An interesting issue recently came up with a client where it had to correct some numbers on an accounting log that had been entered wrong, simple mistake. The problem was that for tax and investor disclosure purposes, the managers couldn’t just go back and “fix” the numbers – it could potentially look as if they were hiding something, there could be tax consequences, etc.
So this client contacted me, and in coordination with their accountant we determined to correct the entries with a “Resolution” showing why and how the correction was being made. A Resolution is a document showing official corporate action (when to make a Resolution will be the topic of a future blog entry), and it got me to thinking, what goes into a well drafted Resolution, whether corporate, LLC or partnership? Here’s the key five:
A Resolution, in my opinion, should briefly tell the complete story of the transaction, First, who is making it: Board of Directors, Shareholders, Managers, Members, Partners. Second, the Resolution should say under what authority. In the Bylaws, Operating Agreement, or Partnership Agreement there should be a section giving authority to these various groups and also limiting their authority. The point is to make sure that the group Resolving has legal authority to so Resolve; and that proper procedure is being followed (notice or waiver; majority, unanimous or 2/3 vote).
Next, the “why” should be answered. Why is this Resolution being adopted: is it to expand the business, authorize a loan, purchase a large piece of equipment? Answer the “why” to show that there is a valid business purpose to the transaction. For example, “Whereas the Directors have determined that the Company should expand its operations to Raleigh …”
Following that, the “what” should be stated clearly but succinctly – this is the Resolution itself. This is not the place for details however, unless necessary; those are left to the Officers or Managers to hash out. One might see, “Resolved, that the Company is authorized to search for and purchase suitable commercial property in Raleigh for the expansion of its chain of stores …”
Finally, the “who”: Who is tasked with carrying out the Resolution. Especially in a corporation, it gives explicit authority to an officer or manager to undertake the Resolved task. Thus under the Bylaws the CEO may not have authority to purchase property valued in excess of $100,000 on his own initiative; however, the BOD could by Resolution give him that authority. “The CEO is given authority to carry out and implement this Resolution …”
Could a business get away with just saying, “Resolved, the CEO shall find and purchase …” and omit the rest of the story? Sure, why not, there’s no set rules to this. However, I’ve found that when a Resolution tells the whole story, it will answer many questions that a third party such as an investor, auditor, new manager or officer might have without having to chase down the facts. And when that third party is a judge, the document contains the legal foundations for the Resolution and can thereby limit discovery into other corporate affairs.
I charge my existing clients a minimum of 1/2 hour to draft simple Resolutions because I need to understand the situation; review their corporate documents (which often need to be fixed themselves); and incorporate all of the above into the Resolution. I think it’s well worth the time and money spent to do it right the first time. For any business transactional legal questions you may have, call me in Asheville or Chicago at (312) 671-6453.