chapter one introduction to pennsylvania corporate practicedownloads.pbi.org/pubs/8222 business...

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Chapter One

Introduction to Pennsylvania Corporate Practice

William H. Clark, Jr.

This chapter is an introduction to Pennsylvania corporate practice in general and to the discussions in the remaining chapters of this book.

Section 1-1 of this chapter is an overview of the significant factors that influence the choice of where to in-corporate a business, including the similarities and differences between the Pennsylvania Business Corpo-ration Law of 1988 and the Delaware General Corporation Law (Delaware GCL). Section 1-3 describes the classification of private corporations under Pennsylvania law generally, with particular emphasis on the classification of business corporations in the BCL by size and type. The reader should also consult the two appendices that outline the general procedures under the BCL for incorporating nonpublic corporations; see appendices 1-A, Incorporation—Data Collection Sheet, and 1-B, Annotated Incorporation Process Outline and Checklist.

Throughout this chapter, as well as those that follow (with the exception of chapter 9), the focus is on non-public corporations. As discussed in section 1-3.2, the BCL uses the term “registered corporation” to refer to publicly traded corporations incorporated under the BCL. The term “nonregistered corporation” is then de-fined in section 1103 as any “corporation that is not a registered corporation.” Thus, the focus of this chap-ter will be on nonregistered corporations, and that term is used throughout this chapter in its defined sense.

1-1 Choosing the State of Incorporation

The first question to be asked when organizing the legal affairs of a business is what type of entity should be used: should the business be conducted as a sole proprietorship, partnership, corporation, limited liability company, or some other type of entity? The analysis of whether to incorporate a business includes consider-ation of the following factors: (1) the tax advantages and disadvantages of incorporating, (2) limited liability, (3) centralized management, (4) greater continuity of organization, (5) transferability of interests, (6) flexibil-ity of management, and (7) the costs, both initial and continuing. This chapter does not deal with the ques-tion of whether to incorporate, but simply assumes that a prior decision has already been made to incorpo-rate. Assuming the choice has been made to incorporate, the question then becomes where to incorporate.

1-1.1 General Considerations

The considerations that influence the choice of the state of incorporation of a nonregistered corporation are (in decreasing order of importance):

(1) the location of the operations of the business,(2) state corporation laws,(3) state tax laws,(4) securities laws, and(5) other state laws.


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Each of those considerations is discussed generally below.

1-1.2 Location of the Operations of the Business

In theory, the promoters of a business have the option of incorporating in any state. The practical choices, however, are usually limited to the state in which the corporation will have its principal operations and a state, such as Delaware, that is known for having a hospitable corporate law environment.

State corporation laws are principally concerned with a corporation’s internal affairs—the roles of its share-holders, directors, and officers. In most small corporations, corporate governance issues are fairly simple and a choice between sophisticated corporate governance models under various state corporation laws can be avoided in favor of a more practical decision based on convenience and expense. For most small busi-nesses, the normal practice is to incorporate a business under the laws of the state in which its principal op-erations will be located (which will be referred to in this discussion as its “home state”).

The home state is usually chosen as the jurisdiction of incorporation to avoid the necessity of making more than one set of corporate law filings. If a business incorporates in a jurisdiction other than its home state, it will need to go through the additional step of qualifying to do business as a foreign corporation in its home state. The two sets of statutory filings may impose on the corporation each year double fees for a registered agent and double franchise or other corporate taxes. In most cases the benefits of incorporating in another state do not justify the added cost. (The most common exception is a corporation organized for the purpose of engaging in a statutory transaction, such as a merger, with another corporation. In that case it is usually simplest to incorporate in the same state as the other corporation so that only one set of statutory filings is necessary.)

A second consideration is that a corporation is subject to suit in its state of incorporation and in many in-stances the internal affairs doctrine requires that suits brought in jurisdictions other than the state of in-corporation must be dismissed in favor of litigation in that state. 1 The inconvenience of litigating in another state, possibly at a significant distance, is generally not worth the benefits of incorporating in that state for most small businesses.

A further reinforcement of the idea that it is generally preferable to incorporate a business in its home state is found in the case of California and New York. The corporation laws of those states have what are known as “sticky fingers” provisions that disregard the state of incorporation and apply certain provisions of their corporation laws to certain foreign corporations doing business in the state. 2 Since the law of California or New York may apply in any event to a corporation with its principal operations in one of those states, con-fusion will be avoided by simply incorporating in that state.

1-1.3 State Corporation Laws

Where it is considered desirable to evaluate the possibility of incorporating in a state other than the home state of a small business, the following corporation law issues should be examined:

(1) Are limits imposed on corporate powers or purposes?(2) Can the desired capital structure be obtained?(3) With respect to the internal affairs of the corporation:

(a) Are there any special qualifications required of directors?(b) May the board of directors be classified by term of office or representation of specific groups?(c) Are there any restrictions on the number of directors?(d) May the board of directors and shareholders act by consent without a meeting or by a meeting

held by telephone?(e) What are the provisions relating to the removal of directors?

1. Note that the internal affairs doctrine has been partially eliminated in Pennsylvania by section 4145(a).2. See Cal. Corp Code § 2115; N.Y. BSC Law § 1319. A similar provision is found in the Pennsylvania Nonprofit Cor-

poration Law of 1988, 15 Pa.C.S. § 6145(c).

