Category Archives: Business Law

Articles discussing issues for business owners.

Forming a Texas Corporation – Other Documents You Should Know About

 

Most folks forming a corporation are aware that you file a certificate of formation with the Secretary of State’s office in order to legally form the corporation and then adopt bylaws to govern the corporation’s day to day operations.  There are several other documents important to properly forming a Texas corporation that you should be aware of and I discuss several of them below.

Pre-Incorporation Agreements

Pre-incorporation agreements are those made between future shareholders regarding the formation of the corporation.  These agreements may be formal (preferred) or informal.  Pre-incorporation agreements vary widely but are often used if there is some concern that one or more shareholders may back out of their commitment to form the new corporation.   They are also used to document the future shareholders’ expectations with regard to employment, capitalization, management, and other terms.

In essence, the pre-incorporation establishes a joint venture between the parties for the purpose of forming a corporation and establishing its business.  The pre-incorporation agreement usually terminates upon formation of the corporation.

Subscription Agreement

A subscription agreement is defined as an agreement between a subscriber and a corporation or a written offer by a subscriber to a corporation, before or after its formation, in which the subscriber offers or agrees to purchased a specified ownership interest in the corporation. Pre-incorporation subscription agreements are irrevocable by the subscriber for six months unless otherwise agreed.  The subscription agreement will usually set forth the conditions of the subscription as well as the payment terms and timeline for the subscription.

These agreements are becoming less common because of the ease with which modern corporation can issue new shares in exchange for additional capital but they are still in use today.  One of the reasons they are still in use is to condition the subscriber’s obligation to purchase shares.  For example, the subscription agreement may condition a commitment from the subscriber to purchase shares upon the occurrence of some event, such as, the corporation securing debt financing, a total capital investment amount, a key customer, hiring a key employee, etc.

An important note: it is important for the corporation to be aware of State and Federal securities laws when considering a subscription agreement and issuing stock to an investor.

Buy-Sell Agreement

A buy-sell agreement sets forth the terms under which the corporation or the other shareholders of the corporation must purchase shares from an individual shareholder.  The agreement also sets forth the terms under which a shareholder must sell his or her shares back to the corporation or to the other shareholders.

The buy-sell agreement will usually contain specific trigger events that create the obligation to sell or purchase the shares.  Common examples of these trigger events include death, divorce, and dissociation.  The buy-sell agreement should set forth the manner of determining the price of the shares to be sold as well as terms for payment of the purchase price.  The buy-sell agreement may set forth different prices and payment terms for different trigger events.

The buy-sell agreement may be set forth in a separate written agreement or in another corporate document such as the certificate of formation, bylaws, or a shareholder agreement.

Shareholder Agreement

A shareholder agreement is a critically important document, especially for small or closely held corporations.  A shareholder agreement is a binding contract between the shareholders used to manage their relationship and the governance of the corporation.  The terms of the shareholder agreement may be the only recourse a disgruntled minority shareholder can rely upon to protect his or herself.  Likewise, majority shareholders may benefit from a shareholder agreement setting forth the shareholders’ agreement with regard to management, rights, duties, and standards of care.

The shareholder agreement is often used to modify the standard corporate governance laws in a number of areas by setting forth specific terms to govern issues such as those listed below:

  • placing restrictions on the transfer of shares
  • creating mandatory buy-sell provisions
  • establishing mandatory voting terms or altering voting rights
  • modifying fiduciary duties and standards of care for Directors and Officers
  • mandating dividend payments
  • setting forth restrictions, requirements, or terms for the employment of shareholders or their family members
  • protecting minority interest holder’s rights
  • modifying the reasons when a corporation may be wound up and terminated
  • setting forth methods for resolving management disagreements
  • mandating the election of specific directors
  • placing restrictions on the management authority or discretion of directors and officers
  • expanding the types of actions which require shareholder approval
  • mandating bylaw terms

