Recordkeeping Is Vital for a Bank Loan Application By M. Nan Kargahi Even with President Obama’s initiatives to promote credit for small businesses, borrowers are still at the mercy of the banks from which they must borrow. In addition to the litany of documents demanded from the borrower, many banks also require that borrower’s counsel deliver a legal opinion. Failure to comply with this requirement will result in much needed financing being delayed or, in the worst case, denied. In the current environment where timely financing is critical, no small business can afford to take this risk. This article explores some of the purposes of legal opinions, the role of borrower’s counsel, and the impact of the failure of companies to comply with required corporate formalities. Purpose of Legal Opinion Legal opinions serve several purposes. Among them, borrower’s counsel must assure the bank that the borrower was duly organized, that the loan documents were duly executed, duly authorized by all necessary corporate action, and will create a valid security interest in the assets of the borrower that are pledged as the collateral for the loan. Additionally, banks require that borrower’s counsel opine that the loan documents do not violate any laws, in part to prevent the borrower from advancing such a contention in the future. Before delivering such a legal opinion, borrower’s counsel must review all the loan documents, research applicable laws, and ensure that all of borrower’s corporate records, beginning on the date the company was formed, are in order. While the adherence to corporate formalities is seemingly straightforward, experience has shown us time and again that for small businesses this is often no simple task. Small business owners, who tend to focus on running their businesses and not forming their businesses, often fail to comply with these mandatory provisions found in state corporation codes and in a company’s bylaws or other governing documents. If not complied with, a company’s corporate record book will not be complete, and, without rectification, borrower’s counsel will not be able to verify all the items as to which he or she is required to opine. For example, immediately after filing Articles or a Certificate of Incorporation, most states require that a corporation have an organizational meeting. If the organizational meeting is not held, then the corporation is not considered to be duly organized and, thus, counsel will not be able to opine that the corporation was duly organized. Additionally, in order for a company’s stock to be validly issued, fully paid and non-assessable, the board of directors must approve of the issuance of the stock to shareholders as well as the purchase price for the stock. If this is not done properly, or if stock certificates have not been issued, counsel may not be able to independently verify who the shareholders of the company are. Further, corporations are required to conduct annual meetings (or prepare written consents in lieu of meetings) of the shareholders and directors at which, at a minimum, directors and officers, respectively, are elected or appointed. If the shareholders fail to elect directors each year, then no directors will exist to appoint officers, approve of the financing or execute board resolutions. As a result, no officers will exist who have the authority to execute the loan documents on behalf of borrower. Again, until this situation is corrected, borrower’s counsel will not be able to opine that the loan documents were duly executed or that the execution and delivery of the loan documents were duly authorized by all necessary corporate action. What Can You Do to Avoid Costly Delays? In addition to the fees charged to a borrower by the financial institution, borrower’s counsel will charge a substantial fee to prepare a legal opinion. If the company’s books and records are not in order, borrower’s counsel may need to assist with the preparation of the appropriate documents, which may substantially increase the fee charged. Furthermore, if borrower’s counsel attempts to negotiate the terms of the legal opinion with the bank’s counsel, the borrower will have to pay the legal fees for the bank’s attorney as well. This entire process may cause delays in obtaining the financing as the bank will not close the loan or disburse any funds until the legal opinion is delivered. In order to avoid delays in obtaining financing and to minimize the additional costs, companies have to be proactive and ensure that their minute books are complete and that all state-mandated corporate formalities are followed from the beginning of the company’s existence. Companies that take short-cuts or ignore the issue altogether do so at their own peril. M. Nan Kargahi is a partner with PilieroMazza PLLC in Washington. Her practice is concentrated on representing companies in a variety of corporate, business and transactional matters, primarily involving mergers, acquisitions, divestitures and joint ventures as well as corporate formation and governance.