Spring Cleaning: Why Businesses Should Take Time Now to Review Corporate Records and Agreements

While the “spring cleaning” that typically comes to mind involves gardening, cleaning off the golf clubs or power washing, it is also an ideal time for business owners to take inventory of their corporate records, governing documents and the requirements set forth in other relevant agreements to maximize the efficiency of any strategic transactions, refinancings or a range of other plans later in the year.

The Health Law Observer previously cautioned business owners that a failure to properly prepare a business for a sale, or a lack of familiarity with timing considerations, can “cause delays in the [transaction] process and impede a timely closing.” As entities encounter additional new reporting requirements, such as the annual report requirement in Pennsylvania and the Corporate Transparency Act, it is advisable for business owners to set aside some time now to perform preventative maintenance this spring.

Although the process can be mundane, business owners are well served long-term to dedicate time to confirming that organizational records are current and key principals are familiar with terms of important agreements, such as financing documents and leases, that may be relevant to contemplated transactions. For example, businesses that operate in a corporate structure, whether as a for-profit enterprise (including professional corporations) or as a non-profit organization, should review their minute books and confirm that:

• the corporation is presently operating with duly elected directors and validly appointed officers;
• annual meetings were duly called and conducted, or corresponding unanimous written consents have been executed for each previous year;
• minutes of meetings were drafted and ratified; and
• resolutions adopting any corporate actions have been reduced to writing and included in the business’s records.

Recognizing that many businesses, including numerous health care entities, operate as limited liability companies that have fewer formal recordkeeping requirements, it is nevertheless advisable for limited liability company principals to at least briefly review the operating agreement that governs the actions and relationship of the members to confirm that all information in the operating agreement remains accurate, including addresses that may have been registered with the jurisdiction of formation, and the list of the company’s members and their respective ownership interests.

In addition, if a business is contemplating a transaction in the coming months, such as a sale or major refinancing, principals should review (or request that the entity’s legal counsel review) pertinent documentation to identify any requirements that are sensitive to timing, such as contracts or leases that require prior written consent to assignment or advance written notice of the transaction. Financing documents require particular consideration. For instance, an entity contemplating a refinancing strategy may be obligated through agreements with its current lender to maintain mandatory financial ratios or debt covenants that could restrict the business from taking certain actions designed to present its operations or financial position in a more attractive light to a potential new lender. Further, a business could trigger prepayment penalties or fees if the business satisfies its debt before a specified date.

When conducting “spring cleaning,” a business owner should consider specific goals and objectives with regards to the entity’s records and the review of the business’s material contracts. The business owner should assemble all necessary documentation and carry out the review to best position the company on a smooth trajectory for the remainder of the year given its strategic goals.