Initial Organizational Meeting Minutes

As soon as the corporation is formed, the initial Directors must hold an initial organizational meeting although the meeting may be accomplished through a written consent.  Regardless of whether an actual meeting is held or action is taken by written consent, the initial organizational meeting is important to address the following business in addition to other matters:

  • adopting the corporate bylaws
  • electing officers
  • issuing stock and setting forth the consideration to be received by the corporation
  • adopting a minute book to document BOD actions
  • establishing corporate bank accounts
  • authorizing other significant actions such as borrowing money, significant contracts, or leases
  • adopting the corporate share certificate
  • approve the initial stock ledger

Assumed Name Certificate

If the corporation will conduct its business under a trade name or any name other than the one set forth on its certificate of formation, then the corporation must file appropriate assumed name certificates.  These certificates are filed at both the State and County levels.

Stock Ledger

The new corporation will also need to create its stock ledger.  The stock ledger will serve as the corporation’s official record of stock ownership in the event there is any dispute as to what shares the corporation has issued and who owns those shares.

Educate Your Employees on Spear Phishing Attacks Now

The latest victim….the White House.  That tells you all you need to know about just how effective spear phishing is as a tactic to infiltrate a computer system.  If the attack is effective against that target then you better believe it could happen to your business.  It happens to businesses across the country on a daily basis.  If you haven’t taken this matter seriously, now is the time to do so.  Educate your employees on how criminals employ the tactic.  Educate your employees on what to look for to avoid your business becoming a victim.  Take steps to protect your business before it becomes a victim.  And develop a plan of action to respond if it fails.

Why are Criminals Targeting Smaller Businesses for Spear Phishing Attacks?

Simple answer, they are easier targets.  Small companies tend to not have the same IT infrastructure and security that larger companies have in place.  They also tend to have less formal rules and restrictions on employee use of company computers.  This creates an easy target for criminals.

Small business have access to information that is just as valuable to hackers as larger companies.  Small businesses often provide services to government agencies or other larger public companies and as such, have valuable information in their possession or offer a pipeline into these more lucrative targets.

What is “spear phishing?”

Spear phishing is a specific type of cyber attack that appears to be from someone or some company you know.  The target receives an email, often with some information about the individual or business contained in the email such as a person’s name, the company’s phone system, or bank.  Where does that information come from?  The target’s online presence.  Think about how much information is readily available regarding your business and the people working for it.  Do you have a contact page on your website with names and email addresses?

This spear phishing email comes with a ZIP file attached or a camouflaged link to an automatic download.  Sometimes the ZIP file is described as a PDF or other harmless file type.  Click to open the attachment or the link and the target is caught.

What happens after your caught?

It depends.  Some attacks are passive, meaning the hackers are simply accessing your computer system to observe and acquire information.  There is at least one case where the hackers had access to a company’s system for over a year before anyone noticed! Hackers can monitor passwords and company activity.  This can affect individual employees accessing personal accounts from work as well as the company.  If the employee types in ID and password information to access a personal or business bank account, the hacker now has that information.  Think about the potential exposure of your company’s trade secrets too.

Some attacks are active, meaning the hackers are accessing your computer system in an attempt to gain control over some portion in order to further their goals.  The hackers then use that control to continue their efforts within your business or using your business as cover.  In the White House breach, for example, it is widely reported that the attack came after hackers infiltrated the State Department to gain control over a legitimate email address which they then used to hack into the White House system.

In other cases the hackers take control of your system and hold it hostage.  Once in your system, they take control of your company files then encrypt them and prevent your business from having access to them.  The next thing you receive is a ransom demand.  Pay up or lose the files forever.  You can read about some of these cases in an NPR story here.  It happens to police departments as well.  Even law firms have been victims.

How Much Could A Spear Phishing Attack Cost Your Business?

Smaller attacks are relatively cheap.  A few hundred dollars paid by the deadline will get you the encryption key to unlock your files in some cases.

