We are frequently asked by clients to review Non-Disclosure Agreements (“NDAs”) in various contexts. It goes without saying that you should be careful of what kind of NDA you sign and not be afraid to negotiate any terms you do not like. 

Nondisclosure or confidentiality agreements come in a wide variety of forms and styles, and they should always have provisions covering non-use by the receiving party–not just a restriction on disclosing such information to third parties. Many NDAs you encounter will be fine to sign as is, but you will also often receive one that contains objectionable terms. This simple guide will better acquaint you with the basics and help you spot common red flags.

What information should NDAs cover?

If you are the disclosing party, you want to make sure the definition of “Confidential Information” is as broad as possible. Typically, every NDA will cover confidential, proprietary, technical, financial, or other non-public information, including intellectual property rights, trade secrets, software source and object code, etc. A “trade secret” is any information that is valuable and whose owner has taken reasonable steps to remain secret, such as encryption mechanisms, password protection measures, physical protections, requiring employees and others to execute NDAs, etc. Examples of trade secrets are the KFC recipe, the Coke recipe, Google’s search algorithms, software source code, manufacturing processes, and customer lists. Trade secrets may or may not be patentable. 

There are typically always customary exclusions from what would be considered confidential, including information that is (a) already in the public domain at the time of or after disclosure, (b) rightfully in the recipient’s possession free of any obligation of confidence or not otherwise obtained unlawfully, (c) independently developed by the recipient without use of the discloser’s confidential information, and (d) required to be disclosed in connection with a court proceeding.

In which scenarios should you sign a NDA?

NDAs should be signed by two parties in advance of entering into discussions or evaluating a certain business relationship or transaction.  Here are some common scenarios: 

• Commercial agreements and IP/technology development deals 
• Mergers and acquisition transactions
• Financing transactions in which investors are conducting due diligence
• Joint ventures 
• Requests for proposals
• As a catch all, any scenario in which you are receiving or sharing sensitive or confidential information with another person or entity.

Another point to note is that there are one-way NDAs and mutual NDAs. With a one-way NDA, only one party will be disclosing confidential information, and therefore only the recipient will be obligated to protect it. In a mutual NDA, both sides will exchange information and be under such obligations. 

As a practical tip, if you are the only side making disclosures, make sure to use a one-way NDA so you don’t also sign yourself up for unnecessary confidentiality and non-use obligations.

When should you enter into an NDA?

The answer is simple: as early as possible, and ideally prior to any discussions, meetings, or negotiations have occurred.  If the parties have disclosed confidential information prior to the execution of the NDA, make sure that the NDA explicitly covers such prior disclosure.

What are some red flags and nuances to watch out for?

