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FAQ: Should My Startup Issue Stock Certificates?

Sorry, no Draw the Law this week (or next week), as I am working on a something important.  I will announce what it is tomorrow.
As for today, this is a follow-up on a FAQ that a lot of founders and startup corporations ask me.  Should they issue stock certificates?

Is It Required by Law?

As I said last week, no. In Hawaii, a corporation, through its board of directors (under the authority of the articles of incorporation or bylaws) may issue shares without certificates.  In general, most, if not all jurisdictions, have done away with the requirement of a piece of paper signifying ownership in a corporation.

Even social media giant, Facebook, scrapped its plans earlier this year to issue paper stock certificate to its shareholders.  More and more companies are turning to electronic registration as a way to keep track of shares.

What about the Startups?

It’s true large, publicly traded corporations are moving away from the traditions of paper, but does that mean you should.  There are some attorneys who feel you should as it signifies ownership and allows a small group of founders to have a check on each other given the fluidic nature of startups.  Others embrace the digital and just say keep good electronic records and documentation.  Not to mention paper certificates are actually costly to print, which is an added cost your young corporation may not need.

For startups, the founding owners should discuss whether or not they want to issue paper certificates or not.  It really is a personal preference, as some people enjoy having the tangible proof of ownership and nostalgia of the paper.  In fact, Scripophily.com buys an sells original paper stocks for people interested in collecting.  Still others prefer the cheaper method, and just keep an electronic spreadsheet to keep track and just send updates.

If My Startup Decides to Issue Stock Certificates What Does it Require?

Hawaii Revised Statute §414-86 states the following required items to be on a stock certificate if you choose to issue them:

 (b)  At a minimum each share certificate must state on its face:

(1)  The name of the issuing corporation and that it is organized under the law of this State;

(2)  The name of the person to whom issued; and

(3)  The number and class of shares and the designation of the series, if any, the certificate represents.

(c)  If the issuing corporation is authorized to issue different classes of shares or different series within a class, the designations, relative rights, preferences, and limitations applicable to each class and the variations in rights, preferences, and limitations determined for each series (and the authority of the board of directors to determine variations for future series) must be summarized on the front or back of each certificate.  Alternatively, each certificate may state conspicuously on its front or back that the corporation will furnish the shareholder this information on request in writing and without charge.

(d)  Each share certificate:

(1)  Must be signed (either manually or in facsimile) by two officers designated in the bylaws or by the board of directors; and

(2)  May bear the corporate seal or its facsimile.

Last Word

Personally, on a practical level, I do not think you need them, but that isn’t a legal opinion.  It just has to do with startup expenses and printing out specialized paper may not be necessary and would only drive up your costs at the beginning when you need to focus on your business model.  However, in some cases it may be warranted, but everyone’s situation is different.  Therefore, consider speaking to an attorney to provide advice and their thoughts given your situation on this matter and all that other paperwork that you need!

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

What’s with all this Paperwork? Part III Corporate Bylaws

Last week’s post was about the differences between the internal documents of bylaws and operating agreements, and what their purpose is as opposed to the Articles documents.  This week and next, I will take a closer look at the in-depth documents, bylaws and operating agreements, separately and mention a couple things that startups and small businesses should know about bylaws.

Adopting Bylaws are Required along with Certain Provisions

Recall last week that I mentioned as opposed to a LLC’s operating agreement, that a corporation’s incorporators or board of directors MUST adopt initial bylaws for the corporation.  However, what is also required are certain provisions that control how shareholders and directors behave with regard to the corporation.  Further, there are provisions that the owners of the company may consider.

*The Difference Between “May” and “Shall”

I don’t normally give grammar lessons on my blog, but when it comes to business law, especially corporate documents, many people get bored, confused, (sometimes angry), at the tedium of the words we use.  Thus the need for clarity in the matter.

Without getting into the mechanical linguistics of it all, when “shall” is used it is something that you MUST do, whereas “may” gives you the option of doing the act.  I am going to use an example when it comes to Annual Meetings.

You Must Have Annual Meetings, but You May or May Not State the Place of the Meetings

What does that mean?  Let me show you the relevant statute and break it down:

(a)  A corporation shall hold a meeting of shareholders annually at a time stated in or fixed in accordance with the bylaws.

(b)  Annual shareholders’ meetings may be held in or out of this State at the place stated in or fixed in accordance with the bylaws.  If no place is stated in or fixed in accordance with the bylaws, annual meetings shall be held at the corporation’s principal office.  Notwithstanding the foregoing, the bylaws may authorize the board of directors, in its sole discretion, to determine that the annual meeting shall not be held at any place, but may instead be held solely by means of remote communication as authorized under subsection (c).

So notice in section (a) it states that a corporation shall hold a meeting of shareholders each yeah and that the bylaws shall state that time.   However, notice in section (b) it states that these shareholders’ annual meetings may be in Hawaii or not, and that the bylaws may state this place. However, if you do not state a place it shall be the corporation’s principal office.

Please note that is just part of the “Meetings” statute as it is to the Hawaii Business Corporation Act.   What you should take away from it is that there are some provisions required in bylaws and there are others that you have flexibility with.

Why is this Relevant for People Starting a Business?

Yes, paperwork is tedious, but it also creates accountability and a method of controlling your business.  More often than not with a start-up there is the idea person, the money person, and the person who can engineer/produce/implement the idea.  With three people involved there has to be a way to control how the interact.  Further, once the business develops, the goal may be to seek more investment, and thus new additional owners of the corporation (shareholders) join the entity.  Thus the need for bylaws to dictate how this all operates.

Some Other Typical Provisions that Appear in the Bylaws

These other provisions are in no particular order, and some may or may not appear in the bylaws.  Further some of them may be required, and others just appear as it is customary.  The point for a business owner using a corporation should know that some of these things appear in your bylaws, the way you govern your business.

Sample Subjects of Bylaw Provisions:

  1. Special Meetings (as opposed to the Annual Meetings)
  2. Required Officers, Duties of Officers
  3. Record Date (this refers to what date a record reflects what shareholders are entitled to notice of a shareholders’ meeting)
  4. Number if Directors, Director qualifications and Duties
  5. Notice (how notice is given for certain circumstances)
  6. Stock Certificate Signatures
  7. Restriction on Transfer of Stock
  8. Shareholder Agreements

There are other provisions that more often than not appear in bylaws, but this is just meant as a sample.  Finally, please take heed you should consider seeking an expert’s help when drafting your bylaws, as this is a foundational document of your corporation.  I have seen many founders wanting to start fast and adopting poor or wrong bylaws, and then requiring “cleanup” work, which is often more costly and time-consuming after the fact of initial adoption.

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.