In other cases, the potential financial exposure is much higher.  The attacks are becoming much more sophisticated.  More sophisticated programs will search out more valuable files. And if it locates them, guess what?  The price goes up.  The CAD designs for that $30 million dollar construction project are going to cost you a lot more to get back than the generic everyday company files.

Don’t forget the potential liability your company may have to third parties as well.  If your files are compromised and the information accessed by the hackers includes personal information protected under privacy laws, then your business may be in for some significant expenses.  Many states (including Texas) have breach notification laws.  Fail to comply with the breach notification laws and your company could face significant fines.  If the information is used by the attackers and a third party suffers a loss, your business could be subject to a law suit as well.

There is also lost business to consider.  If your client learns that its confidential information was lost because your company didn’t take adequate measures to protect it, then how long do you think you will have that client?

 

NLRB General Counsel Memo Discusses Lawful and Unlawful Employer Handbook Rules

This past week the General Counsel for the National Labor Relations Board published a memo titled “Report of the General Counsel Concerning Employer Rules.”  You can download the PDF by following that link.

The report provides an update on the General Counsel’s view of lawful and unlawful employer handbook policies in the areas of confidentiality, professionalism, anti-harassment, trademarks, photography/recording, and media contact rules.  The memo provides examples of policies the General Counsel found lawful and unlawful under each area.

The NLRB GC has been actively challenging certain types of employer policies over the past few years as violations of Section 8 of the National Labor Relations Act.  Under Lutheran Heritage Village-Livonia, 343 NLRB 646 (2004), an employer’s rule may violate Section 8 of the NLRA if employees would reasonably construe the employer rule to prohibit Section 7 activity.  Section 7 activities include, among other things, the right for employees to engage in concerted activity with regard to their working conditions by commenting or speaking about them with other employees and third parties.

The GC has been challenging policies with broad prohibitions on things such as social media comments about an employer, broad definitions of confidentiality, and broad prohibitions on contact with media regarding an employer as violations under Section 8.  The GC has also actively challenged employer policies that prohibit recording or photography in the work place.  This is a much greater concern for employers these days given the fact that seemingly every employee owns a cell phone capable of making an audio recording or taking a photograph.

As a result of the NLRB’s effort, there has been some level of uncertainty as to what language the NLRB would find acceptable in an employer’s policies on these topics under the NLRA and practitioners had been seeking guidance in order to properly advise clients.  This memo is the General Counsel’s response to that request.

Employers would do well to review this memo and consult with their attorney to determine whether their policies and procedures should be revised given this new guidance.

What Employers Should Know About the EEOC Mediation Process

Beginning in the 1990s, the EEOC implemented a mediation program as an alternative means for resolving employment discrimination complaints filed by employees against their employers or former employers.  You can read more about the mediation program’s history on the EEOC’s website.  This article offers some insights into the EEOC mediation process for employers, as well… Continue Reading

Employee or Independent Contractor? IRS Webinar

The IRS is hosting a webinar on March 12th titled “Employee or Independent Contractor?”  This is an opportunity for business owners with questions about employee classification issues to learn more about the IRS’s views, the investigative process, and opportunities to resolve inaccurate classifications.  Topics that the webinar will cover include: Defining “Employee” The three control… Continue Reading

What is the Texas Business Opportunities Act?

Almost everyone is familiar with the concept of franchises and franchise law but many people are unaware of another statute governing business opportunities called the Texas Business Opportunities Act.  The importance of understanding this law cannot be understated due to the penalties involved – failure to comply is by law a deceptive trade practice in… Continue Reading

Starting a Business? Here Is What You Should Know About The Non-Compete Provision With Your Former Employer (or Partner)

Folks starting a new business are often doing so after working for an employer or after departing a previous venture with other partners.  Frequently these entrepreneurs have a non-compete provision tucked into some agreement from the previous relationship that they either did not know about or have not considered.  Look closely through all of your agreements and… Continue Reading