Loaning to Corporations

Part III

By Dan Harkey

Part I

Individuals & family trusts

Part II

Partnerships, LLCs

Part III

Corporations

Corporations:

As a lender, your role in the loaning process is not just significant; it's crucial. You play a vital part in ensuring the corporation is validly formed and selecting the proper signatures for the loan documents. Your contribution to this aspect is not just significant but invaluable.

An inactive or dissolved corporation and its past officers have no authority to sign. Also, the law recognizes three types of people who cannot contract: those with psychological disabilities, those who are intoxicated or drugged, and minors. The parties must seek authority from a court in the jurisdiction.

The lenders should obtain:

·?????????????? Certified copy of the Articles of Incorporation, including any amendments, from the Secretary of State.??

·?????????????? Request a certified copy of the Articles from the Secretary of State.

·?????????????? The articles will tell you the corporation's name, purpose, addresses, minor information on stock, etc.

·?????????????? The lender can order the certified copy of the Articles of Incorporation from the Secretary of State's office or their online portal.

https://www.sos.ca.gov/business-programs/business-entities/information-requests#certs

·?????????????? Requesting a good-standing letter (Certificate of Status) from the Secretary of State is crucial. This document confirms that the corporation is in good standing with the state and eligible to conduct business. Remember, the loan should not be approved if the corporation is not in good standing. This letter is a critical factor in your decision-making process.

·?????????????? The lender may order here:

https://www.sos.ca.gov/business-programs/business-entities/information-requests#certs

·?????????????? If the corporation is a foreign corporation, obtain a certified copy of the Certificate of Status from the California Secretary of State of the form entitled Statement and Designation by Foreign Corporation (or some earlier version of that document) showing that the foreign corporation has registered with the State of California, and is qualified to do business in the State of California.? If not, do not make the loan.

·?????????????? The lender may order here:

https://www.sos.ca.gov/business-programs/business-entities/information-requests#certs

?Obtaining a certified copy of the Secretary of State's most current filed Statement of Information is a thorough process.? This document will reveal the corporation's principal officers and addresses, the directors' names and addresses, and the type of business, among other things, as of the date the Statement was signed. This level of detail ensures you have a comprehensive understanding of the corporation's structure and can make informed decisions about the loan, giving you a sense of security and confidence in your choices.

·?????????????? The lender may order here:https://www.sos.ca.gov/business-programs/business-entities/information-requests#certs

??

·?????????????? Obtain a copy of the By-Laws, certified by the corporation's secretary, including all amendments.

·?????????????? If a lender wants to go above and beyond, obtain the certificate signed by all shareholders stating that the By-Laws, including any amendments, are current and complete, as attached.

·?????????????? It's critical to review the powers and authority sections of the By-Laws and the Articles of Incorporation. This review is not just a formality; it's a crucial step that helps determine who is authorized to sign for a loan, any limitations on the type or amount of loan that can be obtained, and whether additional signatures are required. It ensures you have a comprehensive understanding of the corporation's structure and can make informed decisions about the loan, giving you a sense of security and confidence in your choices.

·?????????????? If the lender has concerns, they can obtain a certified copy (by the Secretary) of the original minutes of the corporation's first organizational meeting. This will, or should, show who was issued shares of the corporation, who the original officers were, and who the original directors were.?

·?????????????? Obtain a notarized, signed under penalty of perjury, Certificate of Incumbency and Representations affirming the officers, directors, and shareholders authorized to act on behalf of the corporation and affirming certain other matters, such as the lack of litigation affecting the property or corporation. This form should be signed by all current shareholders and certified by the secretary, thus having them agree that the parties outlined in the Certificate are authorized to sign the loan documents and agree to certain other matters.

·?????????????? Obtain the Borrower's Opinion of Counsel Letter if the loan is significant or complicated.

·?????????????? If the loan is complicated, or is in a large enough sum, or if you want to add safety to the transaction, obtaining an opinion of the borrower's counsel may be prudent.? This opinion usually discusses and opines as to many things, most often including the legal capacity of an individual and signatories, the proper formation of the entity, authorization and authority to deliver and execute the loan documents, lack of conflict with other contracts, judgments, orders, etc. to which the entity is a party or bound, lack of litigation, "no usury" representation, the enforceability of the loan documents, and many other possible representations.? It should be addressed to the lenders AND THE BROKER for reliance purposes.? This letter is a welcome backup to your investigation of the signators' authority and other matters addressed in the letter, providing you with additional support and confidence in your decisions.??

?·?????????????? Obtain a Resolution from the Board of Directors and certified by the corporation's Secretary authorizing the Corporation to borrow the funds represented by the Loan Documents and authorizing and directing the person signing the documents to sign them. This resolution indicates the corporation's commitment to the loan, providing you with reassurance and confidence in the transaction.

