Small Law Firms, Solo Practitioners

Other Incorporation Documents And What They Do

What else is needed to properly form a corporation?

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lawyer sign contract signature lawIn my last practice-oriented column, I discussed the Articles of Incorporation, which when filed with the applicable state, form the corporation.

But if that’s all it takes, why do law firms like mine give potential clients a list of documents and tell them these are the “formation” docs? What are all these other documents? Are we just trying to run up the bill?

Nope, not in this instance anyway. Today I’ll talk about a couple of these other documents, and how they fit in.

The Articles of Incorporation form the corporation, but there are no directors to run this corporation (assuming directors were not appointed in the Articles of Incorporation), no bylaws laying out how the corporation will be run, and no stock has been issued. But since the Articles of Incorporation authorized a certain number of stock, surely at first all of this stock belongs to the founders, correct? Well, no, not without some corporate action to authorize the issuance. The corporation cannot take any corporate action at all right now, since there is no board of directors to authorize the action.

Action of Incorporator

Enter the Action of Incorporator. This is a short and simple document, that does two things: (1) appoints the directors; and (2) adopts the corporate bylaws. Some people prefer to have the Action of Incorporator only appoint the directors, and then to have the bylaws adopted with the initial resolutions (see my next practice column), thus relying on the state law to govern the validity of the initial resolutions. My position is that unless for some reason your bylaws aren’t ready yet, you might as well adopt the bylaws here. Plus, if you don’t do it here, the Articles of Incorporation will only be one line, which isn’t very aesthetically pleasing. (Note I’m half-joking).

In some states such as New York, the Incorporator can resign in this document. Since you are probably the Incorporator, you need to resign as early as possible, so you don’t end up being liable to a third-party for something your client did. Your duty is done, and now the directors are in charge. Get out!

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Bylaws

The bylaws are long and not very good cover-to-cover reading. Busy clients won’t read them in their entirety, so it’s up to the lawyer to point out what they need to pay close attention to. This is better handled in a phone call than in an email.

However it’s presented, these are the areas I recommend discussing with the client:

  • Stockholder meetings and director meetings. When is it anticipated they’ll be held? How much notice is required? How many shareholders or directors can call a special meeting? (“Special” just means non-annual, so even regular quarterly meetings will be considered “special.” By the way, don’t have the bylaws explicitly require quarterly meetings, since you don’t want your client to get in trouble if the company neglects to hold them.) Note for larger companies that are afraid of having an activist shareholder disrupt their company and try to replace their board, the bylaws will throw up all kinds of roadblocks to stockholders being able to put something to a shareholder vote (such as a slate of directors or a certain corporate action).
  • Director terms. This should be a discussion with the client. Generally, clients will want longer director terms, as they see it as more stable. However, I always try to talk them into one-year terms. It’s not as if each director election is going to be like a presidential election, with name-calling and dirty tricks and foreign interference. Instead, it’s going to be something routine that, for a startup at least, will take up a couple of minutes at most at the annual meeting. The real fear is that one of the directors will simply lose interest, and thus stop being responsive. In that case, it’s far better to simply wait until the next meeting and elect someone else, instead of going about the cumbersome process of removing the person. If you try to do that, that person could wake up and try to fight it. Ever unofficially be “checked out” of a relationship, but then when the person breaks up with you all of a sudden you’re not ready for it to end? I’ve seen a lot of directors behave like that, and claim they’ll do better, and will start going to meetings and responding to emails. And they do, for another week or two. Then they go right back to whatever it was that was more important to them before the attempted replacement.
  • Director removal. On that note, alert your client how directors can be removed. You should also look at your state law, to make sure the bylaws either override the state provision or are consistent with the state law.
  • Officer titles. Clients are always keenly interested in this. It’s hard to get clients to read the entire paragraph having to do with each officer, but their ears will perk up when the titles are discussed. Make sure your client is onboard with whether the President or CEO title is used, and whether there is a separate position carved out for Chairman of the Board. Also inform the client as to who can sign checks (it should be both the President and the Treasurer, but no one else), and if there are any controls, such as two signatures required for checks above a certain dollar amount.
  • Stock certificates. Most stock for new companies will be “uncertificated,” which means it resides in a cap table on someone’s laptop, and hopefully in a resolution on the general counsel’s hard drive (if not a minute book). Don’t assume your client is aware stock can be uncertificated, so let he or she know if stockholders have to receive an actual physical certificate.
  • Insurance. State the company may purchase D&O (director & officer) insurance.
  • Amendment. Can directors amend the bylaws without a shareholder vote? They will always want to. Check the state law, to see when a shareholder vote is not required.  You want to give the directors as much flexibility as possible, since it is generally much easier to get the directors to sign a consent than to round up the stockholders and get them to sign one.

I’m at the end of this week’s column, so I’ll tackle the initial resolutions and the shareholder agreement in two weeks.

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Earlier: Starting A Corporation

Gary J. Ross founded Jackson Ross PLLC in 2013 after several years in Biglaw and the federal government. Gary handles corporate and securities law matters for venture capital funds, startups, and other large and small businesses, as well as investors in each. You can reach Gary by email at Gary.Ross@JacksonRossLaw.com.

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