Shareholder Agreements Require Flexible Buy-Sell Provisions

There are many reasons why shareholders in closely-held corporations may need to quickly sell their shares to others. Therefore, it’s important when drafting a shareholder’s agreement to cover every basic aspect of buying and selling shares – in addition to the general administrative matters that must normally be addressed.

Depending on a corporation’s number of major shareholders and business pursuits, a flexible framework helps facilitate every goal. The following list sets forth some of the main terms that shareholder agreements should cover, separate and apart from the buy-sell provisions that will be discussed in greater detail below.

Common Administrative Topics Set Forth in Many Shareholder Agreements

  • Voting rights. Always describe each shareholder’s voting rights and when they can be properly exercised;
  • Qualifications for serving as corporate officers. Basic requirements must be stated so that only fully qualified individuals can serve as corporate officers at any level;
  • Noncompete provisions. All parties involved with a corporation must agree to avoid compromising its trade secrets or later leaving and then trying to compete for its clients for a limited time;
  • Preferred groups to consult with when internal disputes must be resolved. Include the names of specific mediation or dispute resolution services that can be contacted and how the corporation should decide when such outside help is required;
  • Inclusion of anti-dilution provisions to protect stock values;
  • A description of major shareholders’ “tag-along” rights;
  • Registration rights must be explained and how they apply to certain restricted stocks;
  • Stock valuation procedures must be described and closely followed.

Once these and other crucial topics have been covered, you and your Houston corporate law attorney should discuss the best buy-sell provisions suited to your corporate structure.

Basic Buy-Sell Provisions – Events That Often Trigger Their Use

Your shareholder’s agreement should always include a very detailed explanation of how shares should be sold when one of the following events takes place.

  • The death of a shareholder;
  • The termination of an employee shareholder – whether “for cause” or without cause;
  • The disability of a shareholder;
  • A shareholder’s retirement

When trying to draft the best buy-sell procedures to address these situations, it’s often wise to sit down and review your corporation’s main concerns and interests with your lawyer.

Should the Selling of Shares Be Mandatory — or Provide Parties with Greater Choice?

When trying to answer this question, you may want to provide different answers, depending on whether the sales are to the corporation itself, other shareholders – or to third parties.

  1. Should your corporation be given the first right to purchase (or redeem) the stocks? If you and the controlling officers of your corporation wish to include this provision in your shareholder agreement, be sure to first consider the possible capital gains tax issues involved;
  2. Do you want to automatically offer the available shares to other general shareholders if the corporation isn’t interested in redeeming the shares after a set deadline? If so, it’s important to indicate if majority shareholders will have the first opportunity to buy the shares;
  3. Are you willing to allow outside third parties to buy the newly available shares? If so, you must decide in advance the types of criteria that such buyers must meet.

Other Key Issues Involved with Drafting Your Buy-Sell Provisions

  1. Setting the proper price to be paid for the stocks. In general, if the available shares are to be purchased by the corporation or one of its current shareholders, you should have already created a clear formula in your shareholder’s agreement for determining the current, proper valuation of the stock. However, if the shares are to be sold to an outside third party, that outsider’s offer will normally be determined by the current market price for the type of shares involved;
  2. How should the price be paid? Most corporations will benefit from establishing a basic buyout procedure within its shareholder agreement so that these common transactions can be handled according in a very clear, pre-determined manner. Since lump-sum payments are usually not preferred, you will need to decide if you prefer such options as:
  1. A buyer-financed buyout
  2. A seller-financed buyout, or
  3. Some type of financing arrangement involving insurance or a trust

Since a corporation’s success is often determined by the terms and quality of its shareholder’s agreement, please feel free to contact our firm so we can provide you with our general legal advice or help you draft a new agreement. 

The Basic Steps for Forming a Texas Corporation

Although running a business can be very challenging, it’s often invigorating to reach a point when you may need to incorporate your company. This process is often begun by discussing what can be gained or loss by making this move with your business partners. You should also consider speaking with your Houston business lawyer so you’ll fully understand all the legal implications of making this decision.

The following material reviews the main reasons that many companies choose to incorporate their businesses. It then notes the most common steps that must be taken prior to filing a certificate of incorporation with the Texas Secretary of State’s Office.

