What is the Difference between Par Value and Fair Market Value?

The Par Value of stock is the value per share set forth in the certificate or articles of incorporation on file for the corporation.  Also called nominal or face value, the Par Value is the minimum price per share that must be paid in order for the shares to be considered fully paid.  For Delaware corporations, the Par Value is typically set at $0.0001.  The Par Value has no bearing on the Fair Market Value of the stock.

The Fair Market Value is the current price at which the stock is valued by the “market.” In the case of publicly-traded stock, the Fair Market Value is generally determined by averaging the day’s highest and lowest selling prices from the public exchange on which it is registered, such as the New York Stock Exchange or NASDAQ.

Because non-publicly traded stock has no public market to determine its value, determining the Fair Market Value of private stock is more complicated.  The board of directors, often with the assistance of third party valuation firms, determines the Fair Market Value by incorporating many valuation techniques.  Below is a list of factors that are often considered by a private corporation’s board of directors in determining Fair Market Value:

  • the value of tangible and intangible assets of the corporation;
  • the present value of anticipated future cash-flows of the corporation;
  • the market value of stock or equity interests in similar companies and other entities engaged in trades or businesses substantially similar to those engaged in by the company, the value of which can be readily determined through non-discretionary, objective means (such as through trading prices on an established securities market or an amount paid in an arm’s length private transaction);
  • recent arm’s length transactions involving the sale or transfer of such stock or equity interests; and
  • other relevant factors such as control premiums or discounts for lack of marketability and whether the valuation method is used for other purposes that have a material economic effect on the service recipient, its stockholders or its creditors.

Disclaimer: This article discusses general legal issues, but it does not constitute legal advice in any respect.  No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Helen E. Quinn expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

What is a Registered Agent?

A Registered Agent is a responsible third-party designated to act on your behalf in the state in which your business entity is legally established.  The Registered Agent maintains a physical address in the state and accepts important documents — such as service of process notices, correspondence from the Secretary of State or other governmental, legal or tax notices — on behalf of your business entity.  If you don’t have a physical office in your registered state, you must select a Registered Agent.  However, even if you do have a physical office in your registered state, it is advisable to designate a third-party to receive important documents that would otherwise be sent to your place of business.  The Registered Agent charges an annual fee for their services.  Below are links to the lists of Registered Agents in Delaware and California:

Disclaimer: This article discusses general legal issues, but it does not constitute legal advice in any respect.  No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Helen E. Quinn expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

The Certificate of Incorporation (Delaware)

In the State of Delaware, a corporation is formed when it files its Certificate of Incorporation (COI) with the Secretary of State (see http://www.corp.delaware.gov/incstk.pdf).  In addition to required disclosures, the COI outlines a corporation’s fundamental corporate governance policies with respect to corporate formation and purpose, and details the rights, preferences and restrictions granted to and imposed upon its board of directors, officers, and stockholders.

Delaware General Corporation Law (DGCL) §102 (see http://delcode.delaware.gov/title8/c001/sc01/) provides a detailed list of the required and permitted provisions of a COI.  Below are the required provisions every COI must have:

  • Name of the corporation;
  • Name and address of the Registered Agent;
  • Statement of general business purpose (Note, it is enough to state that the purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the DGCL);
  • The type and number of capital stock the corporation is authorized to issue and the par value, if any, assigned to such shares (e. common stock, preferred stock, etc.)
  • The rights, powers, preferences and privileges of each class of capital stock (to include voting rights, dividends, distribution of proceeds in connection with the sale of the company or other liquidation, composition of the board of directors, etc.); and
  • Name and mailing address of the Incorporator.

In addition to the required provisions, companies should consider adding additional provisions to the COI, such as, among other options, (i) a provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, subject to the limitations set forth in §102(b)(7) of the DGCL; (ii) forum selection for stockholder litigation involving the company; and (iii) authorization to provide indemnification to directors and officers of the company.

Other optional provisions include founder-protective provisions, such as dual-class common stock and/or super voting rights for the founder directors.  These topics will be further discussed in a separate entry.

Disclaimer: This article discusses general legal issues, but it does not constitute legal advice in any respect.  No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Helen E. Quinn expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

How to Reincorporate a California C-Corp into a Delaware C-Corp

The state of California is one of a handful of states that does not recognize the concept of “conversion” to reincorporate a domestic California C-Corp into a foreign C-Corp (e.g. to reincorporate from California to Delaware).

By way of background, a conversion transaction is a simplified way to change an entity type (e.g. change from LLC to C-Corp) or reincorporate from one state to another.  However, in order to use a conversion to change a corporation’s state of incorporation, both states have to recognize the concept.

For states that do not recognize the concept, such as California, most companies choose to reincorporate to another state by means of a merger – meaning that (i) a new corporation is created in the state where the California corporation desires to reincorporate (e.g. Delaware), (ii) the California entity is merged with and into the newly formed foreign corporation, and (iii) the newly formed foreign corporation survives the merger, and the California corporation thereby ceases to exist.

Below is an outline of the steps required.

