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 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.
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.
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.
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.
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.