A company’s articles of incorporation are analagous to its “constitution.” The articles set forth the legal foundation on which the rights of its owners (the “citizens,” so to speak) and the duties of its officers and directors (the “elected representatives,” to continue the analogy) are ultimately built. (In some states, like Delaware, the “articles of incorporation” are called the “certificate of incorporation,” but they are effectively the same thing.)
In most states, the articles of incorporation must address certain issues and may address others. In the State of Washington, for example, the articles must state, at a bare minimum:
- The name of the company;
- The number of shares of capital stock the company may issue;
- The number of directors or the process by which that number will be fixed;
- The name and address of the company’s initial registered agent; and
- The name and address of each incorporator.
At the same time, most states (including Washington) imply certain governing matters by default, unless the articles expressly “opt out.” Thus, a company’s articles must opt out of any unwanted but otherwise implied provisions. In the State of Washington, critical among these “opt-out-or-deal-with-it” provisions are the following two:
- Shareholders enjoy a “preemptive right” to acquire unissued shares; and
- Directors are elected by cumulative voting.
Finally, while the articles of incorporation may deal with a wide array of other matters, several key ones are accessed in the State of Washington only if expressly “opted in,” like:
- The company’s ability to provide expansive indemnification for officers and directors without prior shareholder approval; and
- The authority to take shareholder action without a meeting by non-unanimous recorded consent.
In the end, the founders of a company must make a number of choices about how to “frame” the company’s “constitution,” to return to the opening analogy. Many of these choices are obvious and not controversial, particularly for a small closely-held business that will never be a candidate for outside investment. But many other choices are not so obvious and yet may have a material impact on the company’s future governance and, by extension, its ability to attract equity investors.
A capable corporate lawyer can help you work through these choices.