Month: February 2016

Essential Elements of the Annual Shareholder Meeting

Published on

If you are formed as a corporation, whether you are a small start-up or a larger business, you will almost certainly need to hold an annual meeting of shareholders. An annual meeting of shareholders is a statutorily required meeting to be held once a year subject to the laws of the state of incorporation. Many… Read More

If you are formed as a corporation, whether you are a small start-up or a larger business, you will almost certainly need to hold an annual meeting of shareholders. An annual meeting of shareholders is a statutorily required meeting to be held once a year subject to the laws of the state of incorporation.

Many corporations decide to incorporate in Delaware due to the various regulatory advantages. For more information on some of practical advantages of Delaware incorporation, please read our previous post: The Convenient and Practical Features of a Delaware Corporation. This article focuses solely on the Delaware General Corporations Law, but it is still a great starting point for any corporation because many states have analogous provisions.

When setting up your annual meeting of shareholders, planning will be essential. Setting up a successful annual meeting requires a firm understanding of the purpose of the meeting, an understanding of what options your state law and company bylaws allow, a proper navigation of voting rights, and a balanced approach to cost considerations.

What is an annual shareholder meeting?

An annual shareholder meeting is a meeting held for the primary purpose of electing a new board of directors. When setting up the meeting, the sources of authority that corporations need to consider are (1) the law of the state of incorporation, (2) the certificate of incorporation, and (3) the company bylaws.

Delaware General Corporation Law (hereafter referred to as DGCL) states that each corporation incorporated in Delaware shall hold an annual shareholder meeting. While the primary purpose of the meeting is to have a shareholder vote, the annual meeting of the shareholders is also a great time to review the success of the past year and to present the general vision for the upcoming year. For many corporations, this meeting will also serve as the only face-to-face interaction between shareholders, corporate officials, and investors.

The Nuts and Bolts of a Notice of Meeting

Each shareholder must be informed that the meeting is taking place. Corporations must provide this notice to shareholders so they can make an informed decision about whether or not they wish to exercise their right to appear and vote. DGCL has five key elements that each notice must include to ensure that shareholders are fully informed.

The DGCL states that, (1) a written notice of the meeting shall be given, (2) the notice shall state the place of the meeting, if any, (3) the date and hour of the meeting, (4) the means of remote communications, if any, and (5) the record date for determining the stockholders entitled to vote at the meeting. Each of the aforementioned items must be included in the notice, however, it’s important to remember that these are the minimum requirements and the company’s bylaws can provide additional notice requirements.

1. Written Notice

DGCL states that a written notice must be given to shareholders to notify them of the meeting. Traditionally, this meant that a paper version had to be mailed to each shareholder to provide proper notice. Many shareholders and corporations now prefer notice by email, therefore, the DGCL was amended to allow notice by electronic transmission. While Delaware acknowledged the need for this new option, they also did not want to force shareholders to receive notice by electronic transmission if they preferred paper copies. In order to properly send notice by email, corporations must obtain an electronic transmission consent form from a shareholder.

While sending the electronic consent waiver to each shareholder may sound like a burden, the effort invested will make subsequent notices more efficient because the waiver can be applied to future notices beyond the immediate shareholder meeting.

2. Place

Some considerations of choosing a location for the meeting include: convenience to the shareholders, cost of the location, and the amount of shareholders that will be participating. Keep in mind that if you hold an election for the board of directors during your annual shareholder meeting, the Delaware default rule for voting is voting by written ballot. Many states allow you to opt-out of voting by written ballots, so check the laws of your state of incorporation. Delaware allows for corporations to opt-out of the default written ballot rule so long as language allowing electronic voting is included in the company’s certificate of incorporation.

Delaware also allows corporations to take advantage of evolving technology by allowing meetings to be held solely through means of electronic transmission such as conference calls or Skype. These options can be used to hold your meeting thereby allowing shareholders a convenient way to participate in the meeting.

