This post is based on a Quora question that I answered: Q. What is the board of directors? What are the functions of the board of directors? What is the function of each member of the board?
A. The board of directors, which is subject to shareholder election and removal, generally is responsible for managing the corporation’s business and affairs.
Specific responsibilities typically undertaken by a board (particularly in a mature company) include, but are not necessarily limited to, the following: (more…)
People typically think about corporate board members having equal voting rights: One director, one vote. However, for Delaware corporations, that is not always the case.
Delaware Statute – Board Members
This unusual situation is the result of a Delaware statute. (more…)
This post about limiting directors’ voting rights is based on my answer to a Quora question. (See Can a business owner draw up bylaws/articles of an organization that limit voting rights of directors?)
The incorporator or shareholders may approve a certificate of incorporation or bylaws that limit directors’ voting rights. (more…)
This post addresses a generalized version of a question that I answered on Quora concerning committees of corporate boards of directors. Q. Who appoints the members of a board committee?
A. Appointment of board committee members is governed by the corporation’s bylaws, or by applicable statutes if there are no bylaws. In my experience, bylaws (or statutes) state that a board committee is appointed by a majority of the board members. Committees are not appointed by the CEO or the Chair of the Board. (more…)
This post about corporate directors’ voting rights is based on a question that I answered recently both for a client and on Quora. Q. Do corporate directors’ voting rights depend on the number of shares they own?
A. No. Board members typically have equal voting rights. However, some states allow directors to have unequal voting rights. See, e.g., Delaware General Corporation Law Section 141(d).
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.
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…)
This post explains the difference between a corporation’s board of directors and an advisory board – a point that may not be clearly understood by some people, especially those from other countries, where corporate governance is different from that in the U.S.
The board of directors is elected by the shareholders and is responsible for management of the company. It appoints and removes officers (who run the corporation’s day-to-day business) and makes important decisions about finances and other matters. (more…)
The following question (edited for length) is from Founders Space. Q. What’s the minimum two founders must do regarding board meetings for a startup Delaware corporation doing business in California?
A. You should hold an annual stockholder meeting – or, alternatively, prepare a written consent – at which the stockholders elect the board of directors. See Delaware General Corporation Law Sections 211 and following. (more…)
Earlier today I answered the following Quora question: What does the Chairman of the Board do?
Here is the answer that I provided:
The Chairman of the Board does what the Bylaws and the Board of Directors say s/he will do. Here is some typical Bylaws language: (more…)
Cumulative 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…)
From time to time, a client corporation wants to enter into a business transaction with one of its directors. An astute CEO, recognizing the potential for a conflict of interest, will ask whether and how such a transaction can take place without violating any laws or any fiduciary obligations to the corporation.
California Corporations Code Section 310 provides that, generally, a transaction between a corporation and one of its directors is permitted if, following disclosure of all material facts and the director’s interest in the transaction, it is approved either by a disinterested majority of the board of directors (usually the easier approach) or by the shareholders. (more…)
In How Can I Move My Corporation to Another State?, I explained that there are three ways to move a corporation from one state to another. This post describes one of those ways: Reincorporation.
Three Ways to Move among States
That earlier post described those three ways to move a corporation to another state as follows: (more…)
I am writing this post because of a Quora question that I answered. Please see What does it mean when you have X shares in a company?
Before addressing the significance of the number of shares, I will address the significance of shareholding, generally. (more…)
Frequently, the first service I provide to a client is to form a new legal entity (corporation or limited liability company). And frequently, once that entity is formed, the client’s first question is “What are my entity’s compliance obligations?”
This post provides a high-level answer to that question.
I am writing this post about parent and subsidiary ownership because of a question that I answered recently on Quora and a similar question that a prospective client posed to me. (Please see Can an LLC allocate ownership to individuals on a per investment basis (vs at the LLC level)?)
I always have thought that parent and subsidiary ownership were straightforward. However, that apparently is not the case for everyone. I will use an example to explain this concept. (I will refer to corporations. This discussion can apply equally to other types of entities, such as limited liability companies.) (more…)
I am writing this post about calculating one’s share ownership percentage because of an email exchange I had on behalf of a client.
We had formed a Delaware corporation with 10 million authorized shares. Of the authorized shares, 8 million had been issued to the founder.
The founder and an independent contractor had agreed on equity compensation for the contractor. The agreed-upon share ownership percentage was 2%.
The contractor thought that he should receive 200,000 shares (2% of 10 million). The rest of this post explains how and why the contractor was incorrect. (more…)
This post discusses my surprise at finding that there apparently is no requirement that corporate officers be human beings.
My answer to a Quora question is the basis for this post. Please see Could an A.I. create a company and do all the functions typical of another company?
I was about to write an answer stating that corporate officers be natural persons (human beings). But with a bit of research, I found that apparently is not the case! (more…)
One of my Avvo answers led me to write this post. Please see CA corp Certificate of Determination: must it include tag-along and drag-along provisions?
