Share this Page URL

Where to Incorporate > Where to Incorporate - Pg. 30

First Steps 30 Figure 2.7. IRS form 2553. Points on which state laws vary: · Types of consideration (payment) that can be used to buy stock · Enforceability of voting agreements (agreements that essentially allow certain shareholders to elect a certain number of board seats) · Ability of fewer than all shareholders to act by written consent · Ability to stagger director elections (rather than having all directors up for election at once) · Indemnification of officers and directors · Validity of "poison pill" (anti-takeover) measures · Shareholder appraisal rights (discussed in Chapter Three) If your corporation is privately held (that is, not publicly traded) and it meets the 50/50 test (more than 50 percent of the shares are owned by California residents and more than 50 percent of the business is conducted in California), you will be subject to California corporate governance laws, which have a few quirks worth noting: · California corporations may pay dividends or buy back shares only to the extent of the corpo- ration's accumulated earnings. · Privately held corporations must allow cumulative voting. Under cumulative voting, every share- holder receives that number of votes equal to the number of shares owned multiplied by the number of directors to be elected. This can give minority shareholders power to elect directors. Example: DevCo has 100 outstanding shares of voting stock-- Shareholder A owns 20 percent, Shareholder B owns 80 percent, and five board members are up for election. Shareholder A will have 20 votes to distribute as she sees fit over the nominees for the five board slots, Shareholder B has 80 to do likewise. Shareholder A can therefore be guaranteed one director of her choosing on the board if she places all 200 votes with one nominee. · Staggering of board elections is prohibited; all directors must be elected annually, creating more potential for radical change.