Potential advantages that are often acquired by incorporating a business

  • Improved legal liability status. Creating a corporation can provide each individual business partner with added protection against personal liability for the actions of all other executives or employees. It can also offer greater protection for business assets;
  • Critical, everyday activities can be simplified. Upon incorporating, it can become easier to add new owners and investors while still maintaining the same level of control over your company;
  • The company can more easily transact business all around the world. It’s often easier to conduct business in a corporate form in many other countries;
  • It can help you one day take your company public. While your corporate executives and employees may always want to conduct business privately, a time may come when it may be to your financial advantage to take the company public and sell stock.

Those are just a few of the main reasons why many business executives decide to incorporate their current companies or partnerships.

Common steps you must take when you’re ready to incorporate your business

  1. Name the corporation. Try to choose a name that suits your business and helps raise your profile. You and your lawyer will need to conduct a formal search to see if any of the names you’d like to choose are currently available in Texas;
  2. Select a registered agent and office. Be prepared to designate a trustworthy party to serve as your registered agent and name the city where that person will keep his or her office;
  3. Choose which parties will be named as the corporation’s organizers or incorporators. The names and addresses of each of these individuals must be listed within the certificate of formation;
  4. Designate your corporate directors. After the certificate of formation has been filed, the directors take over running your business. These highly knowledgeable executives must also have strong management and interpersonal skills that will help them successfully negotiate all future decisions and transactions;
  5. Draft a brief statement, indicating the corporation’s official business purpose. While this may sound rather straightforward, it’s often wise to run this description by your lawyer to be sure you’ve fully covered all key aspects of your intended business transactions;
  6. Consider obtaining professional help with the completion of your official certificate of incorporation. Like other states, Texas has specific expectations for the precise information that must be included. Since these requirements can change periodically, it’s often wise to ask your lawyer to review the contents of your certificate of incorporation;
  7. Pay the required fees. These should normally be posted on the Texas Secretary of State’s online website. If you prefer, your lawyer can submit your fees and certificate of incorporation for you.

While this list of common steps isn’t intended to be fully comprehensive, it should clearly indicate the basic steps that you and your business partners should take if you decide that it’s time to incorporate your business.

Please feel free to contact the lawyers at Murray Lobb so we can answer any specific questions you may have about this process. We’ve helped many clients incorporate their businesses over the years – and we’re ready to put that experience to work for you.

How Should You Respond to Potentially False I-9 Documentation?

At present, the federal government expects companies to carefully examine all I-9 documents presented by job applicants and to ask questions about required paperwork that looks like it may have been altered. Once you receive proper documents that look valid, you must keep your copy of the completed I-9 form on file, ready to share it with ICE (Immigration and Customs Enforcement) upon request. In some cases, you may be given only three days’ notice to produce these documents for all your employees.

To help employers fulfill their duties, ICE provides general guidelines that describe how all I-9 document reviews should be handled. These guidelines are further referenced below, along with topics you should address with your human resource staff to help them avoid accidentally discriminating against applicants and employees while simply trying to obtain fully updated, accurate documents.

What federal law established the need to obtain I-9 documents from job applicants?

Congress passed the Immigration Reform and Control Act (IRCA) back in 1986. It requires employers to obtain job applicant documents that validate each person’s right to work in this country. This task is handled by fully completing a Form I-9 document for each job applicant. To help establish their legal status, applicants can produce such items as:  a driver’s license, a Permanent Resident Card, a US passport, a birth certificate and a Social Security card.

Can some I-9 documents be acceptable even when they initially look questionable?

The simple answer to that question is “Yes.” However, you should always keep notes in your file concerning any odd documents that you first believed might be false – and keep a copy of them. As ICE notes on its website, there are times when a worker may show you documents indicating different last names – and that may be acceptable if the job applicant can provide you with a reasonable explanation for the varied listings.

While employers must be respectful and open-minded while handling required I-9 tasks, they should be acting in agreement with previously established, written employee guidelines clearly noting that all new hires and established employees can be fired for providing any false job applicant documents. When you haven’t already created such written guidelines and acceptable standards of employee conduct, you may later find yourself accused of discriminating against an applicant or employee based upon his or her immigrant (or special ethnic) status.

This type of scenario often unfolds when an employee informs you after being hired that one or more documents given to you before being hired was fraudulent or invalid. This tends to occur when the employee is trying to provide you with newly updated, valid documents.

