Regulation within the Market: Ought to Your Firm Deal With Bylaws?

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Many New Hampshire courts have ruled that if a company fails to comply with the “legal formalities” of the New Hampshire Business Corporation Act (“BCA”) and conduct what the court considers grave injustice to one of its companies, this is what the court will do Believer sees “Pierce the veil of the company”; That is, the company’s shareholders will be held personally liable for the claims of the obligee, although the BCA generally prohibits such an outcome.

The most important relevant corporate formalities include:

■ Appointment of first directors and officers,

■ issue of share certificates to all shareholders,

■ issuing of company statutes (internal rules of corporate governance to be observed by the company’s directors and officers),

■ Compliance with these articles of association by, among other things, actually holding meetings of shareholders and the board of directors in accordance with statutory provisions, and

■ Recording and maintaining reasonably detailed minutes of these meetings and corporate transactions with third parties, such as B. important suppliers and customers.

However, completing the above formalities is a significant burden on New Hampshire small private businesses. Regulatory compliance requires attorney assistance and attorney payment, and therefore paying potentially costly legal fees.

As a result, a great many New Hampshire companies simply do not adhere to it, even when fully aware of their duty to comply with company formalities. But the less they comply with these formalities, the more they open up to successful veil-pervading claims from creditors.

And even if their attorneys point out that veil penetration claims are very difficult to win (which they are) and that the likelihood of the particular creditor claim taking precedence is slim, clients can choose to deal with an improbable due to of a potentially catastrophic outcome, they will have to settle the claim on terms they would normally never consider.

There is what appears to be a wonderful solution to the above dilemma – namely, Section 7.32 of the BCA, entitled “Shareholder Agreements”. In essence, section 7.32, surprisingly, provides that if there is an agreement between the shareholders of a particular company that they and the directors of the company are not required to issue articles of incorporation or share certificates, to adopt statutes, to hold shareholder or board of directors meetings; Keep written records of company meetings or transactions, or complete any other company formalities as part of the BCA.

■ You do not have to adhere to these. and

■ You can operate your company as flexibly and informally as if you were an LLC.

However, there are at least two main reasons why, in a veil piercing case, a New Hampshire company may fail to oppose a veil piercing claim by a creditor based on Section 7.32:

First, there is no case in New Hampshire or any other state where Section 7.32 or similar provision is sufficient to overcome a veil-pervasive claim based on company failure to comply with corporate formalities.

Second, under Section 7.32 (a) (8), the courts will only respect a shareholders’ agreement under that Section if it is “not against public order”. The meaning of the quoted expression is unclear, but could easily be interpreted by a court to mean that a shareholders’ agreement pursuant to Section 7.32 is invalid in whole or in part.

Third, “veil piercing” is a law enacted by the judge that actually provides that the courts can hold the shareholders of a company personally liable for the claims of a creditor if so required by the “equity” – i.e. the judge – subjective sense of the matter Fairness. Few legal concepts are more obscure than the concept of corporate justice.

Therefore, I doubt that many New Hampshire corporate attorneys would recommend their corporate clients to rely on an agreement under Section 7.32 to avoid veil piercing. This is particularly so because New Hampshire corporate and LLC law makes it relatively easy for New Hampshire corporations to “transform” into LLCs without adverse legal or tax consequences, and LLCs are practically free from legal formalities, except A taxable income to keep certain basic business records would likely lead them anyway. Specifically, there is an IRS “private letters” ruling that specifically states that a S corporation conversion if a S corporation adversely makes a negative conversion will not have a negative impact on the Has conversion to federal income tax.

Indeed, when an attorney knows that their corporate client is not following BCA corporate formalities and likely never will, and yet they still fail to notify their client of the availability of a legal conversion of the client’s conversion to LLC and if the company does one One day succumbing to a veiled allegation, it is not inconceivable that the attorney could face a lawsuit for misconduct.

Bottom Line: If you are a corporate shareholder or director and you know that your business is exposed to pervasive risk if you fail to follow company formalities, you are not running your business as a business. convert it to an LLC.

(John Cunningham is a Concord, NH attorney with McLane Middleton, PA. His practice focuses on LLC formations, general business and tax law, advising clients under IRC Section 199A, and estate planning. His phone number is (603) 856- 7172, his email address is lawjmc@comcast.net and the link to his website is www.llc199A.com.)