Don’t Forget Your Corporate Records!
Is your business organized as a corporation in Massachusetts? Does it keep or maintain all of the required books and records? It should. Keeping the proper corporate records is an important part of being a corporation and it can save you trouble in the long run!
Permanent Corporate Records
According to M.G.L. 156D (the “Massachusetts Business Corporation Act” a corporation is required to keep the following “permanent records”:
- Minutes of all meetings of its shareholders and board of directors
- A record of all actions taken by the shareholders or board of directors without a meeting; and
- A record of all actions taken by a committee of the board of directors in place of the board of directors on behalf of the corporation.
Id. at § 16.01(a). The term “permanent” of course means that a corporation should always hold onto these records so long as the corporation exists. These records can be kept in any form (written, electronic, film, etc), but must be “capable of conversion into written form within a reasonable time.” Id. at § 16.01(d). But these records do not need to be kept in Massachusetts, except as discussed below.
Other Required Corporate Records
In addition to the permanent records, a corporation is also required to “maintain” the following records:
- “appropriate accounting records” Id. at § 16.01(b); and
- By itself or through an agent, “a record of shareholders, in a form that permits preparation of a list of the names and address of all shareholders, in alphabetical order by class of shares showing the number and class of shares held by each. Id. at § 16.01(c).
These records do not need to be kept permanently but corporations are required to keep current accounting and shareholder records. See Massachusetts Comments on § 16.01. Keep in mind, however, that “current” is not defined in the Massachusetts Business Corporation Act and exact length of time to hold onto these records is not clear. Other laws, such as tax laws, may require your corporation to hold these records for a specific number of years. Consult with your attorney and accountant before destroying any of these records.
The term “appropriate accounting records” is vague so as to allow some flexibility about the type of accounting records that a corporation should maintain. It depends, to some extent, upon the nature of the corporations’ business. For example, the appropriate accounting records for a small business that operates on a cash basis may consist only of a check register, vouchers and receipts. See Massachusetts Comments at §16.01(b). But for large public corporations, the appropriate accounting records are more comprehensive and detailed. See, e.g., Securities Exchange Act of 1934 §§ 13(b) (2) (A), (B) (accounting records and internal controls required of reporting companies).
Record of Shareholders
The “record of shareholders” should include the names and addresses of the registered owners of shares and their beneficial owners, to the extent of rights granted to them under M.G.L. 156D § 7.23(a). The records should also include the number and class of shares (if your corporation holds more than one class) held by each shareholder or beneficiary. But these records can be the stubs from shareholder certificates, an excel spreadsheet or other electronic database, or any other way of keeping accurate track of the shareholder information.
Like the permanent corporate records discussed above, these other records can be maintained in any form so long as they can be converted into written form within a reasonable time. Id. at § 16.01(d). They also don’t have to be kept in Massachusetts. Keep in mind, however, that a corporation must keep part of its accounting records and shareholder records in such a form that they can be shown and possibly delivered to shareholders annually or at a shareholder’s request. Id. at § 7.20 and § 16.20. If you have concerns about showing a shareholder these records, consult with a knowledgeable business attorney as you may be able to withhold this information in appropriate circumstances. See id. at § 16.02 (b)-(c) and § 16.20(d). Don’t play this game, however, without talking with a knowledgeable business attorney as withholding this information will likely generate a lawsuit from the aggrieved shareholder and the corporation can be liable for the shareholder’s attorney fees and costs. Id. at § 16.04 (c).
Corporate Records In Massachusetts
The following corporate records (or copies of them) must be kept in Massachusetts:
- The corporations’ articles or restated articles of organization and all amendments to them currently in effect;
- The Corporation’s bylaws or restated bylaws and all amendments to them currently in effect;
- Resolutions adopted by the corporation’s board of directors creating one or more classes or series of shares, and fixing their relative rights, preferences, and limitations, if shares issued pursuant to those resolutions are outstanding
- Minutes of all shareholders’ meetings, and records of all action taken by shareholders without a meeting, for the past 3 years;
- All written communications to shareholders generally within the past 3 years, including the financial statements furnished under M.G.L. 156D § 16.20 for the past 3 years;
- A list of the names and business addresses of the corporation’s current directors and officers; and
- The corporation’s most recent annual report delivered to the secretary of state under M.G.L. 156D § 16.22.