1-1.4 State Tax Laws

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(f) Are there any requirements as to the location of meetings of the board of directors or shareholders?(g) Do the shareholders have the right to call special meetings of the shareholders?(h) Do the shareholders have the right to propose amendments to the articles?

(4) What restrictions are placed on payment of dividends?(5) What are the provisions relating to the personal liability, and the limitation of that liability by means

of insurance or indemnification, of directors, officers, employees, and shareholders?(6) What are the requirements for amending the articles, merging the corporation with another, or sell-

ing all or substantially all the assets of the corporation?(7) Are there instances where shareholders may be liable for the debts of the corporation?(8) May the articles of incorporation or bylaws contain voting requirements for directors and sharehold-

ers higher or lower than those generally provided for by statute?

When considering where to incorporate a Pennsylvania business, the choice usually becomes one of Penn-sylvania or Delaware. Because of the importance of this issue, a detailed comparison of Pennsylvania and Delaware law is set forth in section 1-2.

1-1.4 State Tax Laws

With limited exceptions, such as the Delaware franchise tax, which is discussed below, state taxes are gen-erally not implicated based on state of incorporation, but are determined based on where a corporation has activity. Accordingly, a company doing business in Pennsylvania will pay the same amount of Pennsylvania corporate net income tax (and capital stock/foreign franchise tax) whether it is incorporated in Pennsylva-nia or Delaware.

The general rule is that a corporation will be subject to income tax in any state in which its business activi-ties create a sufficient “nexus.” Assuming a corporation has been determined to have a sufficient “nexus” and is thus subject to income tax in a particular state, the corporation’s income is either allocated (nonbusi-ness income) or apportioned (business income) among the states where the corporation is doing business.

An allocation of nonbusiness income is based on the geographic location of the source of that income. In-come that is not allocated to specific states is apportioned among the various states in which the corpora-tion is subject to tax according to a formula that is established by each state. Historically, the most common apportionment formula was a three-factor formula based on property, payroll, and sales. However, many states, including Pennsylvania (as of 2013), have moved to a single factor apportinment formula based on sales. See 72 P.S. § 7401(3)(2)(a)(9)(A).

Currently the corporate net income tax rate in Pennsylvania is 9.99 percent. 72 P.S. § 7402(b). Through the end of 2015, companies doing business in Pennsylvania are subject to the capital stock/foreign franchise tax. (Many years ago, Pennsylvania entities were subject to the capital stock tax, and foreign entities doing business in Pennsylvania were subject to the foreign franchise tax; however, the taxes are now computed identically and there is no practical difference.) The tax base is determined through a mathematical for-mula based on average accumulated book income over five years and net worth. 72 P.S. § 7601(a). The tax is apportioned using either an exempt assets factor (book value of taxable assets divided by book value of total assets) or a three-factor apportionment formula as described above. The phaseout of this tax has been ongo-ing, and the 2015 rate is minimal, .45 mills, or .045 percent. 72 P.S. § 7602(h). Beginning in 2016, the tax will be completely phased out.

The Delaware franchise tax is applicable only to corporations incorporated in Delaware. The tax may be computed either of two ways: (1) the authorized share method, which is based on the number of shares of authorized capital stock, or (2) the assumed par value method, which is based on the par value of all issued and treasury stock and the corporation's gross assets. 8 Del. Code § 503(a).

The authorized share method is significantly less complicated, and under this method, corporations will pay the minimum tax of $175 if there are fewer than 5,000 authorized shares. If there are more than 5,000 but less than 10,000 shares authorized, the tax is $250. Note that there is a maximum tax of $180,000 per year.

Close corporations choosing to incorporate in Delaware should not authorize more stock than is reasonably necessary, and in doing so should owe only a nomimal amount of franchise tax.


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Pennsylvania does not have a tax analogous to the Delaware franchise tax.

1-1.5 Securities Laws

Although federal and state securities law issues are often not that significant when a small business is be-ing established, there are a few situations where the choice of a state of incorporation may affect the appli-cation of the securities laws.

The choice of a state of incorporation may influence the corporation’s possible future use of the so-called in-trastate exemption from registration available under section 3(a)(11) of the Securities Act of 1933 (15 U.S.C. § 77c(a)(11)) and Rule 147 promulgated under that act (17 CFR 230.147).

The intrastate exemption from registration is particularly useful for offerings to employees where the num-ber of employees, amount of the offering, or lack of sophistication of the purchasers makes other exemptions difficult to rely upon. In order to rely on the intrastate exemption, the issuer must be both a resident and doing business in the same state as all offerees and purchasers in the offering. Since a corporate issuer is considered to be a “resident” of the state in which it is incorporated, Rule 147(c)(1)(i), a corporation will be able to rely on Rule 147 to issue shares only if it is incorporated in the same state as that in which it main-tains its principal office.

