1

The company "Foo Inc" is registered in the U.S. It has not issued any shares or stock options yet.

A company CEO (Alice) needs to make a signed agreement with a third party (Carol) that Carol receives a certain minor amount of company shares or stock options when they are issued.

  • Will this agreement be a legal obligation?
  • What is a good formulation for such paper?
  • What are the consequences if Alice does not fulfill this obligation and Carol decides to sue Alice?
2

TL;DR

  • Yes
  • One that covers the essentials and leaves out the crap
  • Carol would sue the company, not Alice. She could seek an order for specific performance and/or damages.

General Corporations Background Stuff

I speak from an Australian jurisdiction but the general principles will be applicable to the US; the particulars may vary.

There will be overarching legislation that governs the operation of companies. In Australia this law is national, from my limited understanding incorporation of companies in the US is a state matter. This legislation will dictate what companies can and can't do.

Typically, such laws require a company to have a constitution which is essentially a contract between all the shareholders with each other and with the company. The law will say what must, may and must not be addressed in the constitution. It is here that such things as issuing new shares and options and transferring existing shares will be addressed.

You say "It has not issued any shares or stock options yet." This cannot be true; in order for there to be a company there must be at least one shareholder.

Specifics

Issuing stock options or shares may be a power granted by the constitution to the CEO but is usually reserved to the board or more rarely to the members (shareholders). So Alison must determine if she, in fact, has the power to bind the company to such an agreement with Carol or if she needs board (or membership) authorisation.

As an aside, if Alison does not have the power and signs the agreement anyway, then Carol would probably have the legal right to force the Company to honour it; this is because third-parties are entitled to the presumption that an officer of the company does have the power. The company would have to issue the shares to Carol and seek redress from Alison for breaching her duty to the company.

Such an agreement would generally be considered a contract binding the company (not Alice) and Carol providing that it met the threshold requirements:

  • Intention to create legal relations (on the face of it - yes)
  • Agreement
  • Consideration (the company is giving shares to Alice - what is Alice giving the company? A "free" promise is only enforceable if executed as a deed.)
  • Legal Capacity (e.g. Is Alice drunk? Is the company insolvent?)
  • Genuine Consent (Is there a mistake, undue influence, duress, unconscionable conduct etc.?)
  • Legality of Objects (a contract cannot be formed to cover illegal activities)

If the agreement constitutes a contract then it is legally enforceable.

A good formulation for any contract is one that, in line with the complexity and value of the contract, covers:

  • the obligations of each party (who will do what and when)
  • is clear about when the contract has reached completion
  • covers reasonable contingencies ("if this happens then this person will do that")
  • provides a reasonable dispute resolution mechanism (negotiation -> intense negotiation -> mediation -> arbitration -> litigation)
  • a severance provision which states that if any part of the contract is illegal or unenforceable then that provision shall be excised (in the absence of this if any part of the contract is null then legally the whole contract is)

For your contract it should cover:

  • What Carol does and when
  • What the company does and when
  • Considers reasonable contingencies and their consequences (e.g. failure of a party to perform, extraneous events like insolvency etc.)
  • Has a way of resolving disputes
  • a severance provision

The consequences of not fulfilling the terms of a contract can include:

  • Affirm that the contract continues
  • Terminating the contract
  • Repudiating the contract (i.e. there never was a contract)
  • Seeking an order for Specific Performance
  • Seeking an injunction
  • Seeking damages

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.