·?????????????? Determine who must sign the loan documents:

·?????????????? ?They should be able to determine the proper signators from the documents above.

·?????????????? ??Certain presumptions are found in Corporations Code section 313 regarding parties signing on behalf of the Corporation.? The presumptions validate the authority of the persons or entities listed acting on behalf of the Corporation.? The actions are valid unless the third party (here, the Lender) knows the signer's lack of authority.? These presumptions are found in section 313.? These provisions state:

313 Subject to the provisions of subdivision (a) of Section 208, any note, mortgage, evidence of indebtedness, contract, share certificate, initial transaction statement or written statement, conveyance, or other instrument in writing, and any assignment or endorsement thereof, executed or entered into between any corporation and any other person, when signed by the chairman of the board, the president or any vice president and the secretary, any assistant secretary, the chief financial officer or any assistant treasurer of such corporation, is not invalidated as to the corporation by any lack of authority of the signing officers in the absence of actual knowledge on the part of the other person that the signing officers had no authority to execute the same.

So, if you have one of the following:? Chairman of the Board, President, Vice-President, and one of the following:? Secretary, Assistant Secretary, Chief Financial Officer (or Treasurer), or Assistant Chief Financial Officer (or Assistant Treasurer), you will have the benefit of the presumption of authority.? This is a good thing.?? Get the two signatures, one from each group, and you have done an excellent job securing the authority to sign.

·?????????????? Confirm who has authority as presumed under section 313.

·?????????????? Confirming the authority of the authorized signators under the Code is crucial. By reviewing the documents below and ensuring the records are accurate and current, you can proceed with the loan process with reassurance and diligence.

·?????????????? Review the Articles of Incorporation, the By-Laws, and the Statement of Information (remember, the SOI is not determinative of who is entitled to sign).? The current organizational documents (By-Laws and Articles of Incorporation) will tell you who has the authority to sign.

·?????????????? Obtain a notarized Certificate of Incumbency under the penalty of perjury signed by all Shareholders, Directors, and Key Officers (president (CEO), secretary, CFO (treasurer)) as listed in the By-Laws and Stock Ledger (as it may be amended) filled out in the hand of the shareholders or secretary, certifying.

·?????????????? They are the corporation's only shareholders, officers, and directors.

·?????????????? The corporation is fully and validly organized, existing, and in good standing under the laws of the State of California.

·?????????????? The by-laws attached to the Certificate of Incumbency are the By-Laws currently in effect and governing the corporation.

·?????????????? The By-Laws have not been amended, superseded,? or modified in any way, or, if they have, all such changes are attached to the original By-Laws and the Certificate.

·?????????????? There is no litigation pending or threatened against the corporation.

·?????????????? ?The principal address of the corporation.

·?????????????? ?The corporate number issued by the Secretary of State of California.

·?????????????? ?The telephone number and email address of all shareholders, officers, and directors.

·?????????????? ??That the officers/directors listed in the Certificate have full authority and power to encumber the real and personal property of the corporation without any further requirements or consents from any other party or entity (then list the parties with such authority), citing to the provisions of the By-Laws that give them such authority (then, check the section of the By-Laws giving them such authority and read it to make sure it says what they say it says).

·?????????????? Agreeing that the Loan Documents, when signed, will constitute valid, legally binding obligations of the Borrower and will be enforceable against the Borrower by their respective terms.

How are the parties to sign?

·?????????????? ?When a corporation signs, the lender should have the President and the Secretary (or two others, one from each group as discussed above) sign.

·?????????????? A typical corporate signature block looks like the following. There should be little reason to vary from this standard. Again, there should be two signatures, not just one.?

Blazing Saddles Corporation,

A California corporation,

By: ????????????????????????????????????????

Bart Sheriff

Its President

By:?????????????????????????????????????????

??????????? Mongo Jerry???????????

??????????? Its secretary

??????????????????????????

As with all loans, a lender should prepare escrow instructions with authorization for the escrow/title company to close only when the escrow has determined that the loan documents have been appropriately signed by all required parties who are authorized to sign.

Current loan documentation for each type of borrower and entity requires specialized knowledge from the lender and closing agent.? In most cases, lenders will hire counsel specializing in this area of real estate law. Refrain from attempting to circumvent the best practices of hiring specialists to complete the job.

If you find value in all three articles, please forward them to others.

Thank You

Dan Harkey

Educator & Private Money Lending Consultant

949 533 8315 [email protected]

Visit danharkey.com

?

?

?

?

?

?

?

?

?

?

?