Winter 2005-09 Is your house in order. Legal audit
Number 58
Winter 2005
Is your house in order?: Legal audit
Every manager and business owner dreads the possibility of having himself and his company dragged into a legal dispute, whether it be with a disgruntled employee suing for wrongful termination, a supplier claiming breach of contract, an investor claiming a securities violation, or the government claiming lack of proper permits.
Legal conflicts involve time and money and can be a major distraction for management, ultimately having a negative impact on the company’s bottom line.
Legal risk can be mitigated by performing an annual legal audit and by creating and implementing processes and controls for proper legal management of the company.
The following subject areas deserve particular attention and reflect common sources of legal disputes and litigation:
Corporate formation and business permits
Do you have all of your corporate records maintained in a secure location?
Are all corporate filings up to date?
Are the Articles of Incorporation current, reflecting all changes and revisions?
Are the Bylaws of the company current, reflecting all changes and revisions?
Are copies of the Articles of Incorporation and Bylaws contained in the Corporate Minute Book?
Are the minutes for all meetings of the shareholders complete and current?
Are the minutes for all meetings of the Board of Directors complete and current?
Are there written original consents or proxies from shareholders and directors included that tie properly to all respective meetings and minutes?
Are Shareholder records current?
Records of ownership interests
Is the Stock Ledger current with all shareholders of interest recorded?
Were all sales of stocks or bonds made in compliance with applicable local and federal securities laws?
Is there a record of Board authorization for all stock sales and/or transfers?
Is there a record of Shareholder authorization for all stock sales and/or transfers?
Were all sales or transfers in compliance with existing shareholder agreements?
Are there records and receipts for consideration for each sale of stock?
Is there a record of the issuance of stock certificates with specific identification of the holder?
Did the stock certificates carry all necessary legends, limiting rights or transference?
Are there copies of all transfers of corporate assets?
Records of government filings, applications, and permits
Has your company applied for all required permits and are they current?
Has your company filed for and obtained an Employer ID number?
Has your company filed for and obtained authorization to business in all states, territories and foreign countries where it does business?
Are all annual business filings up-to-date?
Employment procedures and records
Does your company have a current Employee Handbook?
Have all employees affirmed their review and agreement with its requirements?
Does your company have a clear employment policy, such as an “at will” employment policy in place?
Has your company established clear interview procedures in compliance with federal and state or territorial requirements?
Has your company established clear guidelines for periodic employee evaluations and follow-up procedures?
Has your company established a clear guideline for employee terminations or layoffs?
Are all guidelines consistently and uniformly enforced?
Are copies of all letters of interviews, offers-of-employment, evaluation, reprimand, termination, or layoff maintained in centralized and secure files?
Are employee letters carefully drafted and standardized, such as offers-of-employment, reprimand, or termination?
Are there copies of all forms required from employees in the employee’s file (identification, Social Security card or other proof of citizenship, work permits, W-2, etc.)?
Are procedures in place to protect employee records and privacy?
Are all required notices of Non-discrimination or Sexual Harassment Policy clearly posted in a central, regularly accessed location?
Contracts and agreements
Are the company’s contracts and agreements prepared by qualified and experienced legal counsel?
Are the company’s contracts and agreements standardized, with modifications subject to review by qualified and experienced legal counsel?
Are all contracts and agreements in writing and maintained in a secure central location?
Do contracts and agreements provide for jurisdiction and venue beneficial to the company?
Do contracts and agreements provide language limiting the company’s liability?
Do contracts and agreements require that all amendments or changes must be in writing and signed by all parties?
Do contracts and agreements provide for dispute resolution procedures, which limit legal expenses and uncertainty?
Are there procedures in place to confirm compliance with all material terms and conditions by either party?
General record maintenance
Does the company maintain copies of all records in compliance with federal, state, or territorial requirements?
Are employees required to maintain and submit all business expense records and receipts?
Does the company maintain records detailing product development, customer service, or change orders?
Intellectual property
Does the company have established procedures to recognize and protect intellectual property?
Does the company have written agreements in place with all employees, agents, consultants, licensees, third-parties, or sub-contractors acknowledging the company’s ownership rights in current and future intellectual property (Confidentiality Agreements, Assignment of Rights Agreements, Confidentiality Agreements)?
Are managers and employees trained to recognize and understand the importance of trade secrets?
Has the company filed for patent or copyright protection on all intellectual property, logos, or marks?
Are all records and documents constituting trade secrets maintained in a safe and secure location and clearly marked with an appropriate legend (trade secret, confidential)?
When appropriate, are visitors and employees required to wean identification badges and is access limited to areas where sensitive trade secret information or development occurs?
Do all sales and marketing materials display the proper trademark or registration legend or copyright notice?
Does the company have proof of authorization or purchase permitting it to utilize intellectual property of any other party?
Is there a procedure in place to confirm that the company is in compliance with all license agreements where it is the licensee?
Is there a procedure in place to confirm that licensees are in compliance with agreements permitting the use of the company’s intellectual property?
Is there a procedure in place to detect theft of the company’s intellectual property and to enforce the company’s rights?
Internet policies and awareness
Does the company have a written Internet policy?
Has the policy been communicated to all employees and have they affirmed their agreement to comply with the policy in writing?
Does the company have a digital communication retention and storage procedure (e-mail, SMS, instant messaging)?
Does the company’s website comply with all federal, state, and territorial requirements?
Has the company retained a qualified and experienced attorney to review the company’s website to determine what, if any, legal exposure it creates for the company in other states, territories, or foreign jurisdictions.
Does the company have procedures in place to provide redundancy of data contained on hard drives, tapes, disks, etc., and to prevent unwanted or unauthorized destruction of the same?
General applicability of laws
Has the company verified the applicability and/or compliance with the follow areas of law:
corporate
environmental laws
ERISA
securities laws
product liability
worker safety
consumer protection
tax laws
real property laws
truth in advertising laws?
This list may seem lengthy and perhaps even a bit unnerving, however a thorough review can pay enormous dividends by mitigating legal liabilities and management distraction. Nor is the list intended to be exhaustive or apply to every company or business. ◙
| Consult with your attorney and management team to establish written procedures and controls to insure ongoing compliance with all necessary legal matters. Manage defensively and avoid problems before they arise. Craft a plan which is cost effective yet sufficient to provide real reduction in legal risk. The money spent now for a thorough legal audit will be one of the best investments your company will ever make. |
© 2005 Goldman Antonetti