State blue sky laws generally apply to purchases and sales of securities in a state and are designed to protect purchasers of securities within the state. Although the state of incorporation of a business generally does not affect the application of state securities laws to sales of its securities, there are certain limited instances where the state of incorporation may be significant. The Pennsylvania Securities Commission, for example, has by regulation exempted from the application of the Pennsylvania Securities Act of 1972 the sale of shares in a professional corporation organized under Pennsylvania law. 10 Pa.Code § 202.091. This could be a significant consideration if the securities laws of an alternative state do not permit such exemption.

1-1.6 Other State Laws

Although they are important when deciding where to conduct operations, noncorporate substantive laws are not that important for selecting a state of incorporation because their application is affected more by other facts and circumstances (i.e., where a tort is committed). State unemployment insurance laws, for ex-ample, apply to workers in-state, and workers’ compensation acts apply to all accidents occurring within a geographic location, irrespective of a business’s state of incorporation. A state’s public policy with respect to noncompetition covenants is designed to protect residents and is generally not tied to the state of incorpora-tion of the employer. Further, the state of incorporation also does not significantly influence the governing law selected by the parties in contracts.

1-2 Comparison of Pennsylvania and Delaware Corporation Laws

Because the choice of where to incorporate a Pennsylvania business has typically involved selecting between Pennsylvania and Delaware, a detailed comparison of the BCL and the Delaware GCL is set forth below.

1-2.1 Indemnification and Liabilities of Directors

The Delaware GCL provides that the exoneration of directors from liability that may be provided in a corpo-ration’s certificate of incorporation does not apply to “any transaction from which the director derived an improper personal benefit.” Del. GCL § 102(b)(7)(iv). The phrase “improper personal benefit” is not defined in the Delaware GCL and may be significantly broader than the transactions covered by Del. GCL § 144 re-lating to interested directors. It is unclear in particular whether actions that have the effect of maintaining directors in office would involve an improper personal benefit.

The BCL is clear that exoneration is available except in cases of self-dealing, willful misconduct, reckless-ness, criminal acts, or taxes. § 1713. Also, the BCL makes clear that the bylaws may provide exoneration for officers similar to that for directors. § 1712(c).

1-2.4 Optional Differences

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In the related area of indemnification, the BCL is significantly more protective of directors and officers be-cause Pennsylvania permits indemnification against judgments or settlements in derivative suits, which is not authorized in Delaware. § 1746(c).

1-2.2 Corporate Structure

The BCL provides much greater flexibility than the Delaware GCL with respect to numerous issues of cor-porate structure:

(1) “Blank check” stock. In Pennsylvania, the articles may authorize the board to divide the authorized shares into classes and series and to determine the voting rights, preferences, limitations, and special rights of the shares of any class or series. § 1522. In Delaware, however, the board does not have authority to divide shares into classes and its blank check authority is limited to a designated class of pre-ferred stock. Del. GCL § 102(a)(4).

(2) Selection and removal of directors. The BCL permits the bylaws to provide for the se-lection of alternate directors, § 1725(c), while Delaware has no provision for alternate directors.

In Delaware, only a staggered board may be protected from removal without cause, Del. GCL § 141(k)(1); in Pennsylvania, a bylaw adopted by the shareholders may protect a board that is not classified into staggered terms from removal without cause. § 1726(a)(1).

1-2.3 Fundamental Transactions

(1) Required vote. Under the Delaware GCL, an absolute majority of the outstanding voting stock is required generally to take action on a fundamental transaction such as a charter amend-ment or a merger. In Pennsylvania, a majority of the shares voting (rather than an absolute majority) is sufficient generally to take action on a fundamental transaction. §§ 321, 1103 “voting,” and 1914.

(2) Interest exchange. The BCL authorizes a type of transaction not found in the Dela-ware GCL, referred to as an interest exchange, subchapter 3D, in which all the outstanding shares of one or more classes or series of a domestic business corporation may be acquired by any person through an ex-change of shares according to a plan of exchange. An interest exchange in effect permits a triangular merger to be done without the use of the third transactional corporation.

(3) Division. The BCL authorizes a type of statutory transaction not found in the Dela-ware GCL in which any domestic business corporation may be “divided” into two or more domestic business corporations in what is intended to be the reverse of a merger. Subch. 3F.

(4) Special treatment. The BCL permits an amendment or “plan” (as defined in sections 312 and 1906(e)) to contain a provision classifying the holders of shares of a class or series into one or more separate groups (as long as the classification is based on criteria that “are not manifestly unreasonable”), §§ 329 and 1906, and providing mandatory treatment for shares of a group so established that differs from the treatment accorded shareholders holding shares of another group. The Delaware GCL does not autho-rize such a procedure.

1-2.4 Optional Differences

The BCL provides a rule that is more protective of shareholders of a nonregistered corporation than the rule of the Delaware GCL in the areas highlighted below. In each case, however, an appropriate provision may be included in the articles so that a Pennsylvania nonregistered corporation will effectively be in the same position as a Delaware corporation. The opposite is the case for registered corporations, where chap-ter 25 of the BCL makes a Pennsylvania registered corporation subject to the Delaware rule in each area


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listed below unless the corporation elects to retain the Pennsylvania rule. 3 The “optional” differences in-clude the following:

(1) Effective date of partial consent. § 1766(c). The BCL provides that action taken by partial consent of the shareholders without a meeting shall not become effective until at least 10 days’ writ-ten notice of the action has been given to each shareholder entitled to vote on the matter who has not con-sented to the action. The Delaware GCL does not impose such a delay (compare Del. GCL § 228(e)).

