C corp startup with 3 equal share holders - exit strategy

**john22** · 12-08-2009 09:15 AM

Greetings:
I am involved in a start up business with two other partners. We will all hold equal shares / voting. I am planning to incorporate following in the charter inorder to avoid a situation in the future, where two of the partners agrees on something and the third one doesn't. In such a situation, i want to discourage the two agreeing partners, from doing things to force out the third partner.

25. Conflict resolution and arbitration:

25.a All share holders have to consent if the corporation is to change or modify its core business described in section 11a

25.b All share holders have to consent if the corporation wants to raise capital by selling share and/or borrowing

25.c In a situation where a conflict arises pitting one partner against the other two, it is against the corporation charter for the two agreeing partners to collude and try to force out the third partner.
If such a situation arises, all partners agrees to go into a binding arbitration through the <name of a good arbitration, affordable arbitration company>

***

Appreciate any guidance.

**rdc** · 12-08-2009 11:32 AM

Hi John,

Let me see if I can help.

First of all, this should probably be referred to as provisions for "dissolution" or "deadlock", rather than "exit strategy", which is usually a term describing a startup's long-term plan (e.g., operate as a cash cow, become acquired, do an IPO, etc).

If you are writing the bylaws yourself, you will want to pay closer attention to the language. For one, change "has to" to "shall".

Don't use the word "partner" when referring to anything involving a C-Corp, because this ignores the inherent corporate hierarchy of (founder)/director/officer/employee. When operating a corporation, a major aspect is paying attention to what are called "corporate formalities". This is especially important within the document... As you draft corporate bylaws, they need to be in corporate form; when you specify voting requirements, they should correspond with shares and (possibly) classes of shares, if the board is classified.

Since it sounds as though this is at least initially a closely-held corporation, you will probably want a shareholder agreement in place (as well as other instruments such as an irrevocable proxy or voting trust, depending upon the situation). You should probably think more in depth about the dissolution planning and voting structure; you may really want a 2/3 vote to carry the day but have very specific guidelines for dissolution planning.

Generally two shareholders with share proportions you've described cannot "force out" the third partner, in the sense that they can simply make his shares disappear. They can, however, vote by majority to modify the articles or bylaws, which might modify one's ability to vote. One at a minimum will still generally retain liquidation rights tied to stock, though. Suffice it to say, as this part goes you really need customized stock redemption/buyback/put/call provisions, and these would generally be part of a shareholder agreement.

Hope this helps some. If I can help you further or set this up for you, just let me know.