SHAREHOLDERS' AGREEMENTS, BUY/SELL AGREEMENTS, AND VOTING TRUSTS ...

88 Pages·2000·0.4 MB·English

SHAREHOLDERS’ AGREEMENTS,
BUY/SELL AGREEMENTS, AND VOTING TRUSTS
JOHN R. WILLIFORD
JACKSON WALKER L.L.P.
1100 Louisiana, Suite 4200
Houston, Texas 77002
REPRESENTING START-UPS AND
NEW COMPANIES
Dallas, Texas
September 14-15, 2000
Houston, Texas
September 21-22, 2000
TABLE OF CONTENTS
I. SCOPE OF OUTLINE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -1-
A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -1-
B. Choice of Entity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -1-
C. Overview of Outline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -2-
II. STATUTORY ANALYSIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -2-
A. Shareholders Agreements - Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -2-
B. Voting Agreements and Trusts - Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -7-
C. Shareholder Agreements - Delaware . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -8-
D. Voting Agreements and Trusts - Delaware . . . . . . . . . . . . . . . . . . . . . . . . . . -10-
III. ANATOMY OF SHAREHOLDERS AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . -11-
A. Purpose and Client’s Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -11-
B. How to paper: Articles, Bylaws or Contract? . . . . . . . . . . . . . . . . . . . . . . . . -12-
1. Articles of Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -12-
2. Bylaws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -12-
3. Written Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -12-
C. The Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -13-
1. Sellers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -13-
2. Buyers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -13-
3. The Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -15-
D. Triggering Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -15-
1. Voluntary transfers for value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -15-
2. Pledges & Foreclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -16-
3. Gifts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -16-
4. Death . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -16-
5. Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -17-
6. Divorce . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -17-
7. Incapacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -18-
8. Termination of Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -18-
E. Obligation or Option. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -18-
F. Determining Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -19-
G. Financing Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -20-
H. Amendment and Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -21-
I. Dispute Resolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -22-
IV. Anatomy of Voting Agreements and Trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -22-
A. Control Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -22-
B. The Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -22-
C. Voting Mechanisms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -23-
D. Duration, Termination and Amendment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -23-
E. Remedies for Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -24-
V. Marital Property Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -24-
VI. Ethical Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -25-
VII. Federal Tax Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -26-
A. C Corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -26-
B. S Corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -27-
VIII. The Venture Capital Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -28-
IX. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -29-
Appendix A Checklist for Shareholders Agreement A-1
Appendix B Buy-Sell Agreement Employee-Owned Company (Texas) B-1
Appendix C Voting Trust Agreement (Texas) C-1
Appendix D Venture Capital Voting Agreement (Del) D-1
Appendix E Venture Capital Shareholder Agreement (Del) E-1
Appendix F Venture Capital Buy-Sell (Del) F-1
I. SCOPE OF OUTLINE
A. Introduction
This outline focuses on the use of shareholders’ agreements and voting control
agreements in the context of the start-up or venture capital funded company.
Conceptually, shareholder agreements and voting control mechanisms are contractual
modifications of two fundamental principals of the legal business entity: (i) the right
to transfer ownership interests in the entity, and (ii) management control of the entity
proportionate to economic ownership.
As between shareholder agreements (that modify and restrict the right to transfer
ownership) and voting control agreements (that re-arrange voting power
disproportionately to economic ownership), shareholder agreements are more
prevalent and generally requested by business entity owners. In a majority of start-up
businesses, most owners are comfortable with the concept that each owner’s vote is
directly proportionate to the owner’s percentage ownership of the equity in the
enterprise and will seek to structure the equity ownership in a way that results in
majority control through straight voting. On the other hand, in the early stages of
start-up and emerging companies, the tolerance of the owners to allow ownership
participation to be transferred outside of an initial core group is very limited or non-
existent, even insofar as spouses, relatives and fiduciaries are concerned. As a result
of this understandable ostracism of outsiders, the existing owners of the business
entity will desire that the shareholder agreement restrict transfer of stock ownership
in every conceivable fact situation.
