This blog post discusses some simple concepts that are often overlooked by entrepreneurs when structuring a corporation. Addressing such concepts upon incorporation can eliminate problems in the future.
1. Stockholder Agreements: Stockholder Agreements set forth the rights, obligations, and restrictions of founders. A well-drafted Stockholder Agreement can help founders maintain control over the ownership and composition of the company and eliminate future operational disruption. Typical provisions include (a) rights of first refusal which give stockholders the opportunity to purchase stock from a selling stockholder before the stock can be offered to a third party, (b) voting agreements that ensure that certain minority stockholders maintain the right to appoint directors, and (c) dispute resolution procedures which can minimize the time it takes to resolve a dispute between the stockholders.
2. Rights of First Refusal in Bylaws. Some Bylaws include a right of first refusal applicable to all stockholders. Such a provision can be burdensome and impractical for companies that have many stockholders, and can often be missed in the financing, resulting in potential future damages against the company. If an investor or group of investors negotiate a Right of First Refusal, include such rights in a separate agreement that applies only to such investors.
3 . Opting out of Dissenter’s Rights Statutes: Many states have so-called “dissenter’s rights” statutes, that permit stockholders to demand payment for their shares upon a merger, conversion, or certain other corporate transactions. Complying with such statutes can be expensive and burdensome, and result in the company having to use valuable cash to buy out dissenting stockholders. Some state statutes permit companies to opt out of these rights through a provision in the Bylaws or Certificate of Incorporation. Opting out of these rights can simplify the process of future corporate transactions and reduce the potential for disputes with shareholders
4. Uncertificated Shares. In recent years, there has been a trend towards the issuance of uncertificated shares, which are shares that exist only in electronic form. Bylaws provisions allowing for the issuance of uncertificated shares make issuing, transferring, and tracking shares more efficient and cost-effective.
In conclusion, forming a new corporation involves a wide range of legal and business considerations, and it’s essential to pay attention to every detail. By taking the time to understand and address these often-overlooked considerations, entrepreneurs can ensure that their corporations are set up for success.
The information contained in this article is strictly for educational purposes and is not intended to be legal or tax advice or to be relied upon by anyone without doing their own research, and consulting with legal and tax advisors.