A bank's loan officer found the gap the first lawyer had left open

The situation

James first realized something was wrong sitting across from a loan officer at their bank, watching her frown at the company's minute book. She had asked, routinely, how many shareholders the company had, and when James answered, she flipped back to the articles and said that did not match what the restrictions in the document allowed. James did not fully understand the question, only that it was clearly not the answer she expected, and that the loan application was not going to move forward until someone sorted it out. He sat there running through what he actually knew about the company's own paperwork and realized, uncomfortably, that the honest answer was not much.

The company had started five years earlier as something James and his brother Javier did on weekends, a small batch hot sauce business run out of James's kitchen while James worked his regular job as a grocery clerk and Javier cut hair at a local salon. What began as a way to use up a backyard pepper harvest turned into something people actually asked for by name at the farmers market, and it grew slowly, then less slowly, until they were selling through a handful of local shops and had outgrown the kitchen entirely. Revenue had climbed to somewhere around one hundred thousand dollars a year, still modest, but real enough that they needed commercial kitchen equipment they could not afford outright, which was the entire reason James was sitting in that bank in the first place.

To get there, the year before, they had raised a small amount of money from a few people they trusted, including a family friend named Camila, who invested a modest sum in exchange for a minority share position after hearing the brothers talk about their growth at a family gathering. A lawyer they had found through a relative handled the paperwork at the time, including amending the company's articles to restrict share transfers and cap the number of shareholders, provisions the company needed in place to rely on an exemption that let a small private company raise money this way without a full public offering process. James remembered signing a stack of documents that year and assuming, reasonably enough, that a lawyer's involvement meant the job was done properly.

What neither James nor Javier knew was that the lawyer had retired abruptly partway through the file, before the articles amendment was actually completed and filed. Camila's investment had gone through, and shares had been issued to her, but the restrictive provisions the company needed in place to support that issuance were never finalized. Nobody had told James any of this, not the retiring lawyer, not the firm that took over the practice, not anyone. He only found out the day the bank's own review caught what his first lawyer never finished, more than a year after the fact.

The legal problem

A private company relying on this kind of exemption has to actually satisfy the conditions the exemption assumes: a cap on the number of shareholders, a restriction on transferring shares without the other shareholders' consent, and no inviting the public to buy in. The shareholder cap and the bar on distributing to the public are conditions the company has to meet in substance, not clauses that have to appear in the articles, and the transfer restriction itself can live either in the articles or in a shareholders' agreement binding the holders. For James and Javier's company, the plan had always been to put it in the articles, through the amendment their first lawyer never finished. These restrictions are not paperwork formality. They are part of what distinguishes a small private company, exempt from the more demanding rules that apply to a public offering, from one that has effectively invited outside investment the same way a public company would, with all the additional disclosure and process that involves.

When James's file came to us, the articles on record still reflected the company's original, unrestricted form. The amendment adding the restrictions had been drafted the year before, reviewed and apparently approved by James and Javier at the time, but it had never actually been filed with the government registry, meaning the legal document that was supposed to authorize and support Camila's share issuance was never actually in force at the time her shares were issued to her.

That created a period, stretching back more than a year, where the company had issued shares to an outside investor while its own constating documents did not contain the protections its financing was supposed to rely on. It was not clear, on the surface, whether the company could still be treated as having properly relied on the exemption at all for that issuance, and if it could not, the company and its directors could face exposure related to how that investment was raised and accepted, exposure that had simply been sitting quietly in the file for a year without anyone aware it existed.

There was a second, more immediate problem, separate from the exemption question entirely. Without the share transfer restriction actually in force, corporate law alone would not have stopped Camila, or any future shareholder, from selling or transferring shares to an outsider James and Javier had never agreed to bring into the company. That was not the same as nothing standing in the way — a shareholders' agreement can restrict transfers on its own terms, and any sale of her shares would still have needed its own available securities-law exemption — but the specific protection the family believed they had built into the company's own structure simply was not there, undermining the entire point of having wanted the restriction in the first place. That mattered practically as much as it mattered legally: the whole reason the brothers had wanted the restriction was to keep the company in the hands of people they knew and trusted, and for over a year that protection simply had not existed. The loan application had simply been the first place this gap surfaced. It would have surfaced eventually regardless, whether through a future financing round, a shareholder dispute, or a sale of the business, and likely at a worse and more expensive moment than a bank meeting.

