Publications: Articles Authored by Julius J. Brecht

Voting Agreement - Entrepreneur Safe Harbor?"
By Julius J. Brecht [1]
For The Alaska Journal of Commerce

Have you ever had a great idea but lacked the capital to make it a reality?

Perhaps, at the time you came to know some risk-takers willing to invest in your idea. However, you soon realized that they also wanted to be involved in directing the effort to develop and sell products or services – the fruits of your idea.

How do you protect yourself from being squeezed out of meaningful involvement in the venture? You may, among other things, wish to consider entering into a voting agreement.

The dilemma which you face is challenging. In your favor, you have a great idea, and you may have a design, working model or even a patent pending on it. At the same time, you either do not have or do not wish to use your personal assets to fund the venture.

Your comfort level may be satisfied through a guaranteed employment contract for a stated term along with stock options and other incentives. But then again, because it is your idea, you may wish to establish a longer and more meaningful involvement with your company in developing and sharing profits from your idea.

The specific capacity of your involvement in, and specific protection which you may seek with respect to, the venture depends to some extent upon the form of your company’s organization. For example, it may be formed as a limited partnership, limited liability company or corporation.

If formed as a limited partnership, your company would be controlled through its general partners and funded through its limited partners. You may quickly find that one or more investors who make significant investments are likely to want status as general partners as well as limited partner investors.

Your relationship with these majority investors does not become much better using a limited liability company business form. With limited exception, this business form is controlled through its members whose interests and relative voting strength are based upon membership interests purchased. The exception involves, where provided in the company’s articles of organization, management by a manager.

If your company is formed as a corporation, control of it is exercised by its majority shareholders, i.e., those persons holding at least a simple majority of the outstanding shares. It is that faction that elects the company’s board of directors. The board in turn sets policy and elects officers to carry out that policy and manage the day-to-day company operations. In other words, controlling board membership ultimately means controlling your company's direction, including declaration of dividends (in stock or cash) as a return on investment.

There is a common theme in these three business forms. Unless the majority investors are willing to dilute their interests by allowing you significant capitalization of your idea (in lieu of cash contributed to the venture), you lose ownership control of the venture by accepting their cash contributions.

So, the goal for the entrepreneur is to seek to be a part of the effort to control those who set the policy of the organization. Using the corporate form for your company allows you to accomplish that goal using a voting agreement.

What is a voting agreement? The Alaska Corporations Code is the law under which a person may incorporate a for-profit business in Alaska. By contrast, your company may be incorporated in another state and function in Alaska as a foreign corporation under that code. The balance of this article focuses on what can be done with a voting agreement under the code.

The code provides that company shareholders may enter into a voting agreement where the agreement is consistent with that code. This provision is a broad mandate to those shareholders.

The entrepreneur’s challenge is to get majority shareholders to give up or otherwise limit through a voting agreement their rights as majority owners of the company. They may be willing to do so for several reasons.

The majority shareholders should understand that you bring to the transaction the idea, perhaps partial development of it (design, model, patents, etc.) and technical knowledge to make it work. The majority shareholders bring to the transaction the cash needed to fund developing and marketing of the idea for sale and profit of all investors, including the entrepreneur.

The majority shareholders do not necessarily have the expertise to make the idea work. They need the entrepreneur in the effort to turn a profit on the venture.

The voting agreement does not require all shareholders to enter into it. It’s simply an agreement among certain of the shareholders who, through their share ownership, seek to control or otherwise significantly influence shareholder votes on director elections and other matters coming before the shareholders.

A voting agreement typically provides that all parties to it must vote on topics, and in a manner, as specified in it. An agreement usually provides that all parties to it are to vote for the nominees of the other parties to the agreement. However, the terms of the agreement are, to a large extent, negotiable by the parties.

A voting agreement can include a promise to vote unanimously on specific items of business that come before the shareholders. These items can include approval of any matter required to implement action which is the subject of a contract between one or more of the parties to the agreement and which in some way supports the development and operation of the company’s business. It can also include a general provision encompassing any other matter to which the parties unanimously agree.

Under the code, there is no time limit on the duration of a voting agreement. That is, its duration is controlled by its terms. For example, the agreement can provide that it is effective so long as there remain two or more parties to it or until the remaining parties unanimously agree to terminate the agreement.

The usefulness of a voting agreement is not limited to the start up of a business. It can be considered at any time during the business' life cycle.

In summary, the entrepreneur taking on investors to move his or her idea to reality may seek to establish his or her involvement in the venture beyond mere employment through a voting agreement. What terms go into the agreement ultimately are determined by the relative negotiating strengths of the entrepreneur and the prospective investors.

The shrewd entrepreneur identifies his or her goals before entering those negotiations.

[1] Mr. Brecht is an attorney in private practice and shareholder with the law firm of Wohlforth, Brecht, Cartledge & Brooking, A Professional Corporation, with offices in Anchorage, Alaska. Mr. Brecht's concentration of practice is in state and federal securities law and corporate and finance law. The content of this article was not prepared as, and must not be construed as, legal or investment advice to anyone. He may be reached at .

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