OMG! My title rhymes! I can add “Poet” to my list of professions. Let me go and do that on LinkedIn right now.
Anyway, so, you and your fellow founders are ready to start. You’ve got your Founders Agreement in place and you are ready to set up a corporation and begin your journey towards success and riches! Yay!
Naturally, you cannot do this without another legal document. 🙂 Rest easy, at least at this stage of the game, this one probably isn’t going to be too bad.
As part of establishing and registering your corporation, you will need to draft Articles of Association (alternatively, Articles of Incorporation or, in Israel, Takanon תקנון). These Articles serve as a company’s constitution—they detail out the framework and rules for company ownership and management. Fortunately, for smaller entities, these tend to be boilerplate; whomever is handling the registration for you just uses a template, fills in a few blanks and voila! Articles of Association! Of course, as the company grows and becomes more complex, the Articles will be amended to reflect this. In many places one is required to file a copy of the Articles with the relevant government agency as part of the process of registering a corporation and may also be required to file new versions as the Articles are updated.
Most definitions of “Articles of Association” will note that the document will include a definition of the company’s purpose. Now this is technically true. However a lot of the time, the purpose given will be as broad and general as is humanly possible. Think along the lines of “engage in legal commercial activities” as opposed to “operate a cookie factory”. This gives you the flexibility to change your company’s line of business in the future without a lot of legal fuss.
What sorts of matters are you likely to find discussed in the Articles?
- Company name.
- Company purpose (see comment above).
- Where the company is being incorporated.
- The company’s legal form (e.g. private corporation versus publicly traded corporation).
- Capital structure. In addition to a listing of the company’s share capital, this section will include copious amounts of often painfully detailed information both on the shares themselves as well as on events which impact capital structure. Examples include: voting rights, conversion rights, anti-dilution protection rights and calculations, impact of share splits or combinations, how and when the capital structure and/or the number of shares can be changed and myriad other equity-related issues. As additional classes of shares are added, the length of this section is liable to increase exponentially as the terms applicable to each class may vary.
- Share purchase and payment.
- Share sales and transfers. For example, shareholders may be required to offer shares to existing shareholders before selling them to a third party.
- Dividend policy.
- Shareholder meetings and voting rights.
- Board of Directors operating manual. Everything from the number of directors, how they are selected and when and how they operate to what happens if a director is on vacation and there is a meeting.
- Appointment of the CEO.
- Company management and decision making. What decisions may only be made by the shareholders? What decisions may only be made by the Board? What decisions require a unanimous vote, or a super-majority? What decisions is the Board required to make (e.g. appointing an auditor or establishing the company signature rights).
- Financial recordkeeping and reporting.
- Company liquidation. What happens on an exit event, such as an IPO or merger? If the Company goes bankrupt?
Obviously, the above is not a comprehensive list. Certain elements of the Articles are likely to be based on the applicable laws and regulations in the country or state where the company has been incorporated. For example, the Articles of Association for an Israeli corporation will always include terms that the shareholders must hold an annual meeting and that the Board of Directors must appoint the CEO and auditor, as these are dictated by the Israeli Corporations Law. And of course, Articles will further vary from company to company based on how the owners of the company decide to manage company affairs!
One final note…. In the UK and other countries, the information above is broken up into two documents, a Memorandum of Association and Articles of Association. While the structure is therefore a bit different, the overall goal—to create a framework for your company—remain the same.