1. The duration of your confidentiality obligations. If you are the recipient, you want these to be shorter (1-2 years) and vice versa if you are the discloser. 2-5 years is typical.
2. Make sure if you are disclosing any trade secrets that the NDA obligates the recipient to keep it confidential and not use the trade secrets indefinitely, which generally means until such trade secret enters the public domain.
3. We recommend that you avoid disclosing your highly confidential “secret sauce” trade secrets if you can avoid it, even if the NDA adequately obligates the recipient to protect them. 
4. The purpose and use of the confidential information. The NDA should explicitly say that the recipient may only use your confidential information for a predefined purpose, such as its obligations under an agreement or in connection with the evaluation and negotiations of a proposed business relationship or transaction.
5. To whom the confidential information may be disclosed. Typically, the recipient will be allowed to disclose the confidential information to its officers, directors, and key employees. But you should consider whether it is appropriate for the recipient to share the confidential information with its independent contractors, consultants, advisors, and other professionals like accountants and lawyers, who are essentially third parties outside the scope of the recipient company. If this is appropriate, then you should make sure the NDA provides that the recipient may only disclose to such parties if they have executed an agreement providing for confidentiality and non-use on terms no less restrictive than the NDA you and the recipient entered into, and that the recipient will be liable for any breach by its independent contractors. 
6. Many times lower level employees of a recipient should not have access to your confidential information, so we recommend adding that the recipient may disclose such information only to employees only on a “need-to-know basis.”
7. Any unwarranted provisions. Make sure there are not any Non-Solicitation or Non-Competition obligations. Sometimes the other side will attempt to sneak in these clauses, which are not typically appropriate.
8. A “residuals” clause. Sometimes the recipient will attempt to include a “residuals” carveout to the non-disclosure and non-use obligations by allowing its employees to use the discloser’s confidential information they remember from their “unaided memory.” A residuals clause is most often employed by large, sophisticated corporations especially when they think they have leverage over a smaller company. This clause should be deleted every time you see it.    
9. The relationship or engagement between the parties being included as confidential information. Oftentimes the NDA will state that the presence of the NDA and such  negotiations or engagement or relationship is confidential. This isn’t necessarily a dealbreaker, but you should consider whether it is appropriate for the situation. For example, you may be excited to announce to your investors or prospective investors that you have entered into negotiations with a big customer like Amazon or Microsoft, but be aware of whether this would be a breach of confidentiality and consider striking such provision in the NDA upfront.   
10. A license for the recipient to use the confidential information.  Double check to make sure you are not granting a license to any of your confidential information. If you and the other side intend to eventually enter into a licensing arrangement for some IP, this provision should be negotiated separately and housed in a License Agreement. 
11. Obligations to destroy confidential information. You should make sure the other party has an obligation to destroy any confidential information it has received during the engagement after it is over. But there should be a carveout to this exception that states you do not have to go back into your automatic email archiving system and delete any information there. This makes it far less burdensome on you.
12. Injunctive relief. The NDA must provide that, in the event of a breach (or alleged breach) by the recipient, the discloser is entitled to seek an injunction from a court to prevent any further unauthorized disclosure or use by the recipient and any third parties. 
13. A Liquidated damages clause should be deleted if present. Double check and see if the other party has tried to sneak in such a  provision, meaning the NDA states that you have to pay a certain monetary amount for each breach. Depending on the amount, this could add up quickly. 
14. An Attorneys’ fees clause. Make sure the NDA provides that the prevailing party in any legal action to enforce the NDA is entitled to be reimbursed its attorneys’ fees and related costs. 

There are of course more issues that may come up, but this will be a great start for you as you begin your own NDA review. 

By: James Graves and Daniel Neuman

If you have any questions regarding the above, please contact James Graves or Daniel Neuman.

For more posts like this, please visit The Startup Law Blog.

Disclaimer: this post is for informational and educational purposes only. It is not intended to provide any legal advice.

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When you set up your company, you hopefully set up a stock option plan (also known as an equity inventive plan) at the same time so that you have a plan that is properly adopted and ready to be used when you are about to grant options or other equity incentives to service providers.

When you decide to grant stock options or other forms of equity compensation to service providers, we recommend you call us. We have seen many instances in which a mistake is made in administering a stock option plan, and the mistake results in a lot more time and expense incurred than wanted or needed if we had been used to administer the plan in the first place.

Here is a list of things you will need to consider when you grant options:

First, the Board has to approve all option grants. If you do not have the Board properly approve option grants, this can cause problems down the road when the option exercise price has increased, and you have to go back and document approvals. Options are not considered “granted” until the Board has correctly approved them, not just the number of shares underlying the options but also other essential terms of the options such as the vesting schedule and exercise price. This can be achieved either pursuant to a fully executed unanimous written consent of the Board or at a properly noticed and duly called meetings of the Board which is minuted properly. It is generally easier to approve things via written consent if all the directors are in agreement.

Second, you must remain in compliance with state and federal securities laws. There are a number of technical legal requirements when you grant options, which include, but are not limited to:

• Possible filings with state securities agencies (e.g., California).
• Compliance with Rule 701’s mathematical limitations.
• Not granting options under Rule 701 to entities (we see this mistake made frequently). You can only grant options to individuals under Rule 701.
• Issuing the wrong type of option to independent contractors (you can grant ISOs only to employees).

Third, you must make sure your operating documents and cap table are up to date and correct and that they allow for the option grant. For example, your company’s equity incentive plan only allows for a certain number of options to be granted. Another example is that stock options are treated differently from stock awards on your cap table.

Fourth, board approval is the first step of granting stock options, not the only step. You still need to give your service providers a copy of the stock option agreement and a copy of the company’s up-to-date stock option plan to review and sign. These documents would govern the stock options and provide more details to the service providers about the terms of the stock options, such as how long the service providers can exercise the vested options, how they can exercise the vested options and, whether they need to pay any withholding to the company besides the exercise price.

In summary, because of what is at stake, we recommend you use us to help you administer your plan.