B. Choice of Entity
This outline and the accompanying sample agreements focus exclusively on the
business corporation as the selected entity to conduct the business of the start-up
enterprise. In the latter part of the twentieth century, the business law statutes of all
states have undergone major transformations to allow business entity owners wider
ranges of choices: general partnerships, limited partnerships, limited liability
companies, registered limited liability partnerships and statutory close corporations
are all now on the menu. Furthermore, the adoption by the Internal Revenue Service
in 1997 of the “check-the-box” regulations has spurred even greater creativity of
lawyers and accountants in structuring start-up entities and relationships among
entities. To a large degree, however, the concepts and techniques of restricting
transfer of equity ownership retain similar characteristics among all the entities, even
though the semantics and “papering” of the transactions are superficially very
different. For example, an option or obligation of a limited partnership or general
partner to buy out the interest of a limited partner will be cloaked in the verbiage of
partnership law and will likely be documented inside the limited partnership agreement
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(as opposed to a corporate shareholders agreement, which is more typically a stand-
alone contract). But at its core, the same concepts must be analyzed and then drafted
with particularity: (1) what events trigger the buy-sell transaction; (2) who/what is the
identity of the purchaser; (3) how is price determined; (4) what are the mechanics of
giving notice and closing the transaction; (5) how will the purchase be financed; (6)
what are the remedies in the event of a breach or default; (7) how are the remaining
owners of the entity affected; (8) what are the federal and state tax consequences to
the entity, the selling owner and the remaining owners; (9) how is the agreement to
be modified or terminated under future circumstances; (10) what notice and
information is to be given third parties so that the desired transaction is binding upon
them; and (11) how are disputes to be resolved.
C. Overview of Outline
The principal focus of this outline is to assist the lawyer to spot issues, ask the
appropriate questions of clients and draft, re-draft, and re-draft. This is an area in
which freedom of contract reigns supreme. While the statutory background and case
law background is essential, it is short and readily easily digestible. Most all of the
reported Texas cases interpreting shareholder-type agreements–particularly rights of
first refusal-- would have turned out differently if the disputed issues in the contract
had been identified and drafted with specificity. Consequently, the thrust of this
outline centers on samples of shareholder and voting agreements, rather attempting
an exhaustive analysis of the nuances of statutes and cases.
To assist with basic issue identification, see Appendix A–Checklist for Shareholders
Agreement.
II. STATUTORY ANALYSIS
A. Shareholders Agreements - Texas
There are two Texas Business Corporation Act (TBCA) articles that should be
frequently reviewed in the context of preparing shareholder agreements.
Art. 2.22.Transfer of Shares and Other Securities and Restrictions on Transfer
A. The shares and other securities of a corporation shall be personal property
for all purposes and shall be transferable in accordance with the provisions of Chapter 8 –
Investment Securities – of the Business and Commerce Code, as amended, except as
otherwise provided in this Act.
B. A restriction on the transfer or registration of transfer of a security may be
imposed by the articles of incorporation, or by-laws, or a written agreement among any
number of the holders of such securities, or a written agreement among any number of the
holders and the corporation provided a counterpart of such agreement shall be placed on
file by the corporation at its principal place of business or its registered office and shall be
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subject to the same right of examination by a shareholder of the corporation, in person or
by agent, attorney or accountant, as are the books and records of the corporation. No
restriction so imposed shall be valid with respect to any security issued prior to the adoption
of the restriction unless the holder of the security voted in favor of the restriction or is a
party to the agreement imposing it.