This specific type of issue was presented to the Department of Justice (DOJ) back in 2015. Unfortunately, instead of issuing an advisory opinion, the DOJ simply noted that employers should already be prepared to handle these types of issues — based on established employee conduct guidelines. Otherwise, they risk being sued for one of at least four employment-related forms of discrimination.

Is it true that some employers have been heavily fined for I-9 violations?

Yes. One of the largest fines recently imposed by the Office of the Chief Administrative Hearing Officer (OCAHO) involving I-9 irregularities was against Hartmann Studios. That company was required (in July of 2015) to pay $600,000 in civil penalties. (That amount had been reduced from the original penalty sought of $812,665.) When Hartmann was undergoing a new inspection back in 2011, the company employed over 700 workers.

While that large sum of money is quite high, it’s important to recognize that Hartmann Studios was unable to provide any I-9s for some of its employees who had been terminated and needed an extension of time to produce documents for others.

What steps can our office (or company) take now, to make sure were fully complying with all current I-9 document guidelines?

If you haven’t already done so, give serious thought to signing up for the US government’s
E-Verify program that can help you properly process all your I-9 documents. By visiting this government website, you can learn more about how this program works. Your usage of this service may help establish your good-faith attempt to properly handle all I-9 duties.

You may also want to ask your lawyer if you should require all newly hired (and established) employees to sign a form that clearly indicates their awareness that they may be immediately fired for their dishonesty if you ever learn that they’ve provided you with any fraudulent I-9 documents. If you do this, you’ll need to strictly apply this standard.

Please contact our Murray Lobb law office so we can answer any other questions you may have about properly handling all I-9 documents. We can also provide you with advice on drawing up a general employee handbook — that also fully alerts all employees to the possible consequences of supplying your company with fraudulent I-9 documents.

An Overview:  Winding Up Texas Corporate Activities

An Overview:  Winding Up Texas Corporate Activities

Corporate officers can choose to formally “wind-up” all business activities when many different factors change. For example, when smaller corporations are involved, key parties may simply want to retire or pursue new goals. In other situations, market trends may change so significantly that corporate officers may want to choose more advantageous business structures. Regardless of why any specific Texas corporation decides to go through the termination process, basic legal steps must be followed carefully.

Since this process can involve different statutes, including detailed sections of the state’s Business Organizations Code, it’s always best to confer with your Houston corporate law attorneys. They’ll readily understand the termination process that the Texas Secretary of State’s Office expects each corporation to complete. (Of course, in some instances, a corporation may be involuntarily terminated for various reasons – including the failure to file annual reports).

Here’s a look at some of the steps you must be ready to take based on our state’s governing laws and the specific realities involved with your business. Although other states may speak of “dissolving” corporations, Texas usually refers to “winding up” corporate matters.

The Texas Business Organization Code’s Two Main Ways to “Wind Up” Activities

  1. The board of directors adopts a resolution. It should state that they are recommending that the corporation “wind up” its activities — after submitting this proposal to all the shareholders. At a properly convened meeting, the shareholders must then vote on this proposal. In general, a two-thirds majority of the shareholders must approve this decision before the winding-up process can begin;
  2. All shareholders must sign a “consent” document. Once this has been done, the “consent” document must be entered into the corporate records. This approach is most common when smaller corporations are involved. Great care must be taken to cover all key termination matters within this consent agreement.

Once this early internal activity has been concluded, numerous other steps must be taken to properly conclude all corporate business matters.

Common Additional Steps Required to “Wind Up” Your Corporation

  • All known parties with claims against the corporation must be served with notice of the current intent to terminate the corporation’s existence;
  • Every necessary corporate lawsuit must be properly initiated and concluded;
  • All corporate property must be properly collected and sold – depending on whether its value is owed in some manner to the shareholders;
  • All corporate liabilities must be properly discharged – including the payment of any taxes owed to the IRS or the state of Texas.

General Tax Issues and Obtaining Required Certificates

While your Texas corporate attorney may be prepared to handle all your corporation’s tax payment issues involved with the “winding up” process, you may also want to confer with a tax attorney.

Keep in mind that your corporation must obtain a “certificate of account status” from the Texas Comptroller of Public Accounts — and a final federal tax return must be properly filed once all corporate finances have been finalized.