3. Date and Hour

The date and hour of the annual shareholder’s meeting shall be designated by or in the manner provided in the bylaws. When setting the date and hour of the meeting, it is best to consider a time that will allow the most participation as there is a minimum amount of shareholders that need to be present for a valid meeting. (See Quorum below).

4. Remote Communication

In the sole discretion of the current board of directors, shareholders and proxy holders not physically present at a meeting of shareholders may be deemed present in person and vote by means of remote communication in accordance with DGCL. Remote communication gives corporations the ability to conduct a hybrid meeting with some shareholders participating in person and others present by means of remote communication such as conference call, Skype, or any other service.

5. Record Date

A record date represents the cutoff date for the eligibility of voting. Shareholders who have purchased after the record date will be precluded from voting at the annual shareholder meeting. The record date may be fixed at the Board of Directors discretion, but it shall not be less than 10 days nor more than 60 days before the date of the annual shareholder meeting.

Timing of the Annual Meeting

Similar to the record date timing, the notice of the annual meeting shall be given not less than 10 days nor more than 60 days before the date of the meeting. This allows shareholders enough time to make plans should they decide to attend, but not so much time that they forget about the meeting, resulting in low attendance.

Voting Rights and Requirements

Now that each shareholder has proper notice of the meeting, they will want to exercise their right to vote their shares for each board of director seat. We’ve put together a list of five factors to consider regarding shareholder rights and requirements.

1. How Many Votes Do Shareholders Have?

Unless otherwise provided in the certificate of incorporation and subject to DGCL Section 213 (record date shareholders), each shareholder shall be entitled to 1 vote for each share of capital stock held by such shareholder. In other words, one share, one vote.

2. Written ballot

All elections of directors shall be by written ballot unless otherwise provided in the certificate of incorporation. If it is authorized by the board of directors, such a requirement shall be satisfied by a ballot submitted by electronic transmission in compliance with the DGCL Section 211(e).

3. Proxy

Each shareholder entitled to vote at a meeting of shareholders may authorize another person or persons to act for such shareholder by an instrument in writing or by an electronic transmission permitted by DGCL and your company bylaws.

4. Quorum

In order for an election of the board of directors to take place, there must be a minimum number of shareholders entitled to vote present at the election. This is called a Quorum. The articles of incorporation or bylaws of a corporation may specify the number of members having voting power required to be present, or represented by proxy, at any meeting in order to constitute a quorum in accordance with DGCL. Note that in most instances no quorum may consist of less than 1/3 of the shares entitled to vote at the meeting, except where a separate vote by a class or series or classes or series is required. Generally, a majority of voting shares are needed to be present at a meeting to constitute a quorum, and subsequently a valid meeting and vote.

If a quorum is not present, the corporation will have to adjourn the meeting and reset it, conforming with all applicable restrictions mentioned in this post. This adds undue delay and cost to the meeting, which can affect your relationship with your shareholders.

5. Plurality

Once a quorum is present at the annual shareholder meeting, a plurality vote is required for a nominee to be elected to the board of directors. Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directions according to DGCL. Note that this does not mean that the nominee has to receive a majority of the votes (i.e. 51 percent), it means that the nominee has to receive more votes than other nominees. For example, if there are three nominees for one seat of the board of directors, two of the candidates could receive 30 percent each of all votes cast, while the remaining candidate receives 40 percent of all votes cast. While the candidate that receives 40 percent did not receive a majority of all the votes cast, this nominee would prevail as they received more votes than the other nominees.

Cost Considerations

Navigating the laws of your state and the bylaws of your corporation will allow you to reduce the cost of the annual meeting of shareholders. To ensure that your meeting is effective and efficient, consider options that are convenient to your shareholders. For instance, if your shareholders are located throughout the state, you may want to consider holding the meeting through electronic communication or allowing certain shareholders to participate through remote communication.

Additionally, if your shareholder base is small, DGCL allows the shareholders to elect the board of directors, and complete other corporate actions through unanimous written consent. The key here is having unanimous consent, which gets much harder to accomplish as your company grows.