We have written several guides about how to administer your options for a stock plan that you might find helpful, including: (i) Stock Option Grant Checklist (https://www.startuplawblog.com/2010/11/01/stock-option-grant-checklist/); (ii) Stock Exercise Checklist (https://www.startuplawblog.com/2013/03/25/stock-option-exercise-checklist/) and (iii) a guide to stock option plan administration (https://thestartuplawblog.com/stock-option-plan-administration-guide/).

If you have any questions, please do not hesitate to contact me.

By: Haiyan Tao

Disclaimer: this post is for informational/educational purposes only. It is not intended to provide any legal advice.

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Personally Identifiable Information (“PII”) has become a buzzword in the privacy law world the last few years, and it is heavily protected by rules and regulations around the world, such as the General Data Protection Regulation (GDPR). Companies that fail to comply with regulations such as the GDPR, or that suffer a data breach, face steep penalties and/or burdensome, mandated mitigation and reporting requirements.

Because of this, companies, both large and small, across the world, have started to familiarize themselves with the term and their obligations with respect to it.

So, that begs the question: what exactly is it?

At the risk of being a jerk: it depends on who you ask! Changes to privacy laws have been rapid-fire over the last few years, and the definition of what’s considered “personally identifiable information” expands each time a new law is enacted.

Generally, PII is one or more pieces of data that can be used to identify a person with particularity. Below, we’ve compiled a (non-exhaustive but exhausting!) list of things that may be considered PII under the law. Some of these may only currently apply in certain states or jurisdictions. But, as the trend in privacy law is to add to this list instead of delete from it, we want to present you with the most inclusive list possible. Here we go!

* Name
* Alias
* Online identifier (e.g. social media handles)
* IP address
* Unique device IDs
* Account name
* Postal address
* Street address
* Email address
* Telephone number
* Social security number
* Driver’s license number or state identification number
* International ID number (e.g. passport number, other international governmental ID number)
* Other unique personal identifiers
* Physical characteristics or descriptions of a person
* Geolocation data
* Family and lifestyle details
* Genetic data
* Biometric data
* Racial/ethnic/color data
* Political opinion or affiliation data
* Religious or philosophical beliefs data
* Trade union membership data
* Sex life, sexual orientation, and gender identity data
* National origin
* Citizenship status
* Disability
* Insurance policy numbers
* Educational background
* Current employer
* Employment history
* Bank account numbers
* Credit card numbers
* Debit card numbers
* Other financial information
* Medical/health information
* Health insurance information
* Commercial information, including records of personal property, products or services purchased, obtained, or considered, or other purchasing or consuming histories or tendencies.
* Internet or other electronic network activity information, including, but not limited to, browsing history, search history, and information regarding a consumer’s interaction with an internet website, application, or advertisement.
* Audio, electronic, visual, thermal, olfactory, or similar information (e.g. voice recordings)
* Inferences are drawn from any of the information identified in this subdivision to create a profile about a consumer reflecting the consumer’s preferences, characteristics, psychological trends, predispositions, behavior, attitudes, intelligence, abilities, and aptitudes.


We’ll continue to update this list as new privacy laws are enacted. Please check back regularly for updates! Questions? Contact us at privacygroup@carneylaw.com.

For more related posts, please visit our main website, here.

By: Ashley Long

Disclaimer: this post is for informational/educational purposes only. It is not intended to provide any legal advice.

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The California Consumer Privacy Act (“CCPA”) became effective at the start of 2020. Its purpose is to protect the personal identifiable information (“PII”) of California consumers. The bad news for businesses is that the California Consumer Privacy Act’s legal requirements are murky at best. And, even in its infancy, the CCPA has been in a perpetual state of revision. Months after the CCPA became law, businesses are scrambling to answer the question, “Does the CCPA apply to me?”

We’ve endeavored to create a short question and answer list to help you determine whether or not some – or all – of the CCPA applies to your business. Let’s get started!

QUESTION 1: Does your business buy, receive, share, sell, collect, or process, any personally identifiable information of any California consumer?

If yes, continue on!

If no, then the CCPA doesn’t apply to you.

Not sure? Check out our info on “What is Personally Identifiable Information (”PII“)?” and “Who are California Consumers”

QUESTION 2: Are you a “business” as defined by the CCPA?

If your business:

(a) has a gross revenue of $25M or more per year; or
(b) annually buys, receives, shares, or sells 50K or more of California consumers’ PII, or
(c) derives 50% or more of its annual revenues from selling CA consumer PII

then the CCPA applies to you.