C. Any restriction on the transfer or registration of transfer of a security of a
corporation, if reasonable and noted conspicuously on the certificate or other instrument
representing the security or, in the case of an uncertificated security, if reasonable and if
notation of the restriction is contained in the notice sent pursuant to Section D of Article 2.19
of this Act with respect to the security, shall be specifically enforceable against the holder
of the restricted security or any successor or transferee of the holder. Unless noted
conspicuously on the certificate or other instrument representing the security or, in the case
of an uncertificated security, unless notation of the restriction is contained in the notice sent
pursuant to Section D of Article 2.19 of this Act with respect to the security, a restriction,
even though otherwise enforceable, is ineffective against a transferee for value without
actual knowledge of the restriction at the time of the transfer or against any subsequent
transferee (whether or not for value), but such a restriction shall be specifically enforceable
against any other person who is not a transferee for value from and after the time that the
person acquires actual knowledge of the existence of the restriction.
D. In particular and without limiting the general power granted in Sections B
and C of this Article to impose reasonable restrictions, a restriction on the transfer or
registration of transfer of securities of a corporation shall be valid if it reasonably:
(1) Obligates the holders of the restricted securities to offer to the
corporation or to any other holders of securities of the corporation or to any other person or
to any combination of the foregoing, a prior opportunity, to be exercised within a reasonable
time, to acquire the restricted securities; or
(2) Obligates the corporation to the extent permitted by this Act or any
holder of securities of the corporation or any other person, or any combination of the
foregoing, to purchase the securities which are the subject of an agreement respecting the
purchase and sale of the restricted securities; or
(3) Requires the corporation or the holders of any class of securities
of the corporation to consent to any proposed transfer of the restricted securities or to
approve the proposed transferee of the restricted securities for the purpose of preventing
violations of federal or state laws; or
(4) Prohibits the transfer of the restricted securities to designated
persons or classes of persons, and such designation is not manifestly unreasonable; or
(5) Maintains the status of the corporation as an electing small
business corporation under Subchapter S of the United States Internal Revenue Code,
maintains any other tax advantage to the corporation, or maintains the status of the
corporation as a close corporation under Part Twelve of this Act.
E. A corporation that has adopted a bylaw, or is a party to an agreement,
restricting the transfer of its shares or other securities may file such bylaw or agreement as
a matter of public record with the Secretary of State, as follows:
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(1) The corporation shall file a copy of the bylaw or agreement in the
office of the Secretary of State together with an attached statement setting forth:
(a) the name of the corporation;
(b) that the copy of the bylaw or agreement is a true and
correct copy of the same; and
(c) that such filing has been duly authorized by the board of
directors or, in the case of a close corporation that, in conformance with Part Twelve of this
Act, is managed in some other manner pursuant to a shareholders' agreement, by the
shareholders or by the persons empowered by the agreement to manage its business and
affairs.
(2) Such statement shall be executed on behalf of the corporation by
an officer. The original and a copy of the statement shall be delivered to the Secretary of
State with copies of such bylaw or agreement restricting the transfer of shares or other
securities attached thereto. If the Secretary of State finds that such statement conforms to
law and the appropriate filing fee has been paid as prescribed by law, he shall:
(a) endorse on the original and the copy the word "Filed", and
the month, day, and year of the filing thereof;
(b) file the original in his office; and
(c) return the copy to the corporation or its representative.
(3) After the filing of such statement by the Secretary of State, the
bylaw or agreement restricting the transfer of shares or other securities shall become a
matter of public record and the fact of such filing shall be stated on any certificate
representing the shares or other securities so restricted if required by Section G, Article
2.19, of this Act.
F. A corporation that is a party to an agreement restricting the transfer of its
shares or other securities may make such agreement part of its articles of incorporation
without restating the provisions of such agreement therein by complying with the provisions
of Part Four of this Act for amendment of the articles of incorporation. If such agreement
shall alter any provision of the original or amended articles of incorporation, the articles of
amendment shall identify by reference or description the altered provision. If such
agreement is to be an addition to the original or amended articles of incorporation, the
articles of amendment shall state that fact. The articles of amendment shall have attached
thereto a copy of the agreement restricting the transfer of shares or other securities, and
shall state that the attached copy of such agreement is a true and correct copy of the same
and that its inclusion as part of the articles of incorporation has been duly authorized in the
manner required by this Act to amend the articles of incorporation.