Conclusion

Setting up your corporation’s annual meeting of shareholders is a technical task that, when done correctly, can be advantageous to both the corporation and the shareholders. Make sure to check your corporate bylaws to see if there are efficient options that allow for the best meeting for you and your shareholders. If you begin planning your annual meeting of shareholders early, the corporation will be able to host a cost effective performance of official business while building strong relations with key shareholders.

If you have any questions, or need assistance as you start to plan for your annual meeting of shareholders, please give us a call at (415) 633-6841 or send us an e-mail at info@bendlawoffice.com.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

Read Less

The Top Ways to Fund Your Business

Published on

Entrepreneurs have more options than ever to raise capital for their new business ventures. However, with an increase in options comes the difficulty of choosing the best way to fund the business. Keep in mind that this is very much a high level overview. Each capital raise has its own unique features that impact what… Read More

Entrepreneurs have more options than ever to raise capital for their new business ventures. However, with an increase in options comes the difficulty of choosing the best way to fund the business.

Keep in mind that this is very much a high level overview. Each capital raise has its own unique features that impact what it means to be compliant under state and federal laws. There are a lot of ways to have a compliant security strategy, but here are a few points to start the conversation.

Convertible Notes

A convertible note is traditionally one of the most common methods used to raise capital for new ventures. When a company funds the business through a convertible note, they are receiving immediate capital in exchange for debt. The debt will convert into equity at a later date after the company has secured a second round of financing, which is typically at a point in which the company feels it is in a better position to value its stock.

Every business raising capital is looking to obtain that capital for a fair and reasonable price. New businesses often offer equity in exchange for capital, but problems can arise when parties cannot agree upon the value of the equity. The convertible note allows both parties to delay the difficult task of business valuation to a date when the business value is more definite. Furthermore, unlike a fixed price round (more on that below), a convertible note round is much easier (read as, less expensive) to execute. When companies are just getting started, every dollar counts.

This is often why you’ll hear people refer to a convertible note round as a “bridge loan.” The company has an opportunity to establish proof-of-concept, data points, and other key metrics to properly value its business. Investors have confidence in their investment because a convertible note is a loan, therefore giving investors security. The loan will have a maturity date and can build interest during the period that both parties are attempting to determine a proper valuation when a second round of financing occurs.

This option is attractive to young businesses looking for fast capital that don’t have the history to establish a proper business valuation and need to raise capital without committing a lot of money to legal or accounting fees. Convertible notes are equally attractive to investors looking for security in their investment (maturity date and interest), while holding the potential for valuable return once the note converts into equity of the successful business.

SAFE Agreement (“Convertible Security”)

The “SAFE” agreement stands for a “simple agreement for future equity.” These agreements are very similar to the aforementioned convertible note in that the money becomes available to the new business immediately, but are distinct in how the investment is converted into equity.

A SAFE agreement (sometimes referred to as “Convertible Equity”) is an investment of capital into a venture; however, they are not debt instruments, meaning that they do not have maturity dates. The lack of a maturity date allows ventures more time to go through a round of funding or more time to accurately establish the valuation of their venture. Additionally, because SAFE agreements are not loans, interest does not accrue on the invested capital, unlike a convertible note where interest can and often does accrue. Furthermore, while a convertible note will select the definition of a “qualified financing round” which triggers conversion (such as the raise of $1,000,000), a SAFE agreement will convert on the first sale of “preferred stock” regardless of the amount raised.

Investors and businesses are attracted to SAFE agreements due to the lower cost of negotiation compared to convertible notes because the parties do not have to establish an interest rate, maturity date, or definition of qualified financing. In turn, this lowers the cost for both parties to invest the capital to get the business moving (hence the inclusion of the word “simple” within the agreement).

SAFE agreements, while primarily business-friendly, can be rejected by investors because of uncertainty. Absent a clear groundwork for when and how a conversion will take place investors may still lean towards a convertible note, as this gives them power due to the note ultimately becoming due.

