Consistent risk assessment and management are essential for any successful business. As your business grows, regularly and carefully reviewing your business’s essential contracts and other important documents is necessary to ensure continued compliance with the law and avoid or prepare for litigation. Additionally, this review process can help you better understand the documents that control your company’s structure, safeguard its intellectual property, and insure it against the inherent risks of your business. In reviewing your company’s documents, pay attention to what you may think is simply boilerplate language or “legalese” because these terms often contain critical terms.
Organizational Documents & Corporate Records
Your company’s organizational documents (for corporations, the Articles of Incorporation; for limited liability companies (LLCs), the Articles of Organization) determine your company’s basic structure and governance. Consider whether the ownership structure adequately serves your company’s best interests and whether all of the information remains accurate. Ask yourself the following:
- Would creating additional classes of shares help you retain control over your corporation while enabling it to continue growing?
- Would removing certain restrictions on the transfer of membership interests in your LLC help attract capital necessary for expansion?
- Is the information about your company’s registered agent and principal place of business still accurate?
Next, review your corporation’s Bylaws, or your LLC’s Operating Agreement. These documents further specify the authority of the directors, officers, managers, and members of your company and provide the procedures to be followed in exercising that authority. Think about whether you are complying with all of the formalities required by your Bylaws or Operating Agreement and whether the terms are conducive to future growth. For example:
- Does the board of directors meet as often as required by the Bylaws?
- Does the Operating Agreement allow for future capital calls from the members, which may be necessary for strategic investments?
- Are you consistently and accurately recording the actions of the company’s management?
- Do you keep the finances of the company completely separate and apart from the finances and bank accounts of the owners?
Finally, review the corporate records to ensure that the meeting minutes are up-to-date and that the board’s resolutions are adopted in accordance with any procedures in the Bylaws. Whether your company is a corporation or an LLC, if governed appropriately, the shareholders or members should be shielded from personal liability, meaning they will not be obligated to pay the debts or judgments of the company. However, one of the factors North Carolina courts consider when deciding whether to “pierce the corporate veil” – that is, hold the shareholders or members personally liable for a judgment against the company – is whether the company follows all of the corporate formalities required by the Articles of Incorporation/Articles of Organization and the Bylaws/Operating Agreement. If you don’t treat your company as a distinct, separate entity from its owners, then the courts may not either.
Irrespective of which particular industry or industry sector your company competes, there is a good chance that it has trade secrets, proprietary information, or other sensitive and confidential information that needs to be protected. Your company’s business often requires disclosing this confidential information to employees, vendors, suppliers, investors, or partners.
A confidentiality agreement (also known as a non-disclosure agreement or NDA) obligates the recipient of your company’s proprietary information to prevent disclosure of the information to third parties. Make sure your company requires that employees (including officers, directors, managers, and members), as well as other businesses to which you provide confidential information for business purposes, enter confidentiality agreements before your company discloses sensitive information to them. This agreement should specify what the recipient must do to keep your company’s information secret, define clearly what information is confidential, limit the use of the information to certain authorized purposes, and expressly grant your company the right to seek injunctive relief to prevent disclosure and to seek redress in the event of disclosure. Ensuring that every employee and third party with access to your company’s confidential information has agreed not to disclose that information discourages unauthorized disclosure, gives your company a clear, actionable remedy in the event the information is disclosed, and drastically increases the likelihood of succeeding in your assertion that the information is, in fact, confidential and protectable.
Liability coverage and property insurance are crucial to managing risk and protecting your company’s growth from the deleterious effects of costly lawsuits. Understanding your coverage and determining whether there are any gaps in your insurance that could lead to uncovered loss are essential to an accurate assessment of your company’s risk profile. You should consult with your insurance agent or broker at least annually to make sure your coverage is intact and covers all of the risks faced by your company. Depending on the unique circumstances and risks of your business, which can change over time, consider whether your insurance policies provide coverage that includes:
- General commercial liability;
- Directors and officers liability;
- Worker’s compensation;
- Fire, theft, and vandalism; and
- Any coverage required by a lease or other agreement.
- Ensure that shareholders or members of your company, as well as any affiliated or subsidiary entities of your company, are named as additional insureds on your company’s insurance policies or have their own policies.
Regularly reviewing your company’s essential contracts, agreements, and organizational documents can help you identify future pitfalls that could derail growth. This process can also identify opportunities to modify your company’s structure and policies in ways that make it more conducive to expanding into your business’s next chapter.
Kyle Heuser is an attorney at the law firm of Bell, Davis & Pitt. His principal areas of practice are civil litigation and intellectual property matters. He graduated from the Wake Forest University School of Law.
Kevin G. Williams serves as the president of Bell, Davis & Pitt. Kevin’s practice focuses on helping clients navigate business, commercial, professional negligence, and fiduciary disputes. He has been recognized in litigation by Business North Carolina’s Legal Elite and the categories of commercial litigation, banking and finance litigation, and trusts and estates litigation by Best Lawyers in America®.