G. When shares are registered on the books of a corporation in the names of
two or more persons as joint owners with the right of survivorship, after the death of a joint
owner and before the time that the corporation receives actual written notice that parties
other than the surviving joint owner or owners claim an interest in the shares or any
distributions thereon, the corporation may record on its books and otherwise effect the
transfer of those shares to any person, firm, or corporation (including that surviving joint
owner individually) and pay any distributions made in respect of those shares, in each case
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as if the surviving joint owner or owners were the absolute owners of the shares. A
corporation permitting such a transfer by and making any distribution to such a surviving
joint owner or owners before the receipt of written notice from other parties claiming an
interest in those shares or distributions is discharged from all liability for the transfer or
payment so made; provided, however, that the discharge of the corporation from liability
and the transfer of full legal and equitable title of the shares in no way affects, reduces, or
limits any cause of action existing in favor of any owner of an interest in those shares or
distributions against the surviving owner or owners.

The second important Texas statute was recently added to the TBCA in 1997:
Art. 2-30-1. Shareholder Agreements
A. Scope of Agreement. An agreement among the shareholders of a
corporation that complies with this article is effective among the shareholders and the
corporation even though it is inconsistent with one or more provisions of this Act in that it:
(1) restricts the discretion or powers of the board of directors;
(2) eliminates the board of directors and permits management of the
business and affairs of the corporation by its shareholders, or in whole or in part by one or
more of its shareholders, or by one or more persons not shareholders;
(3) establishes the natural persons who shall be the directors or officers
of the corporation, their term of office or manner of selection or removal, or terms or
conditions of employment of any director, officer, or other employee of the corporation,
regardless of the length of employment;
(4) governs the authorization or making of distributions whether in
proportion to ownership of shares, subject to the limitations in Article 2.38 of this Act, or
determines the manner in which profits and losses shall be apportioned;
(5) governs, in general or in regard to specific matters, the exercise or
division of voting power by and between the shareholders, directors (if any), or other
persons or by or among any of them, including use of disproportionate voting rights or
director proxies;
(6) establishes the terms and conditions of any agreement for the
transfer or use of property or the provision of services between the corporation and any
shareholder, director, officer, or employee of the corporation, or other person or among any
of them;
(7) authorizes arbitration or grants authority to any shareholder or other
person as to any issue about which there is a deadlock among the directors, shareholders,
or other person or persons empowered to manage the corporation to resolve that issue;
(8) requires dissolution of the corporation at the request of one or more
of the shareholders or on the occurrence of a specified event or contingency, in which case
the dissolution of the corporation shall proceed as if all the shareholders had consented in
writing to dissolution of the corporation as provided in Article 6.02 of this Act; or
(9) otherwise governs the exercise of corporate powers, the
management of the business and affairs of the corporation, or the relationship among the
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shareholders, the directors, and the corporation, or among any of them, as if the corporation
were a partnership or in a manner that would otherwise be appropriate only among partners,
and is not contrary to public policy.
B. Procedures Required. An agreement authorized by this article shall be:
(1) set forth (a) in the articles of incorporation or bylaws and approved
by all persons who are shareholders at the time of the agreement,
or (b) in a written agreement that is signed by all the persons who
are shareholders at the time of the agreement and is made known
to the corporation;
(2) subject to amendment only by all persons who are shareholders at
the time of the amendment, unless the agreement provides
otherwise; and
(3) valid for 10 years, unless the agreement provides otherwise.
C. Notation of Existence. The existence of an agreement authorized by this
article shall be noted conspicuously on the front or back of each certificate for outstanding
shares or on the information statement required for uncertificated shares by Article 2.19 of
this Act and shall include the following: "These shares are subject to the provisions of a
shareholders' agreement that may provide for management of the corporation in a manner
different than in other corporations and may subject a shareholder to certain obligations or
liabilities not otherwise imposed on shareholders in other corporations." If at the time of the
agreement the corporation has shares outstanding represented by certificates, the
corporation shall recall the outstanding certificates and issue substitute certificates that
comply with this section. The failure to note the existence of the agreement on the
certificate or information statement shall not affect the validity of the agreement or any
action taken pursuant to it.