(2) Adjournment of shareholder meetings. § 1755(c). Under the BCL, any meeting at which directors are to be elected may be adjourned only from day to day, or for longer periods not exceeding 15 days as the shareholders present at the meeting direct. The Delaware GCL does not restrict the adjourn-ment of meetings.

(3) Calling special meetings of shareholders. § 1755(b). The BCL authorizes shareholders entitled to cast at least 20 percent of the votes to call a special meeting. Stockholders in a Delaware corpora-tion do not have a statutory right to call special meetings (compare Del. GCL § 211(d)).

(4) Proposing amendments of the articles. § 1912(a). The BCL authorizes shareholders entitled to cast at least 10 percent of the votes to propose amendments to the articles. Stockholders in a Del-aware corporation do not have such a right (compare Del. GCL § 242(b)(1)).

(5) Fixing the quorum at shareholder meetings. § 1756. The BCL provides that the statu-tory rule on quorums may be varied only by a bylaw adopted by the shareholders. The Delaware GCL per-mits the directors to adopt such a bylaw (compare Del. GCL § 216).

1-3 Classification of Corporations

This section outlines the general classification scheme of private corporations incorporated under Pennsyl-vania law and the provisions of the BCL that apply to the various types of business corporations.

1-3.1 General Classification Scheme

The most general level of classification of private corporations incorporated under Pennsylvania law is based on whether they are conducted for profit or not for profit. With the limited exceptions described be-low, a corporation for profit (which is a defined term in section 102) will be subject to the BCL. A corpora-tion not-for-profit (also defined in section 102) will be subject to the Nonprofit Corporation Law of 1988 (re-ferred to here as the 1988 NPCL) (subpart IIC of title 15). 4

A second level of classification, which is found within both the BCL and the 1988 NPCL, is based on where a corporation is incorporated (i.e., “domestic” or “foreign”). Domestic corporations for profit that are subject to the BCL are referred to as “business corporations” or “domestic business corporations.” § 1103. Foreign corporations for profit subject to chapter 41 of the BCL are referred to as “foreign business corporations.” § 4101(a).

The third level of classification is based on whether or not a corporation is subject to the BCL. There are certain domestic corporations that are excluded from the scope of the BCL 5 and are referred to informally as “section 1102 corporations.” It is important to note, however, that the excluded corporations are subject to chapter 5 of title 15.

In addition to the general classification scheme described above, corporations are also classified by the BCL on the basis of both the number of shareholders and substantively by type.

3. Note that a corporation that has as shareholders only registered corporations (i.e., a subsidiary or joint venture) is also considered a registered corporation. § 2502(2).

4. The one exception is fraternal benefit societies. See 15 Pa.C.S. § 5102(c).5. The excluded domestic corporations for profit are (1) banking institutions, (2) credit unions, and (3) savings asso-

ciations. § 1102(c).

1-3.3 Classification of Corporations by Substantive Type

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1-3.2 Classification of Corporations by Number of Shareholders

(1) Publicly Traded Corporations. All business corporations are by definition either “reg-istered corporations” or “nonregistered corporations.” § 1103. A “registered corporation” is defined in section 2502 of the BCL as a domestic business corporation (1) with a class or series of shares entitled to vote gen-erally in the election of directors registered under the Securities Exchange Act of 1934, or a closed-end mu-tual fund (referred to informally as a “type one registered corporation”); (2) subject to the reporting obliga-tions of section 15(d) of the 1934 act by reason of having registered equity securities under the Securities Act of 1933, or an open-end mutual fund (referred to informally as a “type two registered corporation”); or (3) with all of its shares owned, directly or indirectly, by one or more registered corporations. A corporation may become a registered corporation by voluntarily registering under the 1934 act even though it is not re-quired to register under that act.

The BCL does not use the term “foreign registered corporation.” Instead, a foreign corporation that would be a registered corporation if it were incorporated in Pennsylvania is referred to as a “corporation described in section 4102(b)(1).” See the Committee Comment to § 1103.

Chapter 25 of the BCL is a collection of the provisions applicable to registered corporations, although not all of the provisions of chapter 25 are applicable to all types of registered corporations. A further discussion of chapter 25 appears in section 1-3.3 of this chapter.

(2) Close Corporations. At the opposite end of the spectrum from registered corporations are two types of corporations with very small numbers of shareholders. The BCL treats separately “closely held corporations” and “statutory close corporations,” which are defined terms in section 1103.

“Statutory close corporation” status under the BCL is the successor to “close corporation” status under the 1933 BCL. Statutory close corporation status is optional and is acquired by appropriate provisions in the ar-ticles of incorporation. § 2303. The statutory close corporation provisions are in essence a statutory substi-tute for a shareholders agreement. On the other hand, the status of “closely held corporation” is not elective, but is conferred automatically by statute when (1) a corporation has 30 or fewer shareholders, or (2) a corpo-ration has elected statutory close corporation status. § 1103.