CA Corporation

  • Agreement and Plan of Merger and Reincorporation
  • Board Consent
  • Shareholder Consent
  • File Certificate of Merger with CA

DE Corporation

  • File Certification of Incorporation
    • Adopt Bylaws
    • Appoint Board of Directors
    • Issue Stock
  • Agreement and Plan of Merger and Reincorporation
  • Board Consent
  • Stockholder Consent
  • File Certificate of Merger with DE

Tax Issues

Filing Fees

  • Filing of Certificate of Incorporation for New DE Entity:  Approximately $107
  • Registered Agent for Service of Process in DE: Between $50-$100 per year
  • Filing of Certificate of Merger in DE:  Approximately $250, plus certification fee of $50 (required for filing with State of CA)
  • Filing of certified Certificate of Merger in CA:  $100

Other Fees

  • Qualification to do Business in the State of CA: $100
  • Annual Statement of Information: $25
  • CA Annual Franchise Taxes: Approximately $800
  • DE Annual Franchise Taxes: Approximately $350

Disclaimer: This article discusses general legal issues, but it does not constitute legal advice in any respect.  No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Helen E. Quinn expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

The Age-Old Question – Should I Incorporate in Delaware or California?

There are a lot of great open source resources available which address the pros and cons of incorporating in Delaware vs. California.  By way of example, the Delaware Department of State Division of Corporations published an article titled “Why Corporations Choose Delawarehttps://corp.delaware.gov/whycorporations_web.pdf.  As a general rule, most seasoned corporate attorneys will recommend incorporation in Delaware over California for three reasons:  (i) most angel investors, venture capitalists and investment banks are familiar with Delaware law and prefer to invest in Delaware entities; (ii) Delaware corporate law is well developed, and provides an element of legal certainty; and (iii) Delaware law provides flexibility with respect to corporate administration.  Let’s briefly analyze these elements.

Investors

The following should put things into perspective.  Based on information published by the 2016 National Venture Capital Association (http://nvca.org), of the 100 highest market capitalization U.S. VC-backed companies, 84 are incorporated in Delaware and two are incorporated in California (Apple and Cisco Systems).  The remaining 14 companies are incorporated as follows: One in Florida (SBA Communications Corp); one in Maryland (Under Armour); three in Massachusetts (EMC Corp, Genzyme Corp, Vertex Pharmaceuticals); one in Michigan (Stryker Corp); two in New York (Bed Bath & Beyond, Regeneron Pharmaceuticals); one in Texas (Whole Foods Markets); four in Washington State (Costco Wholesale, Immunex, Microsoft and Starbucks); and one in Wisconsin (Fiserv).

Delaware Law is Well Developed

The Delaware Court of Chancery (http://courts.delaware.gov/chancery/) has decades of first-hand experience and has promulgated a vast amount of precedent in the area of corporate law.  Delaware is known to be business friendly, offering broad latitude in management decision-making, strong anti-takeover protections, and well developed corporate defenses.

Delaware Law Provides Flexibility with Respect to Corporate Administration

The Delaware General Corporation Law provides for significant structural flexibility and management of a company’s business affairs.  By way of example, a Delaware corporation may have any number of stockholders, and only one director may comprise the board of directors.  California law, on other hand, has a tiered approach, and provides in relevant part that the board of directors must be comprised of no less than three directors, except that the board of directors (a) may have only one director if there is no more than one shareholder, and (b) must have at least two directors if there are two or fewer shareholders (see §212(a) of the California Corporations Code).  Many early stage companies are not prepared to have a three-person board of directors, and this alone could represent a significant impediment to incorporating as a California corporation.

The Takeaway

The above is not to say investors won’t invest in a non-Delaware entity (plenty do), but it does demonstrate the prevalence of Delaware corporations in successful VC-funded entities.  At the end of the day, if you plan to seek traditional outside investors for your start-up company, you may be better served by incorporating in Delaware from the start.  Incorporating in Delaware upfront can save the need to reincorporate down the road (which means more legal fees), and may make the entity slightly more attractive to an outside investor, as the investor may have a comfort level with Delaware law that it does not have with other states.  However, if you do not plan to seek outside investors, you may very well decide to incorporate in California, and forgo the additional expense and reporting requirements of incorporating in Delaware.

The additional cost to a California-based company to incorporate in Delaware (vs. California) is, on a relative basis, negligible.  Assuming the California-based company meets certain thresholds of “doing business” in California (see https://www.ftb.ca.gov/businesses/Section_23101.shtml), it will be required to Qualify to do Business in the State of California as a foreign corporation.  The current cost of qualification is $100, plus $25 per year to file an Annual Statement of Information.  The corporation will also need to maintain an agent for service of process within the State of California (at a cost of approximately $50-$100 per year).  With respect to annual franchise taxes, a Delaware company that is Qualified to do Business in the State of California will need to pay franchise taxes in both Delaware (approximately $350 per year, see https://corp.delaware.gov/taxcalc.shtml) and California (approximately $800 per year) – remember that all California corporations are required to pay the $800 annual franchise tax, so this amount is not an extra cost.  Lastly, the Delaware corporation will be required to comply with both Delaware and California corporate law reporting requirements, which adds a negligible amount in legal fees every year.