Fixed Price Financing

Fixed Price Financing, or “Priced Equity Rounds,” are the most well known and most common investment method for an established startup or small business. The key difference between Fixed Price Financing and other options previously mentioned is that there is a valuation of the company and the company will typically sell “preferred shares” to investors. A fixed price round can be completed either through investment crowdfunding (provided you meet the rules of the JOBS Act Title II, and Rule 506 of Regulation D) or as a “private placement” (private=no advertising or generally soliciting of the investment).

Businesses that are willing to set a company valuation often favor Fixed Price Financing. Often, Fixed Price Financing is achieved in multiple rounds, each time adjusting the company’s valuation and equity accordingly. This strategy allows companies to mature, demonstrate proof-of-concept, get in touch with consumers, and evaluate the success of their business at various stages of funding the company.

Fixed Price Financing is one of the more expensive options to raise capital, as businesses will want to exercise due diligence in selecting the proper valuation for their business as well as carefully structure the rights granted to investors under each new class of preferred shares. Furthermore, because fixed price rounds come into play once a company is established, investors will also want to perform their own due diligence on the company. Preparing the proper disclosure packet that can survive the myriad of representations and warranties a company makes undoubtedly increases costs to complete the deal.

Fixed Price Financing provides the certainty that convertible notes and SAFE agreements do not provide because both the business and the investors have negotiated and determined the company’s valuation prior to investment. In turn, this increases the cost of this capital-raising vehicle in comparison to convertible notes and SAFE agreements. Fixed Price Financing is an option most commonly used for a business that has proven operations and can show a path of scalability with additional funds.

New Kid on the Block: “Investment Crowdfunding”

Until recently, crowdfunding efforts have been associated with donations and “pre-orders” in which people pay a fee in order to receive a product in return. Indigogo and Kickstarter are not structured to sell any securities; rather, they are set up to accept donations and create pre-orders. However, whenever the exchange for capital includes either debt or equity, the SEC gets involved and the rules are governed by Title II and Title III of the Jumpstart Our Business Startups Act (commonly referred to as the “JOBS” Act).

Pre-order crowdfunding offers a great way to test the market before taking your company to the next step. This fundraising vehicle allows you to gauge market interest and gain feedback from potential consumers, enhancing your overall service or product before you look to sell any securities. Many crowdfunding campaigns have gained valuable exposure to their core markets, thereby allowing their businesses to gain momentum that is ordinarily associated with high priced advertising efforts.

Once it becomes time to fund your business, the parameters under which a startup can raise funds for equity through crowdfunding depends heavily on whether they will take money from an unaccredited investor. Under Title II, if you take money from only accredited investors there is no cap on the amount of money you can raise, or the number of investors. However, if you take investments from an unaccredited investor per the rules of Title III, you may only raise up to $1 million dollars within a 12 month period, and investors who make less than $100,000 can only invest the greater of 5% of their annual income or $2,000. Furthermore, the offering under Title III must be made via a Broker-Dealer or Portal Intermediary, and significant disclosures are required for companies to help provide transparency (such as yearly audited financials if you raise over $500,000). The factors just discussed are not an exhaustive list, and for a deeper analysis on the distinction between Title II and Title III we encourage you to read this post: Crowdfunding: Understanding Title II and Title III of the Jobs Act.

The recent passage of Title II and Title III has made the ability to seek capital from a wide audience a reality, but the rules still must be carefully followed. Additionally, downstream implications such as a cluttered cap table could hinder your ability to seek venture capital financing after using crowdfunding for investment, and the yearly requirement for audited financials (roughly $10,000 to $20,000 per year) can be a big long-term burden for only raising between half a million and a million dollars. It’s extremely important to strategize ahead of time with an attorney and an accountant to ensure you’re not harming the long-term financial health of the company by selecting crowdfunding for fundraising.

Conclusion

From Convertible Notes to Fixed Price Financing, there have never been more ways to successfully raise capital for your business venture. We have highlighted some of the differences between your capital raising options, but there are many other variations and options to raise capital that can fit your growing business.

If you have any questions, or need assistance as you decide which type of capital raising option is for you, please give us a call at (415) 633-6841 or send us an e-mail at info@bendlawoffice.com.

This Article was written by Alex King and guest author Paolo Visante.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

Read Less