Statutory close corporations are not limited to a maximum number of shareholders. A statutory close corpo-ration may have more shareholders than permitted for taxation as an “S corporation” 6 and it may have more shareholders than the number specified in the definition of “closely held corporation.” Nonetheless, all statutory close corporations are by definition “closely held corporations.” But note that the converse is not true, i.e., a closely held corporation is not automatically a statutory close corporation and must actively elect that status.

It must be emphasized that both statutory close corporation status and closely held corporation status are independent of the federal and state tax status of a corporation. Electing statutory close corporation status does not confer upon the corporation the tax status of an S corporation under either federal or state tax laws. A corporation may have statutory close corporation status without being an S corporation, and an S corporation need not be a statutory close corporation.

1-3.3 Classification of Corporations by Substantive Type

(1) Nonstock Corporations. Chapter 21 of the BCL provides special rules applicable to cor-porations organized on a nonstock basis. It is relevant mainly for mutual insurance companies and to support chapter 71, which provides for the incorporation of for-profit cooperative corporations on a nonstock basis.

(2) Statutory Close Corporations. Statutory close corporations are subject to chapters 11 through 19 and chapter 23 of the BCL. Chapter 23 is an amalgamation of two sets of provisions: (1) chapter B of article III of the 1933 BCL, which focused principally on issues of corporate governance, and (2) provi-

6. Under federal and Pennsylvania law, “S” corporations are limited to 100 shareholders. 26 U.S.C. § 1361(b)(1)(A) (2002) and 72 P.S. § 7301(s.2).


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sions adopted from the Statutory Close Corporation Supplement to the Model Business Corporation Act. These adopted provisions set forth a standardized form of shareholders agreement.

The effect of chapter 23 on existing 1933 BCL close corporations has been insubstantial. There has been es-sentially no change in the affairs of 1933 BCL close corporations organized before October 1, 1989. This is due to the fact that the substantive provisions of old chapter B of article III of the 1933 BCL have been sub-stantially reenacted and the applicability of the new “shareholder agreement” provisions is expressly ex-cluded by section 2301(d). In order for a 1933 BCL close corporation to become subject to the provisions listed in section 2301(d), a unanimous vote of all shareholders, whether or not otherwise entitled to vote, is required.

(3) Registered Corporations. Chapter 25 of the BCL is a collection of the provisions appli-cable to public companies and is a combination of two types of provisions: those intended to equalize Penn-sylvania law with that of Delaware in regard to shareholder rights, and a series of antitakeover provisions that are significantly more protective of management than Delaware law.

At the time a shareholder invests in a nonpublic company, the company will not be subject to any of the pro-visions of chapter 25. Should the company go public, however, it will become a type two registered corpora-tion on the day after it completes its initial public offering, and it may also become a type one registered cor-poration at that time. If it does not immediately become a type one registered corporation, it may become one at a later date either by operation of law when it meets the tests of section 12(b) or (g) of the Securities Exchange Act of 1934 or by voluntarily registering under section 12(g).

Changes in rights of shareholders. The provisions of chapter 25 that are designed to make Pennsylvania law equivalent to Delaware law apply to both type one and type two registered corporations and thus will apply immediately upon the closing of an initial public offering by a corporation in which a shareholder has invested. It should be noted that each of the provisions described below may be made inapplicable by an ap-propriate provision in a corporation’s articles. § 2501(c).

Of particular note are the following three provisions of chapter 25, which provide that certain rights of shareholders that apply to a privately owned corporation are lost when the corporation goes public:

(a) Section 1755(b)(2) gives the right to call a special meeting at any time to shareholders entitled to cast at least 20 percent of the votes that all shareholders are entitled to cast. Section 2521 provides that this right is not available to shareholders of a registered corporation.

(b) Section 1912(a)(2) gives the right to propose an amendment to the articles of incorporation to share-holders entitled to cast at least 10 percent of the votes that all shareholders are entitled to cast. Sec-tion 2535 provides that this right is not available to shareholders of a registered corporation.

(c) Section 1932(c) gives shareholders dissenters rights upon certain sales of all or substantially all of the assets of their corporation. Section 2537 eliminates those dissenters rights in the case of a registered corporation.

Antitakeover provisions. In addition to the provisions described above, chapter 25 contains a series of anti-takeover provisions that are described below and that, in each instance other than section 2538, are limited to type one registered corporations. A more detailed discussion of these provisions may be found in chapter 10 of this book.

(a) Section 2513 authorizes the adoption of poison pills.(b) Section 2538 requires the approval of disinterested shareholders before a corporation can engage in a

transaction with an interested shareholder.(c) Subchapter 25E (the “control transaction” provision) requires a person who acquires 20 percent or

more of the shares of a corporation to purchase any other shares that other shareholders elect to sell to the acquiring person. The price to be paid by the acquiring person is a judicially determined value that is to reflect a control premium.

(d) Subchapter 25F (the “business combination” provision) prohibits an acquiring person from breaking up a corporation or otherwise relying on its assets to pay down any debt used to acquire control of the corporation unless the board of directors of the corporation gives its prior approval to the acquisition of control or certain very restrictive tests are satisfied.