Corporations, by default, issue common shares to shareholders. However, corporations also can issue preferred shares. Preferred shares have characteristics (“preferences“) that typically make those shares more desirable than common shares. Please see What is Preferred Stock?
This post discusses the role of the incorporator when a corporation is formed. I decided to write this after answering a Quora question. Please see When a third party files Articles of Incorporation as the incorporator for a company, what are the necessary steps to ensure that the company is legally released to the directors?
The incorporator signs the corporation’s Articles or Certificate of Incorporation. When I form a corporation for a client, the client typically takes that role.
Several weeks ago, I wrote about how to issue LLC membership interests. In this post, I am addressing how a small corporation should issue corporate shares.
To start, one must examine the Certificate of Incorporation (Delaware) or Articles of Incorporation (California) to determine the maximum number of shares that may be issued. (To simplify this discussion, I will assume that only one class of common shares has been authorized.) A corporation may not issue more shares than are authorized. (more…)
Officers conduct a corporation’s day-to-day business. Among the states, California law is unique in its set of required officers.
California Corporations Code Section 312(a) states that each California corporation must have:
- A chairman of the board or a president or both;
- A secretary; and
- A chief financial officer.
Additional officers are optional.
That Code section also provides that the president is the chief executive officer of the corporation, unless the articles of incorporation or the bylaws state otherwise.
Other states typically take an approach similar to that specified in Delaware General Corporation Law Section 142 (emphasis added):
While working with one of my international clients several months ago, I re-learned a lesson that I already knew: The meaning of a word (in this case, the definition of Director) may depend on the context.
I duly prepared a Statement and Designation by Foreign Corporation and had it signed by the client’s most senior officer. That officer’s title, translated as “Director,” was entered onto the form.
This post is based on a Quora question in which a user who already had invested money in his corporation wanted to know how he can invest an additional amount. My answer, reproduced below almost verbatim, starts by summarizing the steps for an initial equity investment.
Let’s assume you did your startup paperwork properly: The board of directors approved issuing some or all of the corporation’s authorized shares to you in exchange of payment of certain consideration; you deposited that consideration into the corporation’s bank account; the secretary recorded your share ownership on the corporation’s share transfer ledger and issued a share certificate to you.
I have written about opportunities for foreign entrepreneurs who wish to obtain U.S. work visas. (See Visa Basics for Foreign Entrepreneurs Coming to the U.S., Visa Basics for Foreign Entrepreneurs, Part 2: What Constitutes Work?) This post focuses on a particularly interesting aspect of this issue. It asks whether and how a foreign entrepreneur can form a corporation in the U.S. and, then, obtain an H-1B visa to work for that corporation.
After several years of hard work, a client has gained so much traction that venture capitalists – on their own initiative – are asking to make an investment. When the first term sheet arrived, however, the founder / CEO was disappointed – the valuation was fine, but his ability to make significant decisions would be curtailed. I pointed out: If you accept venture capital, you will lose control of your company.
The loss of control does not result from a change in voting power: The VC will own a minority of the corporation’s shares and will control a minority of the seats on the board of directors.
Sometimes a corporation needs to change its name – perhaps its products or services have changed, or the name is similar to another company’s name, or there is a better way to suggest what makes the company special. This post explains how easy it is for California and Delaware corporations to change their names. (There are exceptions, but the following will apply under most circumstances.)
- Both the board of directors and the shareholders (before or after the board) must approve the name change. (Corporations Code Section 902(a))
- Then the corporation files a Certificate of Amendment of Articles of Incorporation.
A client, majority shareholder in a California corporation, asked whether there was any way to make a minority shareholder pay part of the corporation’s losses to date. In this particular case, the answer was “no” – but the question got me thinking about when a corporate shareholder or LLC member might be have personal liability beyond the amount payable for the ownership interest.
The LLC section reference and content below have been updated to reflect California?s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).
A century ago, corporations routinely issued assessable shares, i.e., shares that carried an obligation for the shareholder to pay additional amounts to the corporation under certain circumstances, such as to cover losses or to buy property. Today, however, almost all shares are non-assessable.
Yesterday I wrote about ways that businesses with two equal owners can avoid management deadlocks (Resolving Small-business Disputes: The 50-50 Deadlock). Today I am writing about dissolution, i.e., termination of a California entity’s existence – the only reasonable outcome if a serious deadlock cannot be resolved.
LLC section references below have been updated to reflect California?s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).
The essence of the dissolution process for a California corporation is as follows: (more…)
Sometimes, in an effort to reduce legal fees, clients conduct corporate annual meetings, and prepare minutes, on their own. Regrettably, if they do not know what they are doing, they can make a mess. Here is a quick overview of how to do things right.