If your business does not meet any of these thresholds, you may still be bound by the CCPA’s requirements if you meet the definition of either a “service provider” or “third party”, so read on!

QUESTION 3: Are you a “service provider” as defined by the CCPA?

A “service provider” is:

(a) a for-profit legal entity that
(b) processes California consumer PII
(c) on behalf of a “business” (as defined above)
(d) pursuant to a contract that prohibits the service provider from processing the information for any purpose other than those specified by the “business.”

If one or more of these 4 factors doesn’t apply, then you aren’t considered a “service provider” under the CCPA.

If all 4 factors apply to your company, then please contact a member of our team to determine what aspects of the CCPA apply to your business.

QUESTION 4: Are you a “third-party” as defined by the CCPA?

A “third party” is:

(a) a legal or natural person that is NOT a “business” or a “service provider” (both as defined by the California Consumer Privacy Act); that
(b) receives California consumer PII from a “business.”

If one or both of these factors doesn’t apply, then you aren’t considered a “third party” under the California Consumer Privacy Act.

If both of these factors apply, then please contact a member of our team to determine what aspects of the CCPA apply to your business.

Have other questions regarding the CCPA? Please contact us at privacygroup@carneylaw.com for more assistance!

Disclaimer: This post is for informational/educational purposes only. It is not intended to provide any legal advice.

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By: Ashley Long

The California Consumer Privacy Act (“CCPA”) has some twisty definitions of who is – and isn’t – considered a California consumer. The text of the CCPA says a business who “alone or in combination, annually buys, receives for the business’s commercial purposes, sells, or shares for commercial purposes, alone or in combination, the personal information of 50,000 or more consumers, households, or devices” is under the jurisdiction of the CCPA. So how do you know if the data you are collecting, etc., is from a “consumer,” “household,” or “device”?

We’ve attempted to provide you with the current and proposed parameters of each of these terms below. Check back regularly for updates!

Consumers: Generally, California consumers are California residents. An important distinction is made for people who are physically located inside – or outside – of California if their physical status is “temporary” or “transitory.” For example, a person is still a California consumer if they are domiciled in California, but are temporarily outside the state when you happen to collect their data. The corollary of this works as well. A person’s temporary or transitory visit to California does not make them a “California consumer” under the CCPA.

Households: The original CCPA language was a bit vague about what constituted a “household.” The current proposed definition of household is a person or group of people who: (1) reside at the same address, (2) share a common device or the same service provided by a business, and (3) are identified by a business as sharing the same group account or unique identifier. (“Business” means a business as defined under the CCPA.)

Devices: A consumer can also be identified by their device. This definition is the most straightforward of the lot. A “Device” is “any physical object that is capable of connecting to the internet, directly or indirectly, or to another device.” CA CIVIL Sec. 1789.140.

Still not sure if the data you’ve got is for a California consumer? Please contact a member of our team at privacygroup@carneylaw.com.

Disclaimer: this post is for informational/educational purposes only. It is not intended to provide any legal advice.

By: Ashley Long

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A common question we receive when working with limited liability companies taxed as partnerships under Subchapter K of the federal income tax law (“LLCs”) is, can the company grant stock options to its employees and independent contractors, even though the company isn’t a state law corporation (and is in fact taxed as a partnership under the federal tax law)? The short answer is, yes, it is possible for an LLC to issue equity-based compensation to employees and independent contractors, but it is not called a stock option and differs from stock options in some important respects. Profit interests have much different complexities to it, and we will give you an overview as you read along.

Overview of Profit Interests:

LLCs do not issue “stock”, but rather, “membership interests”, or “units”. Most LLCs that have multiple members are taxed as partnerships for federal tax purposes, and do not elect to be taxed as a corporation. For LLCs that are taxed as partnerships, the closest equivalent to a stock option in a corporation is called a “profits interest”.

If you grant an individual a profits interest in an LLC, that individual is receiving an interest in both the future profits of the LLC, and the appreciation of the assets of the LLC. Because the recipient of the profits interest is only receiving an interest in the future profits of the LLC and the appreciation of the assets of the LLC, the grant of the profits interest, if done correctly, should not result in any taxable income to the receipt at the time of the grant.

