Does a negative “Say on Pay” vote trigger a breach of fiduciary duty claim?

The Dodd-Frank Act, passed in 2010, includes the so-called “Say on Pay” provision for publicly traded companies. This provision requires that, at least once every three years, the shareholders of a publicly traded company must vote on its executive compensation arrangements. In addition, the shareholders also vote at least once every six years on the frequency of the “say on pay” vote.  Shareholders are able to elect whether the vote will happen once every one, two, or three years.  In most companies, the shareholders have chosen to have the “say on pay” vote conducted annually.  Publicly traded companies are also required  to disclose, in any proxy solicitation asking for the approval of a merger, acquisition, or other sale of the company, any compensation from “golden parachutes” that would be triggered.  Shareholders also have a chance to “approve” (or not approve) such golden parachute payments. [Read more…]

Do managers of Delaware LLCs have the same fiduciary duties as directors of Delaware corporations?

Recently, the Delaware Court of Chancery issued a ruling on the question of whether a manager (or managing member) of a Delaware limited liability company owes fiduciary duties to the company and its members.  The court ruled that it does.

As a legal practitioner, this result is unsurprising.  I think most business lawyers, both when representing LLC managers and when representing LLCs and their members, operate under the assumption that a manager owes a fiduciary duty of care and loyalty to the company and its members.[1]  What is somewhat surprising is (a) that this conclusion was ever in doubt and (b) more importantly, in light of recent comments made by the Chief Justice of the Delaware Supreme Court, this conclusion may still be in doubt if the ruling is appealed. [Read more…]

5 Legal Mistakes Often Made By Startups

Entrepreneur magazine recently posted an article on their blog describing five overlooked legal mistakes that entrepreneurs often make. It’s a good worthwhile read. The mistakes mentioned are:

  1. Making handshake deals (i.e. not in writing) with clients and vendors.
  2. Choosing the wrong business structure (i.e. sole proprietorship, LLC, Corporation).
  3. Entering into a partnership without a detailed written agreement.
  4. Entering into a 50-50 partnership.
  5. Filing a trademark without doing a detailed and extensive search before hand.

I wholeheartedly agree with four out of the five common mistakes. Perhaps the one I may partially disagree with is mistake number 4: entering into a 50-50 partnership. 50-50 partnerships can certainly present challenges when it comes to governing a company and general decision-making when there is a deadlock between the partners. However, I think categorically ruling out such an arrangement is a mistake. Rather, if the partners desire to establish a 50-50 partnership and that relationship is important to them, they should plan ahead and consider adding detailed provisions in their partnership agreement which deals with deadlocks. In addition, the company buy-sell provisions will have to be carefully considered as well.

Article Referenced: Five Overlooked Legal Mistakes Entrepreneurs Make

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© 2011 Alexander J. Davie — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.

Even in deals with “yourself,” you still need proper legal documents.

One situation I often encounter with small businesses is that sometimes they don’t always document the transactions they enter into with their owners and other related parties. For instance, let’s say that two owners of a corporation decide that their corporation needs more funding. However, they don’t want to invest more equity into the business. [Read more…]

Should new business owners set up their business as a Wyoming LLC?

Previously, I have written about the advantages and disadvantages of incorporating in Delaware or Nevada as a small business owner. With regards to Delaware, my conclusion was that, for most small companies, the disadvantages outweigh any advantages. With regards to Nevada, my view was that it is highly uncertain that many of the advertised benefits of incorporation in Nevada, such as greater asset protection and greater liability protection, would actually materialize. In this piece, I’ll cover my thoughts on another state that is frequently pitched as a good place for forming your business: Wyoming. [Read more…]