Key Legal Documents for a Startup Company
In order to legally incorporate your company, you are required to draft and maintain a series of legal documents. These documents are necessary so that the government, customers and members of the public can see basic information about your company and confirm that you are a properly organized business that follows the law. In addition to government-mandated documents, a few other legal documents are commonly used to protect your business from legal disputes with shareholders, employees or competitors. This article will introduce you to these documents and the need to keep them up to date in order to comply with governmental regulation of corporations.
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Nearly all jurisdictions require that as part of the incorporation process, you provide the statutory authorities with the Constitution of your Company (previously known as Memorandum and Articles of Association). The constitution defines that rules by which your organization will be run, the company’s structure and the aims and the rules that govern it. In order to minimise the probability of disputes between shareholders, it is prudent to also draw up a Shareholder’s Agreement.
The set of documents that are needed by every company to comply with the laws of a jurisdiction is called the company register which is kept at either the registered office, or principal place of business. Over the life of your business, you may modify the rules by which you run your company. You are legally obligated to keep a record of these changes and update the documents that are part of the company register. If the business is ever sold, these statutory books (i.e. the company register) must be handed over to the new owner.
If your business produces or uses new technology or other intellectual property (IP) assets, it is essential to agree on who owns that IP, as it is the IP which will provide much of the long-term value to investors and other shareholders. Business owners also need to keep meticulous records of the employment agreements they enter into with individual staff members in order to avoid any confusion later on.
The Constitution of a Company
Once an entrepreneur has made the decision to incorporate, the first document he or she will have to draw up is typically the Constitution of the Company (previously known as Memorandum and Articles of Association). Once signed by initial shareholders, the Constitution can be thought of as your company’s charter. It is a publicly-accessible record of your company’s objectives and structure.
As part of the Constitution, you are required to state your business’s address and legal name. The name of your business should be distinct so as to avoid legal troubles with companies with similar names. Your Constitution should also summarize the main objectives of your business and any ancillary objectives that are required to achieve the main ones.
The Constitution also records important initial financial information about your business and defines its relationship with shareholders. Typically, a liability clause will state that the shareholders are only liable for the business’s debts to the extent to which they are invested in the venture. Additionally, the Constitution lists a company’s assets, the amount of share capital and how it is divided up between shareholders. For larger companies with multiple categories of shares, the Constitution also sets out the types of shares initially offered by the company and their nominal value.
In most jurisdictions, the Constitution must be lodged with the local company registrar as part of the incorporation process, with the notable exception of the USA. In Singapore, you are required to provide the Constitution to the registration authority and Singapore provides a model Constitution that can be used by most companies.
The Constitution outlines the regulations of the company and contains provisions relating to how the company is to be governed. They are a contract between shareholders and the organisation.
The Constitution is required by law to set out the rights and duties of shareholders. There must be an agreed procedure for the allotment, transfer and forfeiture of shares. The extent to which shareholders can expect to receive dividends and enjoy voting rights is specified. The former is of particular interest to investors, as dividends are often a major long-term incentive for share ownership. In the event that all shares are cancelled and the company is shut down, the Constitution will detail the procedure that will be followed by stakeholders.
In addition to setting out the rules governing shareholders’ involvement in the company, the Constitution regulates the behaviour of the Board of Directors. This might include how directors and the chairperson should be elected, how frequently the board should meet and the quorum required for decision-making. The board is typically legally obliged to meet at least once per year for an Annual General Meeting (AGM). Any special rights held by the chairperson should also be specified at this point.
Over the course of your business’ life, you are required by law to keep an ongoing record of changes to the legal structure of the company in your statutory books. This includes changes to shareholding, directors, company secretary, registered office, AoA, company name, etc. Also known as the company register or company books, these records must be given to the new owner in the event that you sell your business. Statutory books are usually kept at the company’s registered office and are available for public viewing within office hours.
The requirements for statutory books vary from jurisdiction to jurisdiction, but companies are typically required to keep a copy of the Constitution, as well as the certificate they receive from the local authority proving that the business is a properly incorporated legal entity.
Shareholders’ agreements are not required by law, nor are they publicly accessible, but they can be extremely valuable in ensuring that shareholders are treated fairly, particularly when multiple shareholders are involved. Such agreements can be unanimous or involve only a small group of shareholders, such as the founding team. As new shareholders join the business, they may want to add additional terms to ensure return on their investment; thus shareholders’ agreements tend to become more complex over time. Once a company has hundreds of shareholders or becomes a public company, the need for this document disappears and the applicable securities regulations then take over.
You can review a template shareholders’ agreement here.
Perhaps the most important part of an agreement like this is a capitalisation table that shows who owns how many shares of different types. Shareholders access to financial reports for a company can also be controlled through this agreement. Entrepreneurs should also specify the criteria under which a shareholder can be bought out and how any disagreements should be dealt with. These clauses can have quite a few bells and whistles; such as shotgun clause, the right of first refusal, or, most simply, a voluntary sale.
Agreements often allow shareholders to pledge their shares, issue them to family or give them over to a trust to manage. Each of these possibilities may have tax ramifications which are beyond the scope of this article and should be discussed with a tax professional. Agreements should also set out a procedure to be followed in the event that a member dies.
IP Assignment Agreement
During incorporation, it is best practice to assign all relevant intellectual property created by the founders to the newly-formed company. This is not a legal requirement, but it is absolutely critical for technology businesses. If your product depends on key IP assets, understanding your right to use such assets will be a central part of any investor’s due diligence. Most investors will not invest in the absence of this document. As such, it is essential to speak to a qualified IP lawyer in the early stages of your company’s life.
As your business expands, it will need to hire employees. In order to provide evidence that an employment relationship exists, it is essential to record these agreements in writing. Failure to do so could have unforeseen consequences at a later stage.
Employment contracts set out the obligations that employers and employees have towards each other and the benefits they will receive from mutual association. In particular, they stipulate the material terms of employment, such as how much the employee can expect to get paid and by when. If employees are entitled to stock or stock options, this should be made clear in their contract. Each agreement must be tailored to suit the individual employment relationship in question.
In many instances, the content of employment contracts will be affected by the employment law in your local jurisdiction. For example, it would be illegal to force workers to be in the office for 18 hours per day every day of the week. Employees are entitled to national holidays, as well as a certain amount of paid holiday which may depend on how long they have worked for your company.
Another crucial part of an employment agreement is the section on duration. Businesses and employees are legally obliged to give each other a certain amount of notice before the employee is either fired or voluntarily quits. This provides both parties with a degree of financial security. For cases where termination is necessary, the contract will stipulate the grounds on which the owner is able to fire the worker. This might include anything from constant lateness to providing competitors with sensitive information, although many employment agreements allow managers to fire workers at will, without giving a substantive reason. Some businesses lock their senior hires into their operations for months or even years after the end of the contract by including a non-compete clause.
In summary, the important documents you need to understand as a business owner fall into three broad categories. The Constitution of the company is a legal requirement when you incorporate; you have no choice about whether you draw them up or not. Creating a shareholders’ agreement and IP assignment agreement are not legally mandatory, but highly advisable, particularly if your company plans on acquiring a large number of shareholders or selling globally. As your business develops, you will have to enter into employment contracts with staff. You must also keep your company books up-to-date so that they can be given to a buyer in the event that your business is acquired.