All of that said, please don’t assume Delaware law reigns supreme.  In fact, there was a relatively recent Wall Street Journal article that challenged the predominance of Delaware law (see “Dole and Other Companies Sour on Delaware as Corporate Haven” written by Liz Hoffman dated August 2, 2015 available at http://www.wsj.com/articles/dole-and-other-companies-sour-on-delaware-as-corporate-haven-1438569507), as well as a recent study published in the North Carolina Law Review titled “The Delaware Delusion” written by Robert Anderson IV of Pepperdine University School of Law and Jeffrey Manns of George Washington University School of Law (available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2500465).

Furthermore, for some California companies who are incorporated in Delaware, the California long-arm statute, §2115 of the California Corporations Code (available at http://www.leginfo.ca.gov/cgi-bin/displaycode?section=corp&group=02001-03000&file=2100-2117.1), may in any event require application of California law to the Delaware corporation with respect to several key provisions, to include directors’ fiduciary duties/standards of care, indemnification provisions, cumulative voting, voting in merger transactions, dissenters’ rights and the like.  However, the ultimate enforceability of the §2115 long-arm statute is a question of significant debate – more on that topic at another date.

Disclaimer: This article discusses general legal issues, but it does not constitute legal advice in any respect.  No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Helen E. Quinn expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

Incorporation Documents – What is Required?

Although the act of incorporation is complete upon the filing of the Articles of Incorporation (for a California corporation) or a Certificate of Incorporation (for a Delaware corporation), there are a number of additional documents that must be prepared by a newly formed corporation in order to (i) comply with required corporate formalities, (ii) implement a capitalization and equity compensation strategy, (iii) protect intellectual property, and (iv) position itself to attract outside angel or venture capital investors.

To incorporate in the State of California, a newly formed corporation should consider the following:

• Articles of Incorporation
• Action by Sole Incorporator
• Bylaws
• Action by Unanimous Written Consent of the Board in Lieu of First Meeting
• Founder Stock Purchase Agreement (with Vesting; 83(b) Election; and Technology Transfer Agreement)
• Stock Option Plan and Underlying Agreements
• Form of Confidential Information and Invention Assignment Agreement
• Form Stock Certificate
• Stock Ledger and Initial Capitalization Table
• Form of Non-Disclosure Agreement
• EIN Number (Fed ID Number)
• EDD Number (CA Employer ID Number)
• State Securities Filings for Founder Stock
• State Securities Filings for Stock Option Plan
• Annual Statement of Information

What are some of the the expected filing fees?

• CA Filing Fee for Articles of Incorporation – Approximately $100
• CA Statement of Information – $25
• CA Form 25102(f) Filings (Founders Stock) – Approximately $25 – $35
• CA Form 25102(o) Filing (Stock Option Plan) – Approximately $200
• Agent for Service of Process (between $50 and $200 per year) – Optional, but recommended
• CA Annual Franchise Taxes (approximately $800 per year)

For a California-based company to incorporate in the State of Delaware, a newly formed corporation should consider the following.

• Certificate of Incorporation
• Action by Sole Incorporator
• Bylaws
• Action by Unanimous Written Consent of the Board in Lieu of First Meeting
• Founder Stock Purchase Agreement (with Vesting; 83(b) Election; and Technology Transfer Agreement)
• Stock Option Plan and Underlying Agreements
• Form of Confidential Information and Invention Assignment Agreement
• Form Stock Certificate
• Stock Ledger and Initial Capitalization Table
• Form of Non-Disclosure Agreement
• EIN Number (Fed ID Number)
• EDD Number (CA Employer ID Number)
• State Securities Filings for Founder Stock
• State Securities Filings for Stock Option Plan
• Annual Statement of Information

What are some of the expected filing fees?

• DE Filing Fee for Certificate of Incorporation – Approximately $110
• CA Qualification to do Business – $100
• DE Good Standing Certificate – Approximately $50
• CA Statement of Information – $25
• CA Form 25102(f) Filings (Founders Stock) – Approximately $25 – $35
• CA Form 25102(o) Filing (Stock Option Plan) – Approximately $200
• Agent for Service of Process (between $100 and $300 per year) – Optional, but recommended
• CA Annual Franchise Taxes (approximately $800 per year)
• DE Annual Franchise Taxes (approximately $350 per year)

Disclaimer: This article discusses general legal issues, but it does not constitute legal advice in any respect.  No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Helen E. Quinn expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

Early-Stage Private Companies and Corporate Law

In this blog we will discuss the fundamentals of incorporation, post-incorporation, venture capital finance and mergers and acquisitions.  The focus will be on early-stage/emerging growth private companies within the context of applicable Federal Securities Law, California corporate law, and Delaware corporate law.  I welcome an open dialogue and any suggestions you may have for topics to be covered.  Before proceeding with this Web site, please be sure to read the DISCLAIMER page and the PRIVACY POLICY page.  Thank you!