How will the legal entity be governed?
The manner in which the persons chosen to govern a legal entity will govern the entity is described in the governance documents of the entity. The nature of the governance documents will depend on the form of entity chosen. For purposes of a water fund, the mission of the fund can be included in the governance documents, which would limit the discretion of the board of directors or other managing persons (depending on the nature of the entity) in managing the resources of the fund … only projects that are consistent with the mission (or missions) of the fund could be financed by the board.
Key considerations:
- Certificate of Incorporation
- Bylaws
- Limited liability company agreement
- Partnership agreement
GOVERNANCE DOCUMENTS
Below is an introduction to each of the governance documents and a brief overview of the provisions that they typically contain:
Certificate of Incorporation
A certificate of incorporation is a document filed with the appropriate jurisdiction’s filing office (in the case of most states in the United States, this is usually the Secretary of State) in order to create a corporation. A corporation is not properly formed until a certificate if formation has been filed with the appropriate filing office. In most U.S. states, the certificate of incorporation for a corporation is referred to as either the “Articles of Incorporation” or the “Certificate of Incorporation.”
FOR-PROFIT CORPORATION
While the requirements regarding the information that must be included in the certificate of formation vary from jurisdiction to jurisdiction, a corporation must generally provide:
● The corporation’s name.
● The address of its principal place of business.
● The name and address of the corporation’s registered agent for service of process.
● The nature of its business.
● The number of authorized shares of capital stock the corporation may issue.
● The name and address of the incorporator.
Beyond serving to form a corporation, the certificate of incorporation can also provide governance provisions addressing the following:
● Annual meetings of the shareholders of the corporation (where, among other things, shareholders vote for the directors).
● Necessary approvals by the board of directors and shareholders including: any deviation from the default rule requiring majority voting, and allowing directors or shareholders to approve actions by written consent in lieu of calling a meeting of the directors or shareholders.
● Transfer restrictions with respect to the corporation’s stock and procedures for issuing new stock.
● Number of directors (sometimes the number of directors is determined in the bylaws).
NON-PROFIT CORPORATION
The requirements for the articles or certificate of incorporation or organization of a non-profit corporation also vary by jurisdiction, but generally they require:
● The corporation’s name.
● Corporate purpose – listing the public or charitable purposes for which the corporation is organized.
● The address of its principal place of business.
● The name and address of the corporation’s registered agent for service of process.
● The name and address of the incorporator.
● Statements intended to comply with the requirements for non-profit status under the Internal Revenue Code of the United States.
● Provisions regarding disposition of assets if the non-profit is dissolved (generally assets must be distributed to another non-profit organization or otherwise for a public charity purpose, not to any directors, officers, members or for-profit enterprises).
Basic forms of Certificates of Incorporation for California and Delaware for-profit corporations and nonprofit public benefit corporations are provided here.
Bylaws
Bylaws are an important governance document required for any corporation, whether for-profit or nonprofit. While the certificate of incorporation of an entity may provide a number of governance terms, the bylaws generally provide the majority of the governance provisions of a corporation, although, if there is a conflict between the provisions of a corporation’s certificate of incorporation and its bylaws, the certificate of incorporation will control.
The bylaws are not filed with the jurisdiction of incorporation’s filing office; instead, the bylaws are generally filed with the books and records of the corporation (as further described below).
FOR-PROFIT
The bylaws will typically address the following:
● The composition of the corporation’s board of directors including the number of directors.
● The terms of each director.
● Procedures for nominating, electing, and removing directors from the board.
● Special or advisory committees of the board.
● Frequency of regular meetings of the board of directors and the corporation’s shareholders.
● Approval requirements for corporate actions.
● The roles of various corporate officers.
● Procedures for appointing corporate officers.
● Indemnification of directors and officers.
NON-PROFIT
The bylaws of a non-profit corporation will typically include:
● The non-profit’s purpose or mission.
● The meeting procedures for members (if any) and directors (including notice and voting requirements).
● The rights, eligibility requirements and responsibilities of members (if any) and directors (including the terms for which directors are elected.
● Officer positions, if any.
The bylaws may also include:
● Indemnification of directors, and possibly officers and employees.
● Compensation or reimbursement policies for directors.
● Procedures for the conduct of business during natural disasters (such as special notice and quorum requirements for director or member meetings).
● Provisions regarding disposition of assets if the non-profit is dissolved (generally assets must be distributed to another non-profit organization or otherwise for a public charity purpose, not to any directors, officers, members or for-profit enterprises)(if not included in the articles/certificate of incorporation).
● Reports and records.
● Restrictions on self-dealing transactions by directors.
One word of caution with respect to both certificates of incorporation and bylaws—the provisions of these documents generally mirror provisions of their respective jurisdiction of organization’s corporate law or contain acceptable deviations from the default laws of a particular jurisdiction. Those forming a new entity should be careful to only use forms of certificates of incorporation and bylaws that are for entities in their jurisdiction in order to ensure that their organization will be formed and governed in compliance with the appropriate corporate law.
Basic forms of bylaws for California (for-profit and nonprofit public benefit corporations) and Delaware for-profit corporations are provided below.
Limited liability company agreement
A limited liability company agreement, frequently called an “operating agreement” is an agreement that details the governance arrangements and the members’ financial and managerial rights and duties of a limited liability company. The limited liability company agreement is entered into among the LLC and its members and is required by many states in the United States. In addition to providing for the name of the company, address of the principal place of business, purpose of the company, and other items that are similar to what would be included in the certificate of incorporation or bylaws of a corporation, the operating agreement will also typically include provisions addressing the following:
● Capital contributions that members are required to make and provisions related to the capital accounts of the LLC.
● The methods for allocating the profits and losses of the limited liability company to its members.
● Management of the LLC.
● Appointment of officers.
● Procedures for appointing and removing a managing member (if a manager-managed LLC).
● Transfer restrictions applicable to membership interests.
● Procedures for liquidating and dissolving the LLC.
While many states in the U.S. have default rules governing the governance of a limited liability company, those forming a limited liability company can often deviate from such default rules in an operating agreement.
Basic forms of limited liability company agreements for California (multiple-member) and Delaware (single and multiple-member) LLCs are provided below.
Partnership agreement
A partnership agreement is an agreement that, similar to a limited liability company agreement, details the governance arrangements and partners’ financial rights (such as the distribution of profits and losses) and obligations in a limited partnership. The partnership agreement is entered into by the partners of the limited partnership and is required by many states in the United States, however partnership agreements are not necessarily required. That said, even if the jurisdiction in which a water fund is proposed to be formed does not require a partnership agreement, it is strongly recommended that one be drafted in order to provide clear guidelines for the governance of the partnership. While many states have default rules governing partnerships, as is this case with LLCs, the partnership can in most cases deviate from the default rules in the partnership agreement.