A LEGAL CHECKLIST FOR BUSINESSES--CORPORATE AND CONTRACTS

Is your company adequately protecting its rights? Our last article provided a checklist for Employee and Intellectual Property matters. This one does the same for Corporate and Contract matters. These checklists cover many important points that often are overlooked, although no checklist can cover everything.

CORPORATE

BOARD AND SHAREHOLDER MEETINGS FOR CORPORATIONS  Have an annual shareholder meeting to elect directors–and keep minutes of that meeting. With respect to the board of directors, have minutes for board meetings or have unanimous written consents for major decisions regarding the company. These can be written up later if everyone on the board concurs, but it is better to do them at the time the resolutions are needed.

REGISTRATIONS IN OTHER STATES  If you have offices in other states, make sure you register your business in those states.

SECURITIES LAWS  Before offering or giving stock, stock options or promissory notes with stock-conversion rights, contact an attorney to make sure you obtain the proper securities-laws exemptions.

BUY-OUT AGREEMENT AMONG OWNERS  The shareholders generally should have an agreement where, before a shareholder can sell or transfer shares, the company and the other shareholders have a right to buy them first. The shareholders may also want an agreement that provides buy-out provisions if a shareholder leaves the company or is terminated from it.

LOANS TO AND FROM PRINCIPALS  With loans between the company and a principal:

    the interest rate and other terms should be commercially reasonable. each loan should be documented in writing.
  • with corporations, the board of directors should approve the loans.

STOCK-OPTION PLANS  If you are choosing a stock-option plan, consider:

    whether it should be a statutorily approved plan to minimize tax consequences for the employees.
  • whether you ought to use a shadow-stock (phantom-stock) plan instead, so that while employees share in the success of the company they do not own stock or options (which can be problematic with potential investors).

CONTRACTS

INTEGRATION AND MODIFICATION  Each of your agreements should have provisions stating that:

    it constitutes the entire agreement between the parties for this subject matter.
  • it cannot be modified except in a writing signed by both parties.

DISCLAIMERS OF WARRANTY AND LIMITATIONS OF LIABILITY  If you provide goods or services, your agreements should:

    restrict warranties which can arise by implication to reasonable terms.
  • limit your potential liability (which could otherwise be far larger than the value of the deal to you).

ASSIGNMENT  If you do not want the other party to be able to assign its rights (for example to a competitor or to a company which may not be financially sound), your agreement should expressly say so.

INTERNET  If you sell on the Internet or out of state, your agreements should:

    limit jurisdiction of disputes so that any litigation or arbitration occurs where you are located (as opposed to the other side of the country).
  • say which state's laws will be used to interpret the agreement.

TERMS AND CONDITIONS  If you use terms and conditions with purchase orders or order acknowledgments, have an attorney review the provisions so that, if there is a conflict between your terms and the other party's terms, yours are more likely to prevail. Alternatively, it may be more practical to use signed written contracts instead (which are much less likely to result in a "battle of the forms").

LETTERS OF INTENT  If you use letters of intent, they should expressly state whether they are binding or not.

INTERNATIONAL AGREEMENTS  Unless you are sure you want it, your international agreements should expressly exclude application of the United Nations Convention on Contracts for the International Sale of Goods. It applies automatically otherwise. If you are dealing with people or businesses with no assets in the United States, your agreements should include an international arbitration provision. It is much easier to get a foreign court to enforce those than judgments obtained in the U.S. court system.

FORM CONTRACTS  If you use form agreements, be sure they are reviewed and updated periodically to meet changes in business needs and law.

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Methven & Associates
2232 Sixth Street Berkeley, CA 94710
Phone: (510) 649-4019 Fax: (510) 649-4024
Web Site: www.methvenlaw.com
Copyright 2004 Bruce E. Methven, All Rights Reserved.

The foregoing article constitutes general information only and should not be relied upon as legal advice.