Category Archives: Corporate

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.

2015 Texas Legislative Update

The 84th Legislature Regular Session began last month.  A number of bills that are of interest to Texas businesses have already been introduced and referred to committee.  Below you can find a brief description of some of the pending bills and the impact they could have should they make it into law.  Be sure to check back as the legislative session progresses for updates on new bills and whether these bills make it into law.

HB 1001
This bill would make certain domestic private entities ineligible for credits, exemptions or discounts on taxes or fees imposed by the state if the entity created a job outside the United States that could have been created in the U.S. and, as a result, eliminated or failed to create a similar job in the U.S.

SB 433
This bill offers an amendment to the Texas Business Organizations Code to clarify that the charging order for membership interests applies to both single-member and multiple-member LLC’s.

HB 94
This bill would mandate the creation of a publicly accessible database of employers who committed certain wage payment violations. The database would include employers who are assessed a “bad faith” administrative penalty, failed to comply with the payment requirements following a wage determination, or who are convicted of a criminal offense related to the payment of wages under Labor Code section 61.019 or Penal Code section 31.04.

HB 162/SB 152
This bill would amend the “bad faith” administrative penalty authorized under Labor Code Section 61.053 to make it a mandatory penalty against the employer. The bill also offers a list of specific acts constituting “bad faith” including: (1) a history of previous violations; (2) failure to pay wages as an act of discrimination or retaliation against an employee; (3) failure to pay wages to multiple employees at the same time; (4) failure to pay wages knowing it was a violation of law; or (5) actions showing a reckless disregard for wage payment requirements.

HB 174
This bill would require state agencies, political subdivision, and vendors or other contractors of state agencies to adopt a “living wage policy” mandating employee wages that are the greater of $10.10 an hour or the federal minimum wage under the FLSA.

HB 187/SB 65
This bill would expand the statute of limitations for filing an allegation of discrimination in payment of compensation by defining when the unlawful employment practice occurs.  This bill would also allow recovery for similar unlawful employment practices that occurred prior to the filing period.

HB 670
This bill would invalidate certain foreign forum selection and foreign choice of law clauses in contracts if application of the chosen forum or law to the dispute would result in violation of a right guaranteed by the U.S. Constitution or the Texas Constitution. In this bill, foreign means forums and laws outside the U.S. and its territories.

HB 828
This bill would prohibit a court, arbitrator, or administrative adjudicator form basing a ruling or decision on a foreign or international law or doctrine, or a prior ruling or decision that was based on a foreign or international law or doctrine, with certain limited exceptions.

When should you hire an attorney to negotiate your agreement?

Business owners, partners, managers in closely held companies all share a very common trait – they like to do things themselves.  Why pay someone else if you can do it yourself?  The first question every business owner usually asks before spending money is whether the expenditure will provide convenience, cost savings, expertise, or will it make them more money?

So when should you look at bringing on an attorney (or other adviser) to assist with negotiating a contract, lease, asset purchase, business investment, or other deal on behalf of your company?  I’m not talking about for his or her expertise with the subject matter, I’m talking about practical reasons why it might make sense to hire someone to negotiate for you instead of doing it yourself.  I believe there are a number of reasons why a business owner could get a better deal by hiring an attorney to negotiate their next agreement and I’ve discussed them below.

You are not comfortable with confrontation or saying “No.”

Negotiations are difficult and this remains true if they are conducted in a polite and cordial manner.  There is no avoiding the fact that there is conflict inherent in every negotiation.  Some people are not comfortable dealing with that conflict.  This leads to bad deals because the you avoid discussing difficult issues instead of dealing with them.  This also leads to unfair deals because you are afraid to simply say “No” or are willing to give up too much to avoid the conflict rather than working through it to develop a mutually acceptable resolution.

You should bring in an adviser if you are too emotionally involved to maintain objectivity.

Sometimes you are just too emotionally involved in the deal.  Whether because of the deal’s importance to your company or the fact that it is your “baby” that is being discussed and dissected during the negotiations, it is often hard to separate the emotion from the discussion.  This can make it difficult to maintain your objectivity and appreciate the other party’s position.  This can cause you to reject perfectly reasonable positions taken by the other party due to a defensive or emotional reaction.

Emotions can also drive you to make a bad deal simply to get any deal.  Often business owners are so invested in their product or service that they will give up more than they should simply to get a deal done because they believe so strongly in what they are selling that they will make any sacrifice to see it succeed.  Instant gratification can be a strong and powerful emotion to contend with.

You should bring in an adviser if the personalities require it to get a fair deal.

Sometimes you just know that you aren’t the best person to handle the negotiations.  At the end of the day its about business.  Its about getting the deal done.  Whether its because of personal issues with the other party or past dealings, sometimes you just know that your involvement will cause the other party to take a difficult posture solely to “beat” you in the deal rather than negotiate reasonably.  Using an adviser can mitigate those personality issues because he or she has no skin in the underlying deal.  A neutral adviser can also take the air out of a party who is posturing simply to “beat” you because you are no longer involved in making the deal.

You should bring in an adviser if you get too excited.

When you near the end of any negotiation that you have an interest in, it is natural to get excited.  Particularly in business, you often see the light at the end of the tunnel and race to get the deal done because carrying out the terms of the deal (and getting paid) is more important to you than negotiating it.  Often this can lead you to leave little things on the table that collectively would make a big difference for your company or it could even lead to a bad deal that over looks important details.  If your excitement makes it difficult for you to slow down to evaluate and re-evaluate the overall deal then you may do well to hire an adviser to handle the negotiation.

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