Id. at § 16.01(e)(italics added).
These corporate records can be kept in the corporation’s principal office or in the office of its transfer agent, secretary, assistance secretary or registered agent, so long as they are kept in Massachusetts. Id. Like the other records discussed above, these records also do not need to be kept in written form so long as they are capable of being turned into a written form within a reasonable time.
These records are required to be kept in Massachusetts to be available for inspection and copying by any shareholder. Each shareholder has an unconditional right to inspect and copy the seven (7) categories of records above under M.G.L. 16.02(a). This means that a shareholder does not have to demonstrate good faith or a proper purpose in order to obtain these records. With respect to the records in Nos. (1), (6), and (7) above, it seems doubtful that a shareholder will request this information from the Corporation since these records are readily available at the Secretary of the Commonwealth’s website.
But if a corporation receives a shareholder’s written request to inspect any of these corporate records, it has five (5) business days to make them available (electronically or in paper). Otherwise, it could likely face a lawsuit in Superior Court. See id. at 16.02(a) and 16.04(a). The court will “summarily” order inspection and copying AND order the corporation to pay the shareholder’s costs, including reasonable attorney’s fees. Id. at 16.04(c).
Business Reasons to Comply
Many private corporations tend to ignore these statutory corporate record requirements and view them as unnecessary and a waste of time. But, there are multiple business reasons to keep the required corporate records.
First, many required corporate records provide essential information about the corporation, its shareholders, and its decision. For example, corporate bylaws provide information on topics, such as how your corporation elects officers and directors, whether there are any stock transfer restrictions, and many other issues. Additionally, director and shareholder minutes provide a record of the important decisions your corporation has made and the basis for the decisions. Since a corporation can survive in perpetuity, these records will allow the corporation to keep track of its decisions and the results of these decisions.
Second, directors in your corporation have multiple duties to the corporation, such as the duties of care and loyalty. See e.g., M.G.L. 156D § 8.30 and § 8.31. To fulfill these duties, directors should regularly meet to discuss the corporation’s activities, disclose any potential conflicts, and vote on any proposed corporate action. Keeping accurate minutes (or consents) of these meetings is often the best defense to any shareholder or derivative lawsuit. The minutes can demonstrate that the directors fulfilled their duties and considered all material issues.
Third, holding annual shareholder meetings and providing shareholders with the required financial information helps keep them satisfied and informed about the activities of the corporation. This is especially important with respect to shareholders not actively involved in running the business. Non-involved shareholders are much more likely to bring a lawsuit when they believe that information is being kept from them and that the other shareholders running the business are receiving more profits and distributions from the corporation.
Additionally you may prevent (or have a defense) a future shareholder lawsuit that alleges a shareholder was not informed about an important decision (like a merger or a sale of assets) by keeping accurate minutes (or consents) of when the matter was discussed and a register of which shareholders were informed of the meeting and attended.
Finally, keeping or maintaining these records properly is an important defense against attempts by third-parties to pierce the corporate veil and hold shareholders liable for the actions and debts of the corporation. See e.g. In re WJM, Inc. 84 B.R. 268, 273 (Bankr. D. Mass. 1986) (maintenance of corporate formalities precludes piercing the corporate veil). Massachusetts courts typically consider twelve (12) factors when deciding whether to pierce the corporate veil, at least 3 of which are directly related to maintaining adequate corporate records and holding director meetings. See Attorney General v. M.C.K. Inc., 432 Mass. 546, 557 n.21 (2000) (identifying factors for piercing the corporate veil). Thus if your corporation is not keeping its records or holding its required meetings, it is at a greater risk for the corporate veil getting pierced and having the individual shareholders found liable for the corporations’ actions or debts.
If you’re not sure that your corporation is maintaining all of the required corporate records, consult with a knowledgeable business attorney! Many of these problems can be fixed. Don’t wait until its too late!