You have successfully negotiated your first commercial bank loan, and it’s the day before closing. The bank’s attorney is on the phone with you about final loan paperwork. “Oh right, please send over your corporate resolution as soon as you can,” she says. Wait…what is a corporate resolution? Is it different from the promise you made to yourself on January 1?
A corporate resolution is a signed document authorizing a major action of an organized entity—such as entering into a new lease, buying or selling property, taking out a loan, or sometimes even guaranteeing the obligations of another person or entity. The reason one party may want this from another is to ensure that the action was authorized. As a bank, it would be very bad to know that the loan that just closed was initiated by a “rogue” employee at the borrower and not authorized. That could lead to all sorts of trouble for both parties.
So, what should be in a resolution? The first step in drafting a resolution is to review the governing documents of the entity. If it is a limited liability company, this would be the Operating Agreement. If it is a general or limited partnership, this would be the Partnership Agreement. If it is a corporation, this would be the By-Laws. What actions require ratification by the Members (in the case of an LLC), the Partners (if an LP), or the Shareholders (if a Corporation)? If the action being taken requires consent, then it should be reflected in a resolution. If a 60% vote of these owners is required, the resolution needs to be signed by persons holding 60% of the interest in the entity.
More items to know about Resolutions:
- Formal resolutions usually contain background clauses using the word “Whereas.” Then, the resolutions themselves begin with the word “Resolved.”
- Resolutions usually waive advance notice requirements, as typically set forth in the governing documents. For example, an Operating Agreement may say that a special meeting of the members requires 10 days’ notice. If all the members are signing the resolution, then it can be waived.
- Resolutions can appoint a single person to sign on behalf of the entity at a Closing. This often happens when there are different owners and one person acts as the “boots on the ground.” This could also be someone who is not an officer of the company. This may be confused with a power of attorney. A power of attorney grants a third-party the ability to sign for an individual in their individual capacity. A resolution may grant a third-party the ability to sign for the corporate entity itself.
- Resolutions sometimes must call out specific provisions of a transaction, such as a guaranty, waiver of jury trials, waiver of certain remedies, and confession of judgment. Often, a bank will want to know these items are specifically called out so that lack of knowledge is not a defense should the bank enforce its rights.
- Resolutions sometimes contain “catch-all” language to protect officers and members such as “all actions prior to these resolutions relating to the Transaction are hereby ratified and confirmed.”
- Sometimes resolutions specify the parties authorized to rely on them: “These Resolutions may be relied upon by Lender or any title insurance company retained by Lender.“