For example: If you are granted a profits interest in an LLC equal to 5% of the LLC’s outstanding equity, you have a right to 5% of the LLC’s profits after the date on which you received the profits interest. Additionally, let’s say the LLC was valued at $1 million on the date you received the profits interest. A year later, a buyer comes along and purchases the LLC’s assets for $2 million. Because the LLC’s assets appreciated in value by $1 million, your profits interests at the time of the sale would be equal to 5% of that appreciation, which is $50,000. You would not be entitled to any value of the $1 million allocated to the other members prior to the grant of your profits interest.

Typically, to create and issue profits interests, an LLC will have to amend its operating agreement to create a new class of membership interests or units that will take the form of profits interests. The current members hold capital interests in the LLC (which we would typically call the “Class A Units”), and the recipients of the profit interests would likely receive “Class B Units”, which will need to be clearly labeled and set forth in the LLC operating agreement as profits interests. The class of profits interest units can either be voting or non-voting units.

Major Similarities and Differences Between Profit Interests and Stock Options:

Like stock options, a grant of profits interests should not result in a taxable event for the recipient at the time of the grant. Unlike stock options, the recipient of a profits interest does not have to pay an exercise price to obtain the equity interest represented by the profits interest. Upon receipt of the profits interest, the recipient is a member of the LLC (an option holder only holds an option to purchase shares, and is not a shareholder until they exercise their option and pay the exercise price).

Like stock options, a grant of profits interests can also be subject to a vesting schedule. Vesting can be either time based or performance based, so that the recipient vests in the equity as they continue to provide services to the LLC, or they meet certain performance goals set by management of the LLC.

A recipient of a profits interest can no longer be considered an employee of the LLC for federal income tax purposes. Instead, once the recipient receives the profits interest, they have to be treated as a “partner”. This means that instead of having income and employment taxes withheld from their paychecks and receiving a Form W-2, they will instead have to make quarterly tax deposits themselves as a self-employed person, pay self-employment taxes, and receive a Form K-1 from the LLC. A recipient of a stock option, on the other hand, continues to retain employee status and receive a W-2 reporting their salary/withholding information.

If you want to give employees an equity incentive, but you don’t want them to cease being employees for federal income tax purposes, you could issue the equity out of a separate company set up for this purpose. This is expensive and more administratively burdensome, but employees typically prefer to have taxes withheld from their paychecks on their behalf.

For related articles, please click here.

Conclusion

While the concept of granting a profits interest in your LLC may seem straightforward, there are additional tax law requirements not discussed above that must be met in order to ensure recipients are eligible to receive profits interests (the dreaded so-called “capital account book up”, for example) (see IRS Rev. Proc. 93-27 and 2001-43).

We would be happy to discuss these complexities with you if you think profit interests may be a good option for you and your LLC. Please contact me at haveman@carneylaw.com if you have any questions.

Disclaimer: this post is for informational/educational purposes only. It is not intended to provide any legal advice.

By: Zach Haveman

We wrote about the Paycheck Protection Program (“PPP”) component of the CARES Act (“Act”) last week and how it expanded who is eligible for Small Business Administration (“SBA”) loans in response to the COVID-19 pandemic.  One of its general qualifications is that the company must have no more than 500 employees.   

One issue we are seeing is the SBA’s “affiliation” rules and how they are rendering many VC-backed startups ineligible for PPP loans based on this number-of-employee qualification.  While the Act waives the affiliation rules for certain companies [See Footnote 1], others will continue to have to follow the rules. 

When the SBA counts the number of employees of an applicant to determine whether the applicant has 500 employees or less, it will look to the number of employees of the company and the employees of its affiliates. 

For several VC-backed companies, this means that SBA will aggregate all the employees of your company, and all the employees of the VC firm backing you, and the employees of the other companies that the VC firm “controls” (more on “control below).  This could quickly push your company above the 500 employee threshold and render you ineligible for a PPP loan. 

Among the several methods to determine affiliation under 13 CFR §121.301, the following seem to be the most problematic for VC-backed startups:

1. Ownership: if one person or firm owns more than 50% of the voting shares in the company.  
2. Negative Controls: if a minority shareholder “has the ability, under the concern’s charter, by-laws, or shareholder’s agreement, to prevent a quorum or otherwise block action by the board of directors or shareholders.”
3. Management: if the CEO/President also controls the management of another business. 

Note that with respect to items 1 and 2, the SBA will deem as exercised all options and convertible securities.

Guidance

If you are wondering whether any other business is an “Affiliate” of your company, there are some straightforward gut checks you can perform, and, if necessary, bring in attorneys to help you sift through anything that is more complex. 

First, whether your CEO or President also controls the management of another company is easy enough to determine. 

