Several weeks ago, I discussed in this column the dangers of careless business communications. I recommended several specific steps that should be followed in any verbal or written communication that has the potential of being construed as the company's promise, commitment or assurance of performance. The purpose of that article was to encourage business managers to be more disciplined in their conversations and written corre-spondence in order to avoid expensive misunderstandings and possible legal trouble down the road.
Today, I am prescribing additional discipline in practicing preventive law. I recommend that every company, large or small, subject itself to an annual legal audit conducted by the company's attorney. The scope and cost of the audit is negotiable between the company and its lawyer. A legal audit is so critical that every business should view the cost of the audit as a reasonable premium for an insurance policy against potentially expensive mistakes.A legal audit will ensure that a corporation is holding its required annual meetings and correctly completing its annual corporate reports. Non-compliance with statutory requirements may seriously hamper the corporation's ability to do business. For example, most state statutes require a corporation to notify the secretary of state of any changes in the composition of the corporation's board of directors. Failure to file the notice of a change of directors could render subsequent actions by the board voidable.
A legal audit will also identify the issues that should be included in the agenda of upcoming meetings of the company's board of directors and shareholders. The audit will uncover legal problems that are often overlooked, such as the need for trademark, trade secret or copyright protection as well as regulatory compliance issues. A legal audit will also determine, in the case of an expanding business, whether existing insurance policies are adequate to cover the increased risks attending the company's expanding business operations. The audit would disclose whether the company's insurance policies are sufficiently flexible to automatically cover new contractual obligation and other risks or whether such new contracts or other obligations must be reported to the insurance provider as they arise. In many instances, it would be wise for a company to also conduct a periodic independent insurance audit.
Business expansion also results in new contractual activities and borrowing efforts that may impact on existing loan agreements, leases and other contracts. Many businesses unwittingly enter into leases, loans, purchase contracts and other legal obligations without realizing that such activities violate covenants set forth in earlier agreements.
A legal audit will also disclose which steps, if any, should be taken to protect a business's proprietary information and documents. In many cases, it may be advisable to require employees to execute non-disclosure and non-competition agreements. By carefully auditing a business's vulnerability to trade secret, trade name, patent, copyright or trademark infringement, the company's attorney can make valuable specific recommendations, such as establishing a limited access area for visitors and non-essential employees; creating physical restrictions such as locked file cabinets or limited access areas to enhance security; preparing a rubber stamp to be imprinted on drawings, customer lists and other written materials that indicates that such documents are the property of the company and may not be photocopied or disseminated without management's approval.
A legal audit may indicate, for example, that a trade name should be selected which can also be registered as a federal trademark, providing greater infringement protection to the company than the mere reservation of the company name. An annual legal audit can also assure that the company pays the necessary maintenance fees for patent applications.
A myriad of stock and shareholder issues should be addressed in an annual legal audit. Documentation evidencing the board of directors' compliance with legally required standards of performance must be prepared and preserved. The corporate stock records must be accurate. Shareholder voting agreements and any stock restriction agreements must be reviewed for compliance. Changes in corporate laws and tax laws should be reviewed with management. Compliance with affirmative action, equal employment, worker's compensation and other statutory laws protecting employees must be assured. Licenses, leases and other agreements should be reviewed annually to assure performance of obligations that are often ignored but the breach of which can come to light at great expense in the future.
The format for an annual legal audit can be comprehensive or limited in scope. In any case, I would recommend a fairly comprehensive initial legal audit; discovering and dealing with legal problems before they reach crisis stage can save thousands of dollars in legal fees as well as other unnecessary costs. A corporation should request that an annual legal audit be conducted at least 30 to 60 days before the end of the corporation's fiscal year in order to allow sufficient time to implement decisions that for tax or other reasons must be completed before the end of the corporation's tax year. A company should also insist that its lawyer maintain a client suspense system or tickler file that will trigger an automatic annual audit.