1-4 Procedures for Organization of a Pennsylvania Business Corporation

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(e) Subchapter 25G (the “control share acquisition” provision) requires the approval of shareholders be-fore anyone who acquires or seeks to acquire certain levels of share ownership may vote the “control shares.” A corporation that is subject to subchapter 25G will also be subject to subchapters 25I and 25J, which provide for certain severance compensation and the continuation of labor contracts follow-ing certain transactions.

(f) Subchapter 25H (the “disgorgement” provision) requires the disgorgement of profits earned from a sale of shares following certain attempts by the seller to acquire control of the corporation.

(4) Management Corporations. Chapter 27 of the BCL provides special rules for manage-ment companies registered under the Investment Company Act of 1940 as well as other corporations that elect to be subject to its provisions. In particular, chapter 27 permits the elimination of election of directors and requires the consent of the directors to a wide variety of shareholder actions.

(5) Professional Corporations. Chapter 29 provides special rules for professional corpora-tions and is essentially a reenactment of the Professional Corporation Law of 1970 (former 15 P.S. § 2901 et seq.).

(6) Insurance Corporations. Effective on June 19, 1991, insurance corporations became subject to the BCL, and the provisions of the Insurance Company Law of 1921 that duplicated provisions of the BCL were repealed. In addition to the provisions of chapters 11 through 19, domestic insurance corpora-tions are subject to chapter 31, which provides certain special rules applicable only to insurance corporations.

(7) Public Utility Corporations. All public utilities incorporated in Pennsylvania have be-come subject to the BCL, and the large number of old corporation laws previously applicable to utilities has been repealed. See also § 1511.

(8) Benefit Corporations. Chapter 33 of the BCL permits a business corporation to elect the status of being a benefit corporation. A benefit corporation is subject generally to the BCL except that it has three distinctive characteristics:

(a) The purpose of the corporation includes having a material positive impact on society and the environ-ment. § 3311. A benefit corporation may also elect to pursue a particular social or environmental goal in addition to its general commitment to have a positive social and environmental impact.

(b) Directors and officers are required to consider the interests of all of the corporation’s stakeholders. § 3321.

(c) The corporation must prepare an annual report that describes how it has performed in its pursuit of its social and environmental impact. § 3331.

Benefit corporations are discussed in detail in chapter 12 of this book.

1-4 Procedures for Organization of a Pennsylvania Business Corporation

Two checklists for organizing a Pennsylvania business corporation are included in the appendices to this chapter. Both checklists assume that the corporation will be a nonregistered corporation and will not be conducting a regulated business to which special corporate governance rules are applicable (such as an in-surance corporation or a horse race meeting corporation). 7

The first checklist, appendix 1-A, Incorporation—Data Collection Sheet, is for use when collecting from the client the information needed in the incorporation process. The second checklist, appendix 1-B, is a detailed outline of the incorporation process and the various issues that should be considered.

7. As to insurance corporations, see chapter 31. As to horse race meeting corporations, see the committee comments to sections 1302 and 1723. With limited exceptions, the checklists do not deal with the provisions of chapters 21 through 33 of the BCL, which are a series of provisions limited to specialized types of corporations (see the dis-cussion of those chapters in this chapter, section 1-3).

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Chapter One:

Appendices

1-A Incorporation—Data Collection Sheet ............................................................................................... 13

1-B Annotated Incorporation Process Outline and Checklist ................................................................. 17

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1-A Incorporation—Data Collection Sheet

Appendix 1-AIncorporation—Data Collection Sheet

1. Name of corporation: _______________________________________________________________________

a. Alternative names, if first choice is unavailable: _______________________________________

__________________________________________________________________________________

b. Will the corporation conduct business under any other name? __________________________

__________________________________________________________________________________

2. Address of principal place of business:________________________________________________________

__________________________________________________________________________________

3. Registered office:

Will use commercial registered office provider:

_____Yes ____ No

If yes:Name of commercial registered office provider:

__________________________________________________________________________________

Venue county: _____________________________________________________________________________

If no:Address of registered office:

__________________________________________________________________________________

__________________________________________________________________________________

County: ___________________________________________________________________________

4. Specific business of the corporation:

__________________________________________________________________________________

__________________________________________________________________________________

5. States (other than Pennsylvania) in which corporation initially will conduct business:

State Need to register_________________________________________ ______ Yes ______ No_________________________________________ ______ Yes ______ No

______ None

6. Authorized capital stock (include par value, if any): ___________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

Appendix 1-A

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7. Names, addresses, and social security numbers of shareholders (if more than 10, see Pennsylvania Se-curities Commission Form 203-D for information needed):

SocialName Address Security #_______________________ ______________________ _____________________________________________ ______________________ _____________________________________________ ______________________ ______________________

8. Number of shares to be issued to each shareholder and consideration for shares to be paid by each (if shares are to be issued for assets of existing business, obtain balance sheet):

Name # of Shares Consideration_______________________ ______________________ _____________________________________________ ______________________ _____________________________________________ ______________________ ______________________

9. Shareholder rights:

(a) preemptive rights ____ grant _____ deny

(b) cumulative voting ____ grant _____ deny

(c) shareholder action byless than unanimousconsent ____ authorize _____ deny

(d) 20% of shareholderscan call specialmeeting ____ authorize _____ deny

(e) 10% of shareholderscan propose articlesamendment ____ authorize _____ deny

(f) classify board of directors ____ yes _____ no

(g) shareholders waive annual financialinformation ____ yes _____ no

10. Names and addresses of directors:

Name Address_________________________________ ______________________________________________________________________ _____________________________________

