The Initial Resolutions: A Key Incorporation Document
The initial resolutions fill in the gaps in the operation of the corporation that were not covered in the bylaws.
In the last two venture capital/startup columns, we’ve covered the Articles of Incorporation, the Action of Incorporator, and the bylaws. I will close out this series on incorporation documents with a discussion of the initial resolutions. There are several other documents commonly offered by startup attorneys as part of their “startup package,” but the other docs (with the exception of the stock purchase agreement) are somewhat ancillary and are not necessarily applicable to all corporations.
The initial resolutions fill in the gaps in the operation of the corporation that were not covered in the bylaws. Generally, matters that are only relevant at the beginning of the corporation (such as ratification of incorporation actions) or that may change later (such as the identity of the officers) are more appropriate for the initial resolutions rather than the bylaws.
Companies act through their board of directors, and the board can either meet in person and vote yea or nay on certain items, which will then be memorialized in the minutes, or the board can act by each of the directors signing a written consent (unless this has been prohibited in the bylaws, which would be highly unusual). The initial resolutions work better as a written consent, since it’s likely people will continually be referring back to this document, and oftentimes minutes aren’t easy to parse through.
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New lawyers or those practicing in fields such as personal injury or divorce may not have seen corporate resolutions before. (I managed to skate through law school and two summers without ever having seen them.) Here’s a tip: the document is not actually titled “Resolutions,” and if you do a Google search for company resolutions you may have trouble finding many examples. Try “unanimous written consent” instead.
With that out of the way, let me dive right into what needs to be included and what you should highlight for your client.
Ratification. Make sure everything that has been done so far to form the corporation is ratified, and that the company is authorized to pay all incorporation expenses. The Incorporator is probably you, the attorney, so in particular make sure everything the Incorporator did is ratified, so you don’t have to worry about someone later claiming you did something that was unauthorized.
Incorporator resignation. You can resign in the Action of Incorporator or here, though it is most often done here in the initial resolutions. Just make sure you get out! After all, you’re just the lawyer.
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Officers. Set out the initial company officers here. Hopefully you remembered to explicitly mention in the bylaws that one person can hold more than one office simultaneously. No need to describe the duties or to otherwise regurgitate what’s in the bylaws. Obviously, you should direct your client’s attention to this section, as officeholders have a way of being in flux in the early days of a company, so the officers might have changed since the last time you spoke with your client (even if it was only yesterday).
Common stock issuance. The most important section. Stock was authorized in the articles of incorporation, but we didn’t say who it’s going to, so we’re going to do that here. Issue about 50-70% of the authorized stock, depending on future needs over the short term (meaning the next year or two). If the founder wants 51%, I suggest giving her 51% of the authorized stock, but if the founders give you a list of the initial stockholders and people are listed by percentages and it comes out to 100%, then I would consider that as being 100% of the issued stock, not the authorized. Language should be included stating that the board has determined the price these initial shareholders paid for their stock is equal to the fair market value of the stock (likely just above zero, since the company has just started), and if it wasn’t done in the bylaws, state whether the stock will be certified or uncertified.
Bank account. The initial resolutions need to authorize the ability of one or more of the officers of the company to open a bank account. When I first started practicing, banks would routinely supply companies trying to open an account with specific language that had to be included in the resolutions, but I don’t see this happen anymore, so boilerplate authorizing language should be sufficient.
Omnibus. This is a Latin word that means “for all.” The last part of the resolutions should contain an “omnibus” that gives each of the officers the ability to take any actions, including executing documents, required to carry out the foregoing resolutions. This should provide cover for anything that isn’t explicitly spelled out but is necessary in the early days of the corporation.
Attachments. We usually have the stock issuance table and the common stock purchase agreement attached, though some attorneys will also go ahead and attach a stock equity plan, a restricted stock purchase agreement (for employees, as opposed to founders), a non-disclosure agreement, and an invention assignment agreement. I prefer to handle these a little bit later, like the week or two after incorporation, since often clients are in a little bit of a hurry to incorporate, so if it’s not absolutely necessary to have something finalized first, it doesn’t make sense to have it delay matters. (Plus sending ten or so documents to review at once can overwhelm a busy client.) Whatever you attach, be crystal clear on whether whatever startup package you’re offering to the client includes these attachments. It’s a little shady to deliver the initial resolutions to a client and then tell her you’re going to charge her extra to draft the attachments.
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There are of course several other parts to the initial resolutions, such as fiscal year, withholding taxes, and the like, but the above are the primary sections that should be discussed with the client (though you probably don’t need to mention the Incorporator resignation).
Next VC/Startup column (coming in two weeks): What is a security?
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.
