The High-touch Legal Services® Blog…for Startups!

© 2009-2017 Dana H. Shultz, Attorney at Law

When is a Shareholder Vote Required?

Logo for Avvo, where Dana Shultz answered a question about: when a shareholder vote is requiredThis post discusses when a California corporation must hold a shareholder vote.

It is based on an Avvo answer that I wrote recently. Please see Beside elections, are there corporate decisions that REQUIRE the vote of the shareholders?

California Shareholder Vote Requirements

A corporation must hold a shareholder vote to approve the following actions. Please note that this may not be a comprehensive list. Reference links are to the relevant California Corporations Code sections. (more…)

Future Services Can’t Buy Shares in CA but *Can* Buy LLC Membership

Label saying "100% free", symbolizing buying an equity interest by future services rather than cashFuture services seem like a great no-cost way to buy equity in a startup. In California, however, whether you legally can buy equity with future services depends on whether the startup is a corporation or a limited liability company (LLC).

Corporations Code Section 409(a)(1) specifies the types of “consideration” that can be paid for corporate shares. These include, for example, “money paid; labor done; [and] services actually rendered to the corporation or for its benefit or in its formation or reorganization”.

However, “neither promissory notes of the purchaser [subject to certain exceptions] nor future services shall constitute payment or part payment for shares of the corporation“. So a California corporation cannot grant shares in exchange for future services.

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Directors’ Inspection Rights Include (Almost) Anything in California

Picture of a fox hunt, symbolizing corporate directors' inspection rights

I have written about shareholders’ rights to inspect corporate financial records and shareholder lists. This post discusses directors’ inspection rights, which are far greater.

California Corporations Code Section 1602 states:

Every director shall have the absolute right at any reasonable time to inspect and copy all books, records and documents of every kind and to inspect the physical properties of the corporation of which such person is a director and also of its subsidiary corporations, domestic or foreign. Such inspection by a director may be made in person or by agent or attorney and the right of inspection includes the right to copy and make extracts. This section applies to a director of any foreign corporation having its principal executive office in this state or customarily holding meetings of its board in this state. (more…)

Who Gets to See the Shareholder List?

Pidture of page from ship's log book

The founder of a closely-held corporate client, knowing that some employees soon would be shareholders, recently asked whether those employee-shareholders would have the right to find out how many shares he owns. Here is the information I provided.

Because the client is a California corporation, Corporations Code Section 1600(a) governs who gets to see the shareholder list. That Section states, in relevant part (emphasis added):

A shareholder or shareholders holding at least 5 percent in the aggregate of the outstanding voting shares of a corporation…shall have an absolute right to…inspect and copy the record of shareholders’ names and addresses and shareholdings during usual business hours upon five business days’ prior written demand upon the corporation….

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Class F Shares: A Good Idea?

Logo of the Founder Institute, which invented Class F shares

A client told me that she wants to include Class F shares in the Certificate of Incorporation for her Delaware corporation. This post describes how we concluded that – for this client, at any rate – Class F shares were not a good idea.

Class F Shares – History

Class F shares were invented by the Founder Institute several years ago to protect founders largely against investors, especially VCs. (See If You Accept Venture Capital, You will Lose Control of Your Company.) Class F shares provide 2:1 board votes per founder versus normal board members, and 10:1 share votes as compared to normal common shares. (more…)

Should I Send Myself Notice of Annual Meetings?

OnStartups.com logo

This post is adapted from an OnStartups.com question that I answered. The questioner wondered whether, as sole shareholder of a corporation, he needs to give himself notice of annual shareholder meetings.

Q. If I am the only shareholder in a corporation, do I have to give myself notice of annual meetings? It seems silly that I would have to notify myself, but is this required to stay legal?

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What’s the Difference between a Shareholder and a Stockholder?

Sample stock certificate

I recently learned that some people are confused by the terms “shareholder” and “stockholder” and wonder what the difference between them is. Short answer: There is no difference. Each refers to the owner of one or more shares of a corporation’s stock.

Shareholder” is the term used in the California Corporations Code, and “stockholder” is the term used in the Delaware General Corporation Law.

When referring to the law of one of those states, I use the term that appears in that state’s statutes. In general discussions, however, I tend to use the term “shareholder” because I am, and most of the corporations that I form and counsel are, located in CA.

For a more about this issue, please see Why does the Delaware code use the term “stockholder” while others use the term “shareholder”?

Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

Which Financial Information Must a Corporation Provide to its Shareholders?

Financial balance sheet

The CEO of a client recently asked about the level of financial detail that must be disclosed to a (troublesome) shareholder. The client corporation was formed in Delaware but is located in California, so both states’ laws apply.

California Corporations Code Section 1601 says, in relevant part (emphasis added), that “[t]he accounting books and records of any domestic corporation, and of any foreign corporation keeping any such records in this state or having its principal executive office in this state, shall be open to inspection upon the written demand on the corporation of any shareholder . . . during usual business hours, for a purpose reasonably related to such holder’s interests as a shareholder . . . . Such inspection . . . may be made in person or by agent or attorney, and the right of inspection includes the right to copy and make extracts.”

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Which Financial Information Must a Private Company Provide to Employees with Vested Stock Options?

Quora logo

This post is based on a Quora question that I answered (Q and A are somewhat edited). Q. Which financial information must a private company provide to employees with vested stock options?

A. In California, Corporations Code Sections 1500 and 1501 specifies records that must be kept by each corporation. Shareholders’ rights to inspect records are set forth in Sections 1600 and 1601.

I know of no comparable statutory provisions with respect to holders of vested options, however. Unless the stock option plan grants you such rights, the easiest way for you to gain such rights would be to exercise your option with respect to one share and, then, exercise your rights as a shareholder.

Related post: Which Financial Information Must a Corporation Provide to its Shareholders?

Dana H. Shultz, Attorney at Law? +1 510 547-0545? dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

Cumulative Voting: Board Representation for Minority Shareholders

Photo of a ballot, symbolizing cumulative votingCumulative voting for corporate directors is a process by which each shareholder’s voting power is multiplied by the number of directors to be elected. The objective: By allocating all of their votes to one or a small number of directors, minority shareholders can ensure that their interests are represented on the board. (I.e., a majority shareholder will not automatically control all board seats.) (more…)