Filing a Certificate of Termination

After you’ve obtained a certificate of account status from the Texas Comptroller of Public Accounts, you’ll need to file Form 651 (a certificate of termination) with the Secretary of State’s Office. Once this step has been taken and approved, your corporation’s existence has legally ended.

Added Issues That May Need to Be Addressed

Keep in mind that the information provided above was simply intended as an overview of the Texas corporate “winding up” process. Your attorney will be able to provide you further advice about whether additional paperwork is required. Fox example, certain Texas laws governing corporate mergers may or may not apply to your situation.

Please feel free to contact our law office with any questions you may have about possibly terminating your Texas corporation – or any other business entity. We can provide you with the advice you’ll need to properly handle all required stages of this process.

Shareholder Agreements Require Flexible Buy-Sell Provisions

There are many reasons why shareholders in closely-held corporations may need to quickly sell their shares to others. Therefore, its important when drafting a shareholder’s agreement to cover every basic aspect of buying and selling shares – in addition to the general administrative matters that must normally be addressed.

Depending on a corporation’s number of major shareholders and business pursuits, a flexible framework helps facilitate every goal. The following list sets forth some of the main terms that shareholder agreements should cover, separate and apart from the buy-sell provisions that will be discussed in greater detail below.

Common Administrative Topics Set Forth in Many Shareholder Agreements

  • Voting rights. Always describe each shareholder’s voting rights and when they can be properly exercised;
  • Qualifications for serving as corporate officers. Basic requirements must be stated so that only fully qualified individuals can serve as corporate officers at any level;
  • Noncompete provisions. All parties involved with a corporation must agree to avoid compromising its trade secrets or later leaving and then trying to compete for its clients for a limited time;
  • Preferred groups to consult with when internal disputes must be resolved. Include the names of specific mediation or dispute resolution services that can be contacted and how the corporation should decide when such outside help is required;
  • Inclusion of anti-dilution provisions to protect stock values;
  • A description of major shareholders’ “tag-along” rights;
  • Registration rights must be explained and how they apply to certain restricted stocks;
  • Stock valuation procedures must be described and closely followed.

Once these and other crucial topics have been covered, your and your Houston corporate law attorney should discuss the best buy-sell provisions suited to your corporate structure.

Basic Buy-Sell Provisions – Events That Often Trigger Their Use

Your shareholder’s agreement should always include a very detailed explanation of how shares should be sold when one of the following events takes place.

  • The death of a shareholder;
  • The termination of an employee shareholder – whether “for cause” or without cause;
  • The disability of a shareholder;
  • A shareholder’s retirement

When trying to draft the best buy-sell procedures to address these situations, it’s often wise to sit down and review your corporation’s main concerns and interests with your lawyer.

Should the Selling of Shares Be Mandatory — or Provide Parties with Greater Choice?

When trying to answer this question, you may want to provide different answers, depending on whether the sales are to the corporation itself, other shareholders – or to third parties.

  • Should your corporation be given the first right to purchase (or redeem) the stocks? If you and the controlling officers of your corporation wish to include this provision in your shareholder agreement, be sure to first consider the possible capital gains tax issues involved;
  • Do you want to automatically offer the available shares to other general shareholders if the corporation isn’t interested in redeeming the shares after a set deadline? If so, it’s important to indicate if majority shareholders will have the first opportunity to buy the shares;
  • Are you willing to allow outside third parties to buy the newly available shares? If so, you must decide in advance the types of criteria that such buyers must meet.

Other Key Issues Involved with Drafting Your Buy-Sell Provisions

  • Setting the proper price to be paid for the stocks. In general, if the available shares are to be purchased by the corporation or one of its current shareholders, you should have already created a clear formula in your shareholder’s agreement for determining the current, proper valuation of the stock. However, if the shares are to be sold to an outside third party, that outsider’s offer will normally be determined by the current market price for the type of shares involved;
  • How should the price be paid? Most corporations will benefit from establishing a basic buyout procedure within its shareholder agreement so that these common transactions can be handled according in a very clear, pre-determined manner. Since lump-sum payments are usually not preferred, you will need to decide if you prefer such options as:
  • A buyer-financed buyout
  • A seller-financed buyout, or
  • Some type of financing arrangement involving insurance or a trust

Since a corporation’s success is often determined by the terms and quality of its shareholder’s agreement, please feel free to contact our firm so we can provide you with our general legal advice or help you draft a new agreement.