Second, look at your cap table.  Does any one person or entity own more than 50%? Are those shares voting shares? 

Third, look at your Certificate of Incorporation (for Delaware companies) or Articles of Incorporation (for Washington companies).  Most if not all VC backed companies’ Certificate/Articles of Incorporation will contain what are known as “protective provisions,” that typically say the company may not do X,Y, or Z without the approval of a majority of a certain number of shares (sometimes only preferred stock, but may be more complex based on how many rounds of financing the company has undergone). 

Can any one shareholder block any of the actions set forth below? For example, if the protective provision states that a majority of the holders of Series Seed Preferred Stock have to approve a certain action, does any one shareholder hold more than 50% of the Series Seed Preferred Stock?

Next, do the protective provisions themselves trigger “Affiliation”?   The National Venture Counsel Association recently released an opinion on which do, and which do not, and many in the field are looking to this document as gospel for determining whether “Affiliation” is triggered. I would encourage you to compare the protective provisions listed in the document to yours, and see if any match up. 

To remedy this Affiliation issue, the SBA has stated that if “a minority shareholder irrevocably waives or relinquishes any existing rights…..would no longer be an affiliate of the business (assuming no other relationship that triggers the affiliation rules”).  A company can therefore request that any affiliate waive or relinquish any of its Affiliation-triggering rights.

Fourth, see if the shareholders of your company have executed any Voting Agreement, Investors’ Rights Agreement, or Management Rights Agreement.  Sometimes these agreements will give one shareholder a disproportionate amount of control over the Company, or allow one shareholder to control the entire board of the company, which could trigger Affiliation. 

Conclusion

The SBA Affiliation rules have made it more complex than anticipated for VC-backed startups to apply for PPP loans. Be sure to take into consideration the points above so you do not inadvertently disqualify your company for these loans. 

If you have any questions on the above or about the Cares Act, please feel free to email me.

Helpful Links

We have found the following link helpful if you have any additional questions about anything above or about the Cares Act. 

https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequenty-Asked-Questions.pdf

Disclaimer: this post is for informational/educational purposes only. It is not intended to provide any legal advice.

Footnote 1

The Act waives the SBA affiliation rules for these entities:

1. Any Business concern with not more than 500 employees that is assigned a North American Industry Classification System code beginning with 72 (Accomodation and Food Services companies); 
2. Any business concern operating as a franchise that is assigned a franchise identifier code by the SBA; and
3. Any business concern that receives financial assistance from a company licensed under Section 301 of the Small Business Investment Act of 1958 (Small Business Investment Companies).

For more related articles like the Cares Act, please visit our website, here.

By: James Graves

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Joe and I wrote a post last year about how to form a Washington corporation, and the importance of doing away with statutory preemptive rights held by shareholders. If a company did not to do this, all of its shareholders would automatically have the opportunity to participate pro rata in a subsequent issuance of any the company’s shares.

In 2020, the Washington legislature updated RCW 23B.06.300 to remove this preemptive right and flip the standard provision, depending on whether the corporation was form before or after January 1, 2020. Here is the relevant portion of the statute, with the parts I’m referring to bolded.

(1) The shareholders of a corporation do not have a preemptive right to acquire the corporation’s unissued shares except to the extent the articles of incorporation provide otherwise or as set forth in subsection (2) of this section. A statement included in the articles of incorporation that “the corporation elects to have preemptive rights,” or words of similar import, means that the provisions set forth in subsection (3) of this section apply except to the extent that the articles of incorporation provide otherwise.

(2) Unless the articles of incorporation provide otherwise, the shareholders of a corporation formed before January 1, 2020, have a preemptive right to acquire the corporation’s unissued shares.

(3) If shareholders of a corporation have a preemptive right to acquire the corporation’s unissued shares under this section, the following provisions apply

…

So, the rules are now this:

1. If the corporation was formed after January 1, 2020, shareholders do not have an automatic statutory preemptive right unless they are granted one in the Articles of Incorporation of the company.
2. If the corporation was formed before January 1, 2020, the old standard remains the same: the shareholders have an automatic statutory preemptive right unless the Articles of Incorporation of the Company say otherwise.

Be sure to keep all of this in mind if you’re involved in the preparation of a company’s charter.

Please contact me at graves@carneylaw.com if you have any questions.

By: James Graves

Disclaimer: this post is for informational/educational purposes only. It is not intended to provide any legal advice.