Strong corporate governance is essential to protect tribal assets despite the business entity.
By Karrie Wichtman
As Indian Country continues to expand its economic development, more and more tribes are creating wholly owned and operated companies, ranging from unincorporated entities, corporations and limited liability companies (“LLCs”) to federal chartered companies.
To foster economic development, many tribes have enacted sophisticated business organization laws to govern the creation of tribally-owned companies and to control and predict exposure to liability. However, simply enacting laws and creating tribal companies are not enough to curtail liability—companies must also observe corporate formalities. This is especially important for tribally-owned businesses to protect tribal coffers.
Strong corporate governance is essential to protect tribal assets despite the business entity. Every company needs a set of internal rules that governs company operations. Corporations typically have articles of incorporation and bylaws while LLCs have articles of organization and use operating agreements, but there is no limit to innovative business structures and how structures govern themselves. But governing documents, at a minimum, should set forth: (1) the purpose of the company; (2) the powers of the company; (3) whether the company is entitled to share in the tribe’s privileges and immunities; (4) the proper procedure to waive the company’s sovereign immunity; (5) the governing body structure, its composition, its powers; (6) its responsibilities and obligations with regards to meetings and decision making; (7) the rights and obligations of the owners; (8) how profits and losses are allocated; (9) any restrictions on the company; and (10) the process for dissolution and termination of the company’s existence.
When created properly, wholly owned tribal businesses enjoy a special status as a tribal instrumentality, which makes it doubly important that governing documents explicitly state that the company, as an arm of the tribe, is entitled to the privileges and immunities of the tribe. Coupled closely with formation as an instrumentality are detailed steps of when, how, and why a company may waive its sovereign immunity. Without these specifics in governing documents, tribes may find it difficult to attract reputable business partners and investors, as well as face complicated litigation over sovereign immunity.
Governing documents, however impeccable, are not enough-—the company must follow the requirements outlined in the governing documents. Adhering to corporate formalities ensures that the business operates as intended, shields its owners from individual liability, contracts are properly authorized, and waivers (or lack of waivers) are valid. To enjoy the full benefits of the corporate structure, the governing body must adhere to requirements related to meeting notices, quorum and voting requirements, fiduciary responsibilities, and requirements imposed by policies and procedures.
When a corporate entity acts according to the governing documents, the company becomes durable and defendable. When the company action is documented in meeting minutes, the company becomes even stronger. Each act of the governing body should be reflected in the meeting minutes, which should describe: (1) the act; (2) how it was put before the company, e.g., by motion, who made the motion, who supported the motion; (4) the deliberation of the act, (5) and how the act was authorized, e.g., the existence of a quorum, how many voted for and against, how many abstained and who has authority to execute any action.
Finally, a clear and comprehensive record retention policy describing which records are kept, how they are kept, and for how long is crucial. After all, what good is a strict adherence to corporate formalities if it cannot be proven when claims are raised? Well maintained corporate records help keep the business operations efficient, but more importantly, also prevents a plaintiff from the “deep pockets” of the tribal government coffers by allowing a strong defense to an action to “pierce the corporate veil.” Observing corporate formalities, and keeping good records to prove it, allows the company lawyer to prove that a tribal company is acting independently from the tribal government, thus protecting tribal assets and risking only company funds.
Admittedly, it is a tedious task to observe corporate formalities—it is laborious and very time consuming. But it is work that is necessary to accomplish the very reasons the company was formed in the first place – to limit liability of the tribe and protect the tribe’s assets, while still allowing the tribe to engage in economic development initiatives to further self- determination and self-sufficiency of the tribe and its members. Good behavior will ensure the tribe will enjoy the benefits of the company’s success. ♦