What we did

1. Requested the complete file from the prior lawyer's former firm, including the retainer letter, correspondence and draft documents, to understand exactly what had and had not been completed, since James had no clear picture himself of what work had actually been finished versus simply drafted and left sitting in a folder somewhere waiting for a signature that never came, and the firm's own file notes turned out to be incomplete as well.
2. Confirmed with the corporate registry what was actually on file for the company's articles, establishing definitively that the amendment adding the restrictions had never been filed at all, which turned a suspicion into a documented fact we could act on immediately rather than a theory we were still testing against an incomplete paper trail left behind by a lawyer who was no longer reachable.
3. Reviewed the original subscription agreement with Camila to understand exactly what she had been told about her investment and the restrictions supposedly protecting it, since her expectations, formed a year earlier based on documents that were never actually completed, needed to be reconciled with what the paperwork on record actually showed before we approached her directly with the problem and its consequences.
4. Assessed the exposure created by the gap in reliance on the exemption, concluding that the strongest and most practical path forward was to complete the amendment properly now and address the intervening period directly with Camila, rather than treat the original issuance as something that could simply be quietly patched over without her knowledge, an approach that would have left the company exposed to exactly the kind of question a future lender or buyer might eventually ask.
5. Drafted and filed the completed articles amendment, putting the shareholder cap, the transfer restriction and the private offering limitation properly in force for the first time, finally giving the company the structure its financing had always assumed existed but never actually had, and confirmed the filing directly with the registry afterward rather than simply trusting that it had gone through as intended.
6. Had a direct conversation with Camila explaining what had gone wrong with the prior lawyer's file and what it meant for her position as a shareholder, an uncomfortable conversation but a necessary one, since she deserved to understand the gap and its implications rather than discover it later, the way James had discovered it, from someone entirely outside the company.
7. Negotiated a confirmation and ratification agreement with Camila, under which she formally acknowledged and accepted her share position under the now-completed restrictions, in exchange for a small adjustment to her shareholder rights reflecting the genuine uncertainty the gap had created around her original investment and the full year she had spent unknowingly unprotected by the document she believed was already in place.
8. Put a directors' resolution on record confirming the company's reliance on the exemption going forward, along with a written compliance checklist for any future share issuance covering filing confirmation as its own separate step, so the company would not depend on any one advisor's follow-through again without a way to verify it independently, and so James and Javier had something concrete to hand a new lawyer or accountant if either ever left the file mid-stream again.

The outcome

The articles amendment was completed and filed, and the company's structure finally matched what its financing had always assumed was in place. The bank loan went forward once the corrected minute book was in order, giving James and Javier the equipment financing that had prompted the discovery in the first place, and the commercial kitchen equipment they had been trying to buy for months finally got ordered.

This was a partial resolution, not a clean one. Camila's confirmation came with a concession: in exchange for formally accepting her position under the completed restrictions, she negotiated a modest enhancement to her information rights as a shareholder, meaning James and Javier now owe her more regular financial reporting than they had originally agreed to, a small but real ongoing obligation neither brother had budgeted for when they first took her investment. It was not the outcome either brother wanted going in, but it was a fair trade for resolving genuine uncertainty about her original investment, and Camila, to her credit, stayed in the company rather than pushing to unwind her position entirely, which she would have had a reasonable argument for doing given how the year had actually gone.

The company also lost time it could not really afford, several weeks between the bank's discovery and the completed fix, during a period when the equipment purchase was time-sensitive and every delay meant another month of squeezing more product through a kitchen that had already outgrown its usefulness. What it gained was a corporate structure that will hold up the next time a bank, an investor, or anyone else actually looks closely, and a clear record of who is responsible for keeping it that way going forward. James still keeps a copy of the filed confirmation on his phone, half joking that he plans to check it himself from now on rather than assume anyone else has.

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