Law 514 Corporations Instructor: Dwight Drake Basic Organization Documents Corporations Pre-incorporation agreement Articles of Incorporation Bylaws Organization

Law 514 Corporations Instructor: Dwight Drake

Basic Organization DocumentsCorporations

• Pre-incorporation agreement• Articles of Incorporation• Bylaws• Organization Resolutions: Officers, Directors, stock issuance,

employment agreements, bylaws, bank account, transactions, etc.• Shareholder Agreement (Buy-Sell) (23B.07.320)• Employment Agreements• Stock certificates and record• Asset and liability transfer documents• Required government and tax filings

LLCs and Partnerships• LLC Operating Agreement or Partnership Agreement• Asset and liability transfer documents• Required government and tax filings

Copyright 2005 Dwight Drake. All Rights Reserved.Business Planning: Closely Held Enterpriseswww. drake-business-planning.com


Key Article’s Issues (23B.02.010)

• Incorporator identity? 23B.02.010

• Corporate name? 23B.04.010

• Registered agent/office? 23B.05.010

• Authorized shares? Par Value? 23B.06.010 – 020

• Purpose and Perpetual Existence? 23B.03.010 – 020

• Initial directors?

• Number of directors or delegate to board? 23B.02.010

• Preemptive rights? 23B.06.240

• Cumulative voting? 23B.07.280

• Shareholder consent voting? 23B.07.040

• Majority voting overriding 2/3 requirements? 23B.07.270 (3)

• Limited liability for directors? 23B.08.320

• Maximum director indemnification and expense advance? 23B.08.510

• Special stock classes or voting restrictions? 23B.06.010

• Authorized “blank check” preferred stock? 23B.06.020


Mandatory Preemptive Right Problems

• Exceptions and dashed expectations.

• Timing problems and delays.

• New investor hurdles and mixed messages.

• Enhanced security law complexities.

• A weapon for trouble makers.

• It can happen even if not required.


Cumulative Voting Formula

A = B x C + 1 D + 1

A = Total shares needed by minorityB = Total shares voted by allC = Number of directors minority to electD = Total directors to be elected

Example: Minority want to elect 1 of 4 directors and 1000 shares outstanding. Minority would need 201 shares per formula.


Key Bylaw Issues (23B.02.060)

• Number of directors?

• Electronic Transmission shareholder notice? 23B.01.420

• Shareholder annual meeting time and place?

• Special meeting notice requirements?

• Director annual meeting time and place?

• Proxies authorized?

• Participation by communication equipment?

• Action by Board without meeting?

• Board compensation authorization?

• Officer titles, duties, and special authorizations

• Stock Certificates and legends?

• Stock Transfer restrictions?

• Indemnification of officers and directors?

• Fiscal year of entity?

• Amendment of bylaws?

• Special tax elections?


Director Organization Resolutions (23B.02.050)

• Approve Articles and direct insertion in minute book

• Ratify and approve all actions of incorporator.

• Adopt Bylaws and direct insertion into minute book.

• Ratify and approve appointment of registered agent.

• Adopt and approve fiscal year of corporation.

• Authorize payment of organizational expenses.

• Fix number of directors.

• Elect officers.

• Approve form of stock certificate.

• Authorize issuance of stock and terms.

• Authorize and direct securities law compliance.

• Authorize establishment of bank accounts and bank resolutions.

• Authorize tax registrations.

• Authorize key tax elections (i.e. S election).

• Blanket authorization for officers.

• Approval of company accountants or auditors.


Private Business Owner Classifications

• Soloist

• Toilers

• Golfers

• Hybrid

• Big Fish

• Family Affair

• Personal Service Organization

• Emerging Public Company



Client Non Buy-Sell Planning Process

Step One: Layout Potential Issues

Step Two: Identify Client’s Hot Issues

Step Three: Determine Key Facts that Impact Hot Issues

Step Four: Identify Potential Solution Techniques

Step Five: Select Best Solution Technique(s)

Step Six: Develop Rationale for Convincing Co-Owners

Step Seven: Present to Co-Owners (Lawyer’s role may range from passive advising, to strategic negotiation, to hardcore sales). Depends of client identity and objectives.



Important Non Buy-Sell Owner Issues

• Scope of Enterprise - liability exposure, “Tag along” issues

• Business Plan Changes - diversion, expansion, speed-ups

• Debt - Changing, expanding, personal guarantees

• Additional Capital - dilution risks, mandatory

• New Equity Owners - disruption, dilution, synergies

• Owner Roles - service commitments, inner circle

• Owner Employment Rights - tie to equity, expulsion

• Business Location - headquarters, changes

• Outside Owner Activities - competitors, supplies, customers

• Related Party Transactions - conflicts, disclosures, prohibitions



Important Non Buy-Sell Owner Issues

• Tax Elections - cost recovery, inventories, fiscal yr, etc.

• Confidentiality Covenants - extent to owners?

• AP Management - discount fast or normal slow?

• Cash Distributions - priority or no or low expectations?

• Loss Allocations - deficit restoration obligation, three hurdles

• Professionals - selection process and criteria

• Indemnification - words vs. reality, insurance

• Dispute Resolution Procedures - fast, cheap vs. slow, costly

• Life After Rights - fast, easy restarts

• Sell-Out Options - who and how many must bless



Solution Techniques

• Definitive Contract

• Supermajority Vote

• Designated Board or Management Committee

• Specified Conditions

• Individual Veto Right

• Opt-Out Rights

• Buy-Out Trigger

• Cumulative Voting

• Preemptive Rights

• Different Equity Interests


Debt Levels


Solution Techniques






• Opt-Out Rights

• Buy-Out Trigger





New Owner


Solution Techniques






• Opt-Out Rights

• Buy-Out Trigger





CashDistributions