Somewhere, in a file cabinet in your office, sits a stack of papers from when you formed your corporation. Whether you did parts of it yourself or relied on a lawyer or online service, you may never have looked at it again until a problem (like a partner problem) has arisen or a major corporate change (like selling some or all of the company) is on the horizon. If questions come up, where do you look first for an answer? The following is a guide to what goes into the most important documents. While state law can fill in some of the gaps if not all the documents exist or do not address all the concerns (not uncommon in small businesses), corporations have to have some of the general framework in place in order to exist legally.
Please note my separate AVVO legal guide for limited liability company and partnership documentation. The issues are similar, but the documents look different because of the different statutes that govern these entities.
Certificate of Incorporation
The Certificate of Incorporation is the document filed with the state to create the legal entity. Some states call it the Articles of Incorporation. It contains a few basic items: the company name, some optional provisions like indemnification of directors and officers and, most importantly, capitalization. The Certificate of Incorporation lists the number of shares of each class and series a stock your company is authorized to issue. It also states the par value of each, which in the real world is mostly used for the state to calculate annual franchise taxes (and comes as a surprise to people from other countries that have abandoned the concept). The stock can be common stock (called “ordinary shares" in many other countries), common stock with a different number of votes per share than regular common stock, or preferred stock. Preferred stock gives the holder a preference on liquidation of the company and sometimes pays dividends, requires repayment after a certain period of time and grants some limited control rights, but does not always grant the right to vote for directors.
Sometimes, the Certificate of Incorporation authorizes directors to issue up to a specified number of shares of preferred stock, with whatever preferences and other rights the directors deem appropriate at the time. This is called “blank check preferred stock." When the board authorizes the issuance of any shares of this kind of preferred stock, the company files a document with the state called a “Certificate of Designation" describing the terms.
The Certificate of Incorporation can be amended if the board and enough stockholders agree. “Enough" can vary from a majority of the stockholders present and voting at a stockholders’ meeting to a unanimous vote if called for by the corporate documentation or state law; you will need to look into this if it becomes an issue. If the Certificate of Incorporation is amended, the company files a Certificate of Amendment or Articles of Amendment with the state. Your company can easily amend and restate its Certificate of Incorporation if the amendments get too complicated to follow easily.
Bylaws describe some of the inner governing mechanisms of the company: the number of directors, which officers the companies can have, how meetings of the board and stockholders are called and conducted and what happens if a stockholder loses its stock certificate, for example. Although issues often arise around these mechanics, bylaws can make for tedious reading.
The board and stockholders generally adopt routine sets of minutes when the company is set up, electing directors and officers and approving a host of administrative matters such as forms of stock certificates, opening bank accounts, foreign corporation qualifications and the initial sale and issuance of company stock. Ongoing minutes are then required for company operations. They document board and stockholder meetings or consents in lieu of meetings, and reflect decisions on matters required by law such as periodic election of directors and officers and approval of major contracts. The minutes may also contain evidence that the board discussed matters that do not require its immediate attention, such as reviewing of the performance of the business. This sort of evidence can be critically important if directors are sued.
In some companies, formal board and stockholder meeting minutes slip by the wayside. The absence can create problems.
Stock certificates are pieces of paper indicating ownership of an interest in the company. Physical certificates are an important indication of who owns the company but may not be fully dispositive. For instance, in public companies, stock is often transferred by book entry, with the holders never seeing a physical certificate. Certificates may contain a “legend": a statement about restrictions on transfer or ownership being subject to a stockholders agreement, for example. Sometimes a legend mentioning other documents is the first indication to a reader or potential transferee that those documents exist.
Stock Transfer Ledger
The Company is supposed to keep track of each stock certificate, who owns it and the owner’s address. The document in which this is recorded is called the stock transfer ledger, and it is usually kept in the minute books. The ledger is helpful but not dispositive as to who owns which shares, since, like people’s personal checkbook registers, it is not always up to date. There can also be enforceable oral or written commitments to issue or transfer shares that have not yet been recorded. Nonetheless, the stock transfer ledger is the first place to look to determine legal ownership of the company.
If a stockholders agreement exists, it is a key document. It spells out the owners’ understanding as to a number of key concerns. Most stockholders agreements contain restrictions on transfer of shares. They often contain rights of first refusal or rights of first offer in favor of the company or the other owners, as well as the right to participate in a sale by larger stockholders (“tag-along rights") and, for larger stockholders, the ability to cause smaller stockholders to participate in a sale of a large block of stock (“drag-along rights"). They can also contain various forms of buy-sell provisions that are triggered on owner disputes, death, disability or retirement. Sometimes, they contain requirements about how stockholders will vote their shares – for instance, voting for certain people as directors. In an extreme case, there may even be a separate document called a “Voting Trust Agreement," which provides for shares to be held in trust and voted by someone other than the registered owner.
Annual Report and Tax Returns
The annual report and franchise tax return filed with the state often lists the directors and officers. If you are facing an issue of control, you might look at this document for further information. Also, if the report is not filed on time, the corporation is not in “good standing" or might even be administratively dissolved, which leads to all sorts of problems.
Federal income tax returns can have valuable information, too. For instance, in an S-corporation (which has elected to be taxed as a partnership so that company gains and losses are taxed directly to the stockholders), the Schedule K-1s indicate percentage ownership.
Warrants and Options
Warrants and options give the holder the right to acquire shares of a company’s stock in the future at a specified price. The holder hopes the price is below market value at the time of exercise in order to make a profit on the difference between the exercise or “strike" price and the market value. Warrants are often granted as part of a company financing. Options are often granted to employees, sometimes as part of an employee stock option plan.
Registration Rights Agreement
Registration rights agreements entitle a stockholder to participate in public offerings by the company or certain other stockholders (“piggyback registration rights") or even require the company to conduct a public offering (“demand registration rights"). These agreements provide for “cut-backs" if the underwriter thinks too many shares are being taken to market at the same time. If a company goes public without registering all its shares in the transaction, a stockholder may still be able to sell – but the intricacies of securities law are beyond the scope of this Guide.
Employment and Independent Contractor Agreements
Those who work with the company may have employment agreements that spell out job titles, responsibilities, compensation and benefits, grounds for termination, severance and related issues. These agreements often also have confidentiality, intellectual property, noncompete and indemnification provisions. Independent contractors can have similar agreements, and directors often have written indemnification agreements in addition to their compensation arrangements. These types of agreement are the baseline against which all discussions with individuals are negotiated.
Debt arrangements come in many forms, ranging from simple promissory notes to loan agreements and, in larger companies, bonds or debentures. Furthermore, many companies have multiple debt instruments outstanding at any time. The voluminous, complex documentation of debt is beyond the scope of this article, but as an equity holder you should look closely for collateral security documents such as personal guarantees and pledges of stock.