D. Right of Rescission. Any purchaser of shares who, at the time of purchase,
did not have knowledge of the existence of an agreement authorized by this article shall be
entitled to rescission of the purchase. A purchaser shall be deemed to have knowledge of
the existence of the agreement if its existence is noted on the certificate or information
statement for the shares in compliance with Section C of this article and, if the shares are
not represented by a certificate, the information statement noting existence of the
agreement is delivered to the purchaser at or prior to the time of purchase of the shares. An
action to enforce the right of rescission authorized by this section must be commenced
within the earlier of 90 days after discovery of the existence of the agreement or two years
after time of the purchase of the shares.
E. Cessation. An agreement authorized by this article shall cease to be
effective when shares of the corporation are listed on a national securities exchange, quoted
on an interdealer quotation system of a national securities association, or regularly traded
in a market maintained by one or more members of a national or affiliated securities
association. If the agreement ceases to be effective for any reason and the corporation does
not have a board of directors, governance by a board of directors shall be instituted or
reinstated in the manner provided in Section C, Article 12.23, of this Act. If the agreement
is contained or referred to in the corporation's articles of incorporation or bylaws, the board
of directors may adopt an amendment to the articles of incorporation or bylaws, without
shareholder action, to delete the agreement and any references to it.
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F. Managerial Liabilities. An agreement authorized by this article that limits the
discretion or powers of the board of directors or supplants the board of directors shall relieve
the directors of, and impose on the person or persons in whom such discretion or powers
or management of the business and affairs of the corporation are vested, liability for action
or omissions imposed by this Act or other law on directors to the extent that the discretion
or powers of the directors are limited or supplanted by the agreement.
G. Limitation of Liability. The existence or performance of an agreement
authorized by this article shall not be grounds for imposing personal liability on any
shareholder for the acts or obligations of the corporation by disregarding the separate entity
of the corporation or otherwise, even if the agreement or its performance:
(1) treats the corporation as if it were a partnership or in a manner that
otherwise is appropriate only among partners;
(2) results in the corporation being considered a partnership for
purposes of taxation; or
(3) results in failure to observe the corporate formalities otherwise
applicable to the matters governed by the agreement.
H. If No Shares Issued. Incorporators or subscribers for the shares may act as
shareholders with respect to an agreement authorized by this article if no shares have been
issued when the agreement is signed. Added by Acts 1997, 75th Leg., ch. 375, § 10, eff.
Sept. 1, 199
B. Voting Agreements and Trusts - Texas
An attorney preparing a voting trust or voting agreement for a Texas
corporation should first consult TBCA art. 2.30:
Art. 2.30. Voting Trusts and Voting Agreements
A. Any number of shareholders of a corporation may enter into a written voting
trust agreement for the purpose of conferring upon a trustee or trustees the right to vote or
otherwise represent shares of the corporation. The shares that are to be subject to the
agreement shall be transferred to the trustee or trustees for purposes of the agreement, and
a counterpart of the agreement shall be deposited with the corporation at its principal place
of business or registered office. The counterpart of the voting trust agreement so deposited
with the corporation shall be subject to the same right of examination by a shareholder of
the corporation, in person or by agent or attorney, as are the books and records of the
corporation, and shall be subject to examination by any holder of a beneficial interest in the
voting trust, either in person or by agent or attorney, at any reasonable time for any proper
purpose.
B. Any number of shareholders of a corporation, or any number of
shareholders of a corporation and the corporation itself, may enter into a written voting
agreement for the purpose of providing that shares of the corporation shall be voted in the
manner prescribed in the agreement. A counterpart of the agreement shall be deposited
with the corporation at its principal place of business or registered office and shall be subject
to the same right of examination by a shareholder of the corporation, in person or by agent
or attorney, as are the books and records of the corporation. The agreement, if noted
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