Reducing Startup Brain Damage

Trent Dykes - DLA Piper LLP - The Venture Alley

4 minutes to read

Delaware Moves To Further Streamline Corporate Processes For Emerging Companies

Contributed By: Ed Batts,

Proposed amendments to the Delaware General Corporations Law (DGCL) for 2014 aim to significantly streamline routine questions that often prove vexing for emerging growth companies and newly formed subsidiaries of larger companies.

It is a fact of life that people leave jobs. They move to other cities, whether for family or lifestyle. They quit for perceived greener pastures. They retire. Or they are hit by the proverbial bus. Forming a company under Delaware law historically has had a pitfall: a “sole incorporator” (often a paralegal) forms the initial company, one assumes promptly appoints one or more directors and then, one further assumes, immediately resigns.

But sometimes that paperwork is lost, overlooked (particularly if creating a new subsidiary for a larger company) or forgotten in the midst of workloads, or a company founder without the benefit of legal counsel did the incorporation and neglected to resign. An existential crisis involving numerous lawyers scratching their heads can ensue if the resignation paperwork does not exist and the original sole incorporator cannot be located or refuses to cooperate.

The new DGCL provision (Section 108(d)) will allow any person on whose behalf the sole incorporator acted, as either an employee or agent, to take actions that the sole incorporator was authorized to take, such as appointing the initial board and resigning. Consequently, if your favorite sole incorporator decides to quit to travel the world and cannot be contacted while climbing Mount Everest, or your least favorite sole incorporator quit or was involuntarily transitioned out (and it is in just such scenarios where problems most commonly arise), then the DGCL amendment will allow for the company to merely step in, clean up and ratify past actions. Junior associates across the country may now sigh in relief.

Other DGCL amendments that further promise to reduce startup company brain damage are:

  • A future director, whether or not yet formally appointed by the sole incorporator, can now sign documents in advance, such as the routine first UWC authorizing the company to have bank accounts, so long as the signature was revocable and entered into effect within 60 days of the signature. This means startup founders can execute formation documents in advance – as many have done customarily in the past irrespective of the technicalities of Delaware law.
  • Stockholder votes will no longer be required for name changes in the certification of incorporation or for cleaning up items related to the initial incorporator, historical stock-split language or the initial formation clauses. All of this allows routine corporate maintenance and cleanup to be performed without the expense and time allocation of a non-substantive stockholder vote.

Assuming these proposals are approved by the Delaware state legislature, and there is no reason to believe that they will not be so approved, the changes would take effect along with any other changes to the DGCL on August 1, 2014.

The Venture Alley

The Venture Alley is a blog about business and legal issues important to entrepreneurs, startups, venture capitalists and angel investors. The Venture Alley is edited by Asher Bearman, Trent Dykes, Andrew Ledbetter, and Megan Muir, corporate and securities lawyers at DLA Piper.

Contributing authors to The Venture Alley include corporate and securities lawyers from the Seattle office of DLA Piper, which Chambers USA describes as "[a] team that exceeds all expectations" (Chambers USA: America's Leading Lawyers for Business 2010), as well as attorneys from other DLA Piper offices and practice areas. In addition to representing entrepreneurs, startups, venture capitalists and angel investors, DLA Piper's lawyers also assist some of the nation's top companies with their SEC reporting, public offerings, M&A, cross-border transactions and general commercial and securities litigation.

Material in this work is for general educational purposes only, and should not be construed as legal advice or legal opinion on any specific facts or circumstances, and reflects personal views of the authors and not necessarily those of their firm or any of its clients. For legal advice, please consult your personal lawyer or other appropriate professional. Reproduced with permission from DLA Piper LLP. This work reflects the law at the time of writing in May 2014.