Shareholder Voting Rights

Under Colorado law, what corporate actions require a shareholder vote or other type of shareholder approval?

The shareholders of a corporation generally have decision making power over the following corporate actions:

  • Annually electing the members of the corporation’s board of directors
  • Removal of a member of the corporation’s board of directors
  • Amendment or restatement of the Articles of Incorporation of the corporation
  • Amending or restating the Bylaws of the corporation (however, many times the Bylaws authorize the board of directors to amend or restate the Bylaws without shareholder approval)
  • Merging the corporation with another business entity
  • Dissolving the corporation or liquidating the assets of the corporation
  • Selling, leasing or exchanging all or a substantial majority of the corporation’s assets
  • Approving the conversion to a different type of business entity
  • Approving business transactions or business combinations with corporation shareholders that would otherwise be prohibited due to a conflict of interest
  • Approving conflict of interest transactions between a member of the corporation’s board of directors and the corporation

Do shareholders have the power to force the corporation’s board of directors to take a certain course of action?

Generally, shareholders of a corporation do not have the power to require the board of directors of a corporation to pursue a particular course of action. However, the shareholders’ power to annually elect the directors gives the shareholders some control over the board of directors and the decisions made by the board. The shareholders also have the power to remove members of the board of directors either with or without ’cause’ giving the shareholders another method to influence or control corporate activities. Typically, the required vote removing a director equals the majority of the outstanding shares of stock of the corporation entitled to vote on the issue pursuant to the corporation’s Articles of Incorporation.

How much liability does a shareholder have for the actions of a corporation?

A shareholder is not generally liable for the actions of the corporation and has limited liability protection for corporate actions. However, there are certain times when a shareholder can be held liable for corporate activities. In such a situation, a shareholder’s liability for corporate actions is generally equal to the amount of their equity investment in the corporation (there are some exceptions). This is because the shareholder has limited ability to control the actions of the corporation. Also, shareholders are not typically involved in management of the corporation on a daily basis unless the corporation is closely-held. Shareholders also have rights to invalidate acts of the corporation that should have been approved by the shareholders but were not submitted to a shareholder vote. For these reason’s a shareholder is usually only liable for corporate actions to the extent of his or her equity investment in the corporation.

For more information see Colorado Revised Statutes – Title 7:

https://leg.colorado.gov/agencies/office-legislative-legal-services/colorado-revised-statutes

For more information on the duties of majority shareholders to minority shareholders:

https://legalvaughan.com/wp-admin/post.php?post=1600&action=edit

Reviewing a Letter of Intent for a Real Estate Transaction

Parties to a real estate transaction use a letter of intent to agree on, and describe, the important terms of a real estate transaction. The important terms of a real estate transaction are typically the financial terms and the other contract terms that have a substantial affect on one or both of the parties after or during the transaction. The parties use the the letter of intent as a guide in preparing the real estate purchase and sale contract and other binding documents for the transaction.

When reviewing a letter of intent, the first step is determining whether or not the letter of intent is binding on the parties. Although most letters of intent are non-binding they often contain specific terms and conditions which are binding. A few examples of clauses that are typically binding are the confidentiality, dispute resolution, choice of venue and choice of jurisdiction clauses of the letter of intent. These clauses are enforceable even if the parties do not sign a formal agreement memorializing the proposed transaction. Therefore, it is important to review the entire letter of intent to identify any such binding provisions.

The specific language of the letter of intent is also crucial to ensuring the letter of intent is non-binding. If a a letter of intent includes all of the material terms to the transaction then the letter of intent may be binding on the parties. For example, courts have found that including the warranties and representations of the parties to the transaction in the letter of intent, together with the financial terms, may create a binding contract between the parties.

Another clause that appears in a letter of intent causing the agreement to become binding on the parties is a clause stating the letter of intent is enforceable even if the terms of the subject transaction are not completed in a formal written agreement between the parties. Courts have found that including this type of language in a letter of intent is evidence of the intent to create a binding letter of intent.

Deferred Compensation Plans – Common Types

Deferred compensation plans are used by businesses to compensate and incentivize their employees without offering the employees equity ownership in the business. A deferred compensation plan for an executive allows the business to retain talent by compensating the executive over a longer period of time such as during their retirement.

The following are some common types of deferred compensation plans:

Phantom Share Plan

  • Imitates equity ownership by issuing ‘shares’ that have a value connected to the fair market value of the outstanding stock of the company
  • Phantom ‘shares’ can be issued pro-rata to employees or can be tied to productivity; vesting is usually by meeting performance standards or over a certain length of time
  • The value of the phantom shares increase or decrease together with the fair market value of the business
  • Payments tied to the phantom shares are forfeited if the employee leaves prior to the occurrence of a payment trigger
  • Typical payment triggers are the sale of the business, retirement, death or disability and payment on a certain future date
  • The amount of the payment received is equal to the per-share value of the company on the trigger date
  • Employer receives no income tax deduction until a payment is made to employee; employee defers income tax until payment is received or the date the payment is not subject to forfeiture by employee

Long Term Incentive Plan

  • Rewards employee performance; not connected to the financial success of the company or the fair market value of the company stock
  • Typically paid over a period of 3-5 years; can be very structured with complicated payment schedules
  • No vesting; employees must be employed on December 31 of the year in which performance is measured to receive plan payments; payment forfeited if not employed on December 31
  • Payment equal to a percentage of employee’s regular salary
  • Employer receives income tax deduction when payment is made to employee; employee incurs income tax upon receipt of payment