Both California (Corporations Code Section 600(b)) and Delaware (General Corporation Law Section 211(b)) require that every corporation hold an annual meeting of its shareholders to elect directors for the coming year. (In the case of a Delaware corporation, however, the directors may be elected by written consent without calling a meeting.) Any other proper business may be transacted at the shareholder meeting.
From time to time, clients with established businesses have asked me to bring order to their legal affairs. I refer to this as ” corporate housekeeping “.
Usually, the request results from an extraordinary, but desirable, event. This might be an acquisition offer, a prospective new investor, or a restructuring for tax purposes. In each instance, the client quickly realizes that it has not been paying close enough attention to legal documentation.
Although the clients are in different industries, their stories are similar. In essence, they limit their legal activities and expenditures to those required to bring business in the door, satisfy customers’ needs, and pay employees. This approach works on a day-to-day basis. Yet when the extraordinary event comes up, the company suddenly needs to devote scarce resources to legal clean-up. (more…)
Due diligence is a routine part of an investor’s decision whether to invest in a company. The company also should conduct its own investor due diligence.
A couple of years ago, I worked with a company (“Client”) that provided e-mail security products. Previously, Client’s founder (“Founder”) had arranged for an equity investment by a company controlled by an individual in Southern California (“Investor”).
First Mistake: No Legal Counsel
One of Founder’s huge mistakes was not seeking legal counsel to review the terms of the investment. Two of those terms were disastrous for Founder. (more…)
Have you ever wanted a list of what you need to do, once a corporation is formed, to comply with the various legal requirements that confront businesses nowadays? This post may help you.
I am pleased to offer, as a Free Download on the Downloads page, the 10-page document on Postincorporation Matters that I provide to clients once I form their corporations. It addresses such issues as maintaining the separate existence of the corporate entity; conducting annual meetings of shareholders and the board of directors; payment of taxes; personnel hiring and terminations;and intellectual property issues; and much more.
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.
This post discusses whether founders should authorize preferred shares, in addition to common shares, when they incorporate.
As I discussed in What is Preferred Stock?, corporations typically issue preferred shares to institutional investors, such as venture capitalists (VCs). The term “preferred” refers to preferences that those shares have relative to common shares.(more…)
This 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…)
Preferred stock typically is issued to venture capitalists or other institutional investors. Its name is derived from the fact that it has significant “preferences” relative to common stock, which is the basic equity security that is issued when a corporation is formed.
Common stockholders’ principal right is to vote on the election of directors and on other fundamental corporate matters. In addition, common stock has the potential to increase in value if the corporation performs well financially.
If you form a corporation, the Postal Service soon will inundate you with official-looking forms from companies offering to create or file corporate documents on your behalf. Earlier this week I rescued a client from one of these unnecessary companies, Compliance Services.
In Visa Basics for Foreign Entrepreneurs Coming to the U.S., I discussed certain immigration statuses (visa waiver, B-1 and H-1B visas) that permit a non-resident alien to take a passive role in a business (such as forming it) but not to work for it. This post discusses the boundary between permissible passive activities and prohibited work.
A successful exit by acquisition is one of the great thrills of entrepreneurship. That exit does not come easily, however. This post discusses, by category, the most important documents and information that you will need to provide during the acquirer’s due diligence process.
- Articles of incorporation and bylaws, as amended
- Minutes of board and shareholder meetings and actions
- Share transfer ledger, including name and address of each shareholder
- Agreements pertaining to shares and shareholders’ rights (buy-sell, voting rights, etc.)
- List of holders of option or warrants and all applicable agreements
I recently answered the question “Is it best to form an LLC in Delaware?” on Quora. In response to a user comment, I opined on why so many corporations are formed in Delaware. My opinion, slightly edited, is reproduced below.
First, I’ll point out that I have what may be a minority opinion, so others may well disagree. (more…)
Two recently-acquired clients had similar situations that brought up the importance of complying with legal requirements.
Each company is a multi-founder startup where one founder became non-productive, and even somewhat detrimental to the business. The other founders wanted to move the problem founder off to the side, where he could cause no more trouble, in a manner that would be fair to everyone involved.
Unfortunately, each company had failed to comply with some of the most basic legal requirements: Holding annual shareholder meetings to elect directors, annual board of director meetings to appoint officers, etc. As a result, in each instance we had to spend time and money taking corporate actions, and recording those actions appropriately in meeting minutes, before the real problem could be solved.
There are countless online services – including LegalZoom, MyCorporation and The Company Corporation – that will help you form a corporation. The benefits are clear: A minimal investment of time and money.
But, based on the experiences of some of my clients before I began representing them, those benefits may come at a cost: Corporate documents that do not properly meet the entrepreneur’s needs, plus a lack of information about legal requirements to maintain the corporation on an ongoing basis. (Please see this blog’s Hall of Shame page.)