting, and no later than 120 days after the end of the corporation’s fiscal year. However, if the corporation has less than 100 shareholders, this requirement can be waived in the bylaws.
Required Notice – How do you give notice?
You should always check to see what the corporation’s bylaws say about notice, but for most corporations, notice can be given by first class mail, in person, or by electronic delivery such as facsimile or e-mail. Notice should go to the address or contact information provided by the shareholder to the corporation. If you do not have an address, or if the electronic notice gets rejected twice, you can mail the notice to the shareholder care of the corporation at its principal executive office, or you can publish it in a local newspaper. In other words, if you cannot find a shareholder you do not have a legal requirement to spend your time looking for them.
The corporation is considered to have provided notice as of the date it mails the notice, or delivers it personally, by fax or electronically. I recommend that the secretary of the corporation sign an affidavit of mailing or electronic transmission for the corporate minute book. I may be able to provide notice and sign the affidavit as the transfer agent for corporations that are my clients.
Required Notice – When should it go out?
Written notice of a shareholder meeting must be given no less than 10 days and no more than 60 days before the scheduled meeting. Corporations will often provide at least 15 days notice so that the annual financial report can be sent to the shareholders at the same time.
As I mentioned earlier, shareholders can waive the required meeting notice if they did not get notice, or they can waive any problem with the notice they received. If a shareholder does not attend a meeting, they can waive notice in writing either before or after the meeting. If a shareholder shows up at a meeting and does not actually object to the improper notice at the beginning of the meeting, the shareholder is deemed to have waived the notice requirement. However, a shareholder can still object at any time during the meeting if a matter is raised that was not included in the meeting notice. Be very careful about the content of the waiver. Although usually the waiver does not have to include information about what was supposed to be considered at the meeting, certain matters do require a more specific waiver, otherwise unanimous vote of the shareholders may be required on those matters.
Once a company has set a date for its shareholder meeting and either provided proper notice or had the notice requirement waived, the company must now determine who has the right to vote at that meeting, and what votes are required.
Contact Structure Law Group, LLP if your company would like assistance with maintaining corporate formalities, including preparing for annual shareholder meetings, drafting board or shareholder minutes, or reviewing your company’s minute book to make sure the company is in compliance with corporate requirements.
The information appearing in this article does not constitute legal advice or opinion. Such advice and opinion are provided by the firm only upon engagement with respect to specific factual situations. Specific Questions relating to this article should be addressed directly to the author. Individuals, scenarios, and circumstances appearing in this blog have been changed to protect the confidentiality of Structure Law Group, LLP clients.