Nonqualified Deferred Compensation Plan

  • Non-qualified plans avoid limitations placed on other types of qualified retirement accounts such as 401k
  • Non-qualified plans may limit participation to certain executives, make larger contributions and require longer vesting periods than qualified plans
  • Employee may defer income tax over a longer period of time as payments to employee are deferred
  • Appealing option for employees who have maxed out their contributions to qualified plans
  • Business segregates funds to pay awards; funds remain subject to creditors of the business and therefore subject to a substantial risk of forfeiture; resulting in no income tax due to employee on the award of deferred compensation
  • Vesting periods can be a substantial length of time (15 years)
  • Payments can be accelerated if there is a change of control event
  • Typical payment triggers are the later of two events: a fixed date, retirement, death, disability, change in control, termination of services
  • Payment amount is equal to a set formula which the business uses to make annual contributions of cash to the plan
  • Payment is generally in the form of an annuity or a lump sum; employee has the option to choose the form of payment
  • Employers can not deduct amounts contributed to the plan and payments are not subject to income tax by employee until they are distributed; however the employee is required to pay FICA taxes up and until payment is received

Trademark: ‘Generic.com’ trademarks OK with Supreme Court

Recently, the U.S. Supreme Court ruled that a generic word and .com when used together, such as in the company name “Booking.com”, could be eligible for exclusive U.S. trademark protection. This decision overturned a long standing U.S. Patent and Trademark Office (“USPTO”) prohibition on granting U.S. trademark registration for trademarks that contained a generic word and .com.

The Supreme Court ruled that a generic word and .com when combined together would only be considered generic, and therefore not registrable, if when combined they have a generic meaning to consumers as a class of services instead of a specific class member or business providing the services. This ruling may allow for additional .com trademarks to be registered with the USPTO and for new arguments that any generic term may become a trademark if consumers perceive it to be a particular source of goods or services.

In the present case, the online hotel reservation company “Booking.com” sought U.S. trademark registration for its company name which contained the generic term “booking” as used in the online hotel reservation industry. The company argued that consumers did not perceive “Booking.com” as a class of services related to booking hotel rooms, but rather as a distinct, individual and separate business which provided online hotel reservation booking services. Booking.com argued that a consumer’s perception of the generic term is integral to determining if a trademark is generic.

The Supreme Court agreed with Booking.com and lower court rulings which had found that consumers did not identify Booking.com as a class of hotel reservation services but rather as a distinct business that offers online hotel reservation services. Therefore, Booking.com was registrable as a protected trademark in the U.S. even though it contained the generic word “booking” as used in the travel industry for reserving hotel rooms. In explaining its reasoning, the court stated the ruling is limited to a situation where consumers perceived the generic term as identifying either (i) a class in general or (ii) a specific class member. If consumers perceive the trademark to represent a class rather than a specific, distinct class member or business then the term (and trademark) is not registrable as it is considered generic.

In further explaining its reasoning, the Supreme Court stated that internet domain names are unique because only one entity can be assigned the domain name, unlike a trade name which in many states including Colorado is not exclusive to the holder of the trade name. As a result, the Court observed, consumers understand that a particular domain name could identify a unique source, rather than only identifying a generic class of goods or services. The Court also noted that the USPTO’s understanding of past Supreme Court precedent related to the registration of generic terms as protected trademarks was “flawed” because it excluded consumer perception as a factor in determining whether a trademark or particular term is generic.

Closely Held Business – 7 Duties to Minority Owners

Generally, the majority owners of a closely held (private, non-public) business have certain legal obligations to the minority owners preventing the majority owners from abusing their position and taking certain corporate actions without the approval of the minority owners.

For example, in a general partnership where one partner owns 51% of the ownership interests in the partnership and the other partner owns 49% of the ownership interests, absent a written agreement to the contrary, in most jurisdictions the 51% owner has strict obligations and duties of loyalty, care and good faith to the 49% owner and to the business itself.

The concept of a majority owner having duties and obligations directly to minority owners arose in partnership law to prevent a majority owner from oppressing the rights of the minority owner. Certain legal doctrines such as the free transferability of business property and the business judgment rule frequently led to situations where the minority owner’s interest in the value of a business was diluted, significantly reduced in value or even made worthless, without the consent of the minority owner.

The duties of loyalty, care and good faith between partners in a partnership have also been applied to corporate shareholders. Although many states follow the modern Delaware approach of eliminating these duties for shareholders of a closely held corporation, the concepts have now made their way into corporate law in the form of a general duty of shareholders of a corporation to treat each other with “utmost good faith and fair dealing”, especially in the case of a closely held corporation.

The following examples are 7 situations where the majority owner has been found to have either (a) violated their duty of loyalty, care or good faith or (b) have not acted with the ‘utmost good faith and fair dealing’ in relation to the minority owner of a business:

  • Attempting to force a buyout of the minority owner by eliminating salary, distributions or dividends
  • Diluting a minority owner’s interest by issuing additional voting shares to force a buyout at low prices
  • Denying the minority owner access to important financial, tax or business enterprise information
  • Removing a minority interest from ongoing participation in management and decision making
  • Locking an employee out of a business, a workstation or any other type of shared company facility
  • Usurping and diverting corporate opportunities for the benefit of the majority owner instead of first offering the opportunities to the business
  • Diluting the minority’s ownership interest at unfair prices in order to force a buyout