11. Names, addresses, and social security numbers of officers:

SocialTitle Name Address Security #________ ____________________ ___________________ ______________________________ ____________________ ___________________ ______________________________ ____________________ ___________________ ______________________________ ____________________ ___________________ ______________________

12. Fiscal year begins on: _______________________________________________________________________

13. Annual meeting date: ______________________________________________________________________

Incorporation—Data Collection Sheet

15

14. Bank accounts and signatures to be required:

__________________________________________________________________________________

__________________________________________________________________________________

15. Subchapter S? ______ Yes ______ No

(a) Who will file the S-elections (accountant or attorney)?

__________________________________________________________________________________

(b) When will the corporation actually begin business?

__________________________________________________________________________________

16. Benefit corporation? ______ Yes ______ No

(a) Statement of specific purpose (if desired):

__________________________________________________________________________________

(b) Benefit director? ______ Yes ______ No

(c) Benefit officer? ______ Yes ______ No

17. Agreements to be authorized in organizational minutes:

(a) Shareholder Agreement ______________________________

(b) Employment Agreement ______________________________

(c) Lease Agreement ______________________________

(d) Loans ______________________________

(e) Other (specify) ______________________________

18. Name of accountant (address and phone number if known):

__________________________________________________________________________________

__________________________________________________________________________________

19. Client phone number:_______________________________________________________________________

20. Approximate number of employees: __________________________________________________________

21. First date wages will be paid: _______________________________________________________________

22. To whom are most of the products or services sold?

____________ Public (retail)

____________ Business (wholesale)

____________ Other (Specify)_________________________________________________________________

17

1-B Annotated Incorporation Process Outline and Checklist

Appendix 1-BAnnotated Incorporation Process Outline and Checklist

Table of Contents

I. Collect Necessary Data .............................................................................................................................18

II. Design Corporate Structure......................................................................................................................19A. Board of Directors ..................................................................................................................19

B. Capitalization.........................................................................................................................19

C. Shareholder Rights ................................................................................................................20

D. Takeover Provisions...............................................................................................................20

E. Tax Issues...............................................................................................................................21

F. Transfer Restrictions and Securities Law Issues ................................................................21

III. Prepare and File Incorporation Papers....................................................................................................22

IV. Immediate Post-incorporation Steps........................................................................................................22

V. Completion of Corporate Records .............................................................................................................23

Appendix 1-B

18

____ 1. If the prospective shareholders of a proposed corporation do not have separate counsel, do not proceed until after reviewing Pennsylvania Rules of Professional Conduct 1.7 and 1.13.

Note: If two or more persons retain a lawyer to organize a corporation, careful consideration should be given to Pennsylvania Rules of Professional Conduct 1.7 and 1.13 in order that all parties understand the lawyer’s role in the incorporation process, particularly as it may impinge upon different constituent interests.

I. Collect Necessary Data

____ 2. Select desired and acceptable alternate proposed corporate names.

Note: See sections 202 and 203 for limitations on permissible corporate names. It may be desirable to file a request for name reservation. See item 40, below.

____ 3. Determine the post office address, including street and number, if any, of the intended place of business of the corporation in Pennsylvania.____ 4. Determine whether a commercial registered office provider will be designated in lieu of a regis-tered office. Any such provider should be notified if it is to be so designated.____ 5. Determine the intended county of venue of the corporation in Pennsylvania if a commercial reg-istered office provider will be designated in item number 4, above.

Note: The county of venue need not be the same as the county in which the place of business in item 3, above, is located, nor the actual address of the commercial registered office provider. The registered office of the corporation will be deemed for venue and official publication purposes to be located in the county so named. See § 109.

____ 6. If a commercial registered office provider will not be designated, determine the post office ad-dress, including street and number, if any, of the intended registered office of the corporation in Pennsylva-nia, and the county in which the registered office is located.

Note: This address need not be the same address as in item 3, above. Section 135(c)(2) requires the arti-cles to state the county in which the registered office is located.

____ 7. Determine the post office address to which the corporation desires correspondence to be di-rected by the Department of Revenue and other Commonwealth agencies in connection with the affairs of the corporation.____ 8. Determine the names, addresses, and social security numbers of the officers.

Note: The same person may hold more than one office (§ 1732). Vice presidents and assistant officers are optional. The corporation must have persons who act as president, secretary, and treasurer, but may use a different name or title for those persons.

____ 9. Determine who will act as incorporator.

Note: For convenience, the legal assistant or attorney responsible for the preparation of the incorpora-tion papers usually names himself or herself as sole incorporator. There is no requirement that the incorpora-tor be a shareholder or subscriber for shares (see § 1306, 1988 Official Source Note).

____ 10. Determine the kind or kinds of business in which the corporation actually intends to engage in Pennsylvania within one year.

Note: This information is for use on the docketing statement (see appendices 2-H and 11-D) and the ap-plication for employer identification number (see appendix 2-I) and should be a candid and accurate state-ment of the corporation’s actual business: e.g., “retailing women’s dresses,” “prospecting for minerals in Alaska,” etc.

Annotated Incorporation Process Outline and Checklist

19

____ 11. Determine the date on which the fiscal year will begin.

Note: This is a matter that should be reviewed with tax counsel. For example, normally S corporations must choose a tax year beginning on January 1.

____ 12. Determine the date and time of the annual meeting.

Note: The usual practice is to pick a day of the week approximately three to five months after the close of the corporation’s fiscal year.

II. Design Corporate Structure

A. Board of Directors

____ 13. Determine whether directors are to be named in the articles.

Note: If directors are named in the articles, the written consent of the directors to be so named must be in the hands of the incorporator before the articles are filed (§ 1306(d)). Although the naming of directorseliminates the need for separate action by the incorporator naming the directors (§ 1310), the usual practice is to omit the names of directors from the articles.

____ 14. Determine the number of directors who will constitute the whole board and the names and ad-dresses of the initial directors.

Note: The number of directors may be as few as one, regardless of the number of shareholders. See § 1723. The usual practice is to permit the board to fix its size within a specified range.

____ 15. Determine if a classified board of directors is desired and whether the shareholders may remove the directors without cause by unanimous consent or a lesser vote.____ 16. Determine whether cumulative voting for election of directors is desired.

Note: Cumulative voting for directors exists unless barred in the articles (§ 1758).

____ 17. Determine whether any standing committees are to be established in the bylaws.

Note: This is usually not done in the case of close corporations.

____ 18. Determine whether supermajority voting or unusual quorum requirements are desired for board meetings.____ 19. Determine whether the exoneration of directors permitted by section 1713 is desired. Consider whether to expand the limitation to officers as permitted by section 1712(c).

Note: A provision may be included in the bylaws limiting the liability of officers to achieve commonal-ity between the officers and the directors.

____ 20. Determine which standard of care is to apply to directors of the corporation.

Note: A more liberal standard of care was adopted in Act 1990-36, which gives directors the flexibility to place the interests of stakeholders above the interests of shareholders. In the case of a nonpublic corpora-tion, the more restrictive standard applicable prior to Act 1990-36 (now found in section 1716) will generally be more appropriate. An election to be subject to the more restrictive standard must be set forth in the articles (see § 1711(b)(3)(ii)). See chapter 10, section 10-2, in this book.

B. Capitalization

____ 21. Determine the initial capitalization to be set forth in the articles.

Note: Capitalization is a complex subject that is beyond the scope of this book. In a typical case the ar-ticles will simply provide for 1,000 shares. Par value no longer has any substantive effect under the BCL (see

Appendix 1-B

20

§ 1524). However, it is recommended that a nominal par value be used because par value may continue to have some effect in other states where the corporation may register to do business.

____22. Determine whether the directors are to have authority to fix by resolution the terms of the capi-tal stock of the corporation.____ 23. Determine whether preemptive rights are desired.

Note: If preemptive rights are desired, a provision to that effect must be inserted in the articles (§ 1530) (except in the case of a statutory close corporation, where section 2321(b) provides that preemptive rights are available unless negated by a bylaw adopted by the shareholders).

C. Shareholder Rights

____ 24. Determine whether the shareholders are to be permitted to act without a meeting by consent.

Note: Unanimous consent action by shareholders without a meeting is permitted in the absence of any special provision in the articles, but action without a meeting by any lesser vote requires authorization in the bylaws (§ 1766).

____ 25. Determine whether shareholders are to be permitted to call special meetings of the shareholders.

Note: See § 1755(b)(2).

____ 26. Determine whether shareholders are to be permitted to propose amendments to the articles.

Note: See § 1912(a)(2).

____ 27. Determine whether supermajority voting or unusual quorum requirements are desired forshareholder meetings.____ 28. Determine whether some or all of the shareholders will waive their right to receive annual fi-nancial information.

Note: Section 1554 gives each shareholder the right to receive annual financial information about the corporation unless the shareholder specifically waives that right in writing. A waiver included in the arti-cles, bylaws, or share certificate will not be effective.

D. Takeover Provisions

Note: The takeover provisions listed in items 29 through 33 are applicable only to corporations with eq-uity securities registered under the Securities Exchange Act of 1934 and thus are generally not relevant in the incorporation process. Venture capitalists and other investors, however, sometimes require that corporations in which they invest opt out to avoid subsequent complications should they later go public. For a more de-tailed discussion of the provisions listed in items 29 through 33, see chapter 10 in this book.

____ 29. Determine whether to opt out of the restrictions on approval of transactions with interested shareholders in section 2538.

Note: Unlike the provisions listed in items 30 through 33, section 2538 does not contain a specific provision on opting out. It is subject, however, to the provision of section 2501(c) permitting an opt-out in the articles.

____ 30. Determine whether to opt out of subchapter 25E of the BCL (§ 2541 et seq.) (shareholders must be offered fair value for their shares once a person acquires 20 percent of the voting power of the corpora-tion’s shares).____ 31. Determine whether to opt out of subchapter 25F of the BCL (§ 2551 et seq.) (restrictions on business combinations with interested shareholders).____ 32. Determine whether to opt out of subchapter 25G of the BCL (§ 2561 et seq.) (shareholder who