Big Red Car here. Turned out nice today in the ATX. If your definition of niiiiiiiiiiice is 82F, 23% humidity and a nice breeze out of the Southwest. Ahhhh.
So The Boss is talking to two of his CEO clients — brilliant guys, really.
They are working on killer web applications and were getting ready to raise some money. Normal kind of conversation for CEOs and The Boss.
CEO: So, Boss, how many shares are we authorized to issue? I looked at your post on the pre-money and post-money blog post and wanted to work through the math. Where do I find this information?
The Boss: Brilliant, CEO, look at your Articles of Incorporation. You can see the number of “authorized” shares and then look at your cap table to see the number of “issued” shares.
CEO: Uhhh, where do I find my Articles of Incorporation and what are they? Are they the same as the Corporate Bylaws?
The legal backbone of your business
The Articles of Incorporation and the corporate Bylaws are the legal backbone of your company. They authorize and describe how you are going to conduct business in a given state.
Keep these documents in a corporate documents book or file with multiple copies. The Boss likes to keep them digitally in addition. [And why not, sayeth the Big Red Car? WTF not? We are all digital beasties now, right?]
Articles of Incorporation
Articles of Incorporation are a legal document which is required to form a corporation and to conduct business as a corporation in a specific state. The exact requirements differ from state to state. The Secretary of State’s website will be instrumental in understanding the requirements. States typically have templates you can follow and may require you to follow those templates exactly. Get legal advice early on this matter. Get legal advice.
Why is it important to adopt a specific legal organizational structure such as a corporation? Because shareholders in a properly formed and registered corporation are NOT personally liable for the debts and obligations of a corporation.
Articles of Incorporation typically state the name of the corporation (which must be researched to ensure no duplication and reserved with the state), the individual forming the corporation, the purpose of the corporation, the duration of the corporation, the address of the corporation, the person who will accept service of process for the corporation and, the type and number of shares of the corporation. Again, different states will have different requirements.
Additional requirements may include the structure of the Board of Directors, a statement about the resolution of conflicts of interest, an indemnification provision, the manner in which the corporation will be dissolved at the end of its existence and other provisions.
Some states may evidence their receipt and acceptance of your filing by issuing a Certificate of Incorporation. Keep this Certificate attached to a copy of your Articles of Incorporation.
Corporate Bylaws
The corporate Bylaws are the playbook by which the corporation will be governed. While Articles of Incorporation may be very limited and simple — not always but most of the time — the Bylaws are as detailed as is necessary to the situation.
The Bylaws will outline in great specificity how the Board of Directors will select and oversee the management of the corporation. The Bylaws will also specify how the Board will be constituted, the make up of the Board as it relates to independent directors, how it will function, what committees will be formed, how long Board members will serve, how a Board member can be removed and other detailed operating requirements.
The operations of the Board are often supplemented by the issuance of a Board Charter which provides even more specificity — such as appropriate trading windows before the report of earnings for Board members and other insiders — and which is likely approved by a Board vote. This is a very good corporate governance practice.
One can get caught in the weeds a bit when drafting Bylaws but this is time well spent. Bylaws also have to be coordinated with the pertinent state law to ensure compliance with state requirements.
Typically a corporation has an annual meeting at which Directors are elected by the shareholders; a Board chairman, vice chairman, committee chairs are selected; and, thereafter the Chief Executive Officer and Secretary of the corporation are appointed by the Board of Directors.
This is an example of where there is an opportunity for a bit of mischief when a Board simply does not appoint you — brilliant CEO — as CEO rather than formally firing you. This is exactly why it is important that you have a formal Employment Agreement. Not a bad idea for the notion of an Employment Agreement to be noted in the Bylaws.
Amendments
The Articles of Incorporation are rarely modified or otherwise amended. An example which would require an amendment might be when a company has filed to issue common stock and then subsequently decides to issue preferred stock in addition. The documents are simply modified or amended and refiled. This would require Board approval typically.
The corporate Bylaws are frequently amended as the reality of how the company operates overwhelms the original expectations. The Boss is keen to have Bylaws be “amended and restated” which means that a whole new document is drafted incorporating the changes and thereby relieving everyone of having to obtain the original Bylaws and a stack of Amendments. In this manner, the Amended and Restated Bylaws are comprehensive and one does not have to scurry about looking for all the Amendments. Bit tidier housekeeping?
Such Amendments would require Board approval.
It is imperative that whenever a company contemplates raising capital the CEO takes a damn good look at the Bylaws to ensure that the issuance of additional stock is authorized and correctly done under the company’s Bylaws. This is the time to amend the documents to ensure legal compliance. This is not a big deal. But it has to be done.
Shareholder agreements
Often in the raising of funds and the issuance of additional stock to investors, the company will document the deal by entering into a Shareholder Agreement which outlines exactly what happened and the obligations of each party. This is where you would memorialize such things as Board seats granted to new investors. This is a very simple matter unless you fail to do it and then it becomes difficult to recall what everyone has agreed to do.
Obviously, the Shareholder Agreement has to be coordinated with the Articles of Incorporation and the corporate Bylaws.
Get legal advice. Get legal advice. Get legal advice. [Bordering on the obnoxious, Big Red Car. WTF? We get it — legal advice. Believe me nobody is taking legal advice from a 1966 Impala convertible. “Well, Your Honor, on the advice of a 1966 cherry red Impala Super Sport convertible, I decided to……..” Haha, Big Red Car, you are a goose.]
Record keeping
Keep exquisite records. Maintain them digitally and physically.
Keep a working copy of everything — Articles of Incorporation, Certificate of Incorporation, Bylaws (Amended and Restated), Shareholder Agreements — in a binder and make sure you, your assistant and the CFO can put their hands on it in an instant. Hopefully, you will never, ever have to read it.
Fees
Did I fail to mention that all of this administrative wizardry requires the payment of certain fees? [Haha, of course it’s going to cost money, Old Sport. Haha. Sorry, sayeth the Big Red Car.]
You have to pay filing fees, annual fees, reporting fees and sometimes a year’s estimated taxes in advance. Varies from state to state. Oh, yes, legal fees also. When you are on your 5th deal, you can start pencil whipping some of this stuff yourself but until then — get and follow legal advice. It is cheaper in the long run.
So, there you have it and Bob’s your uncle indeed.
But, hey, what the Hell do I really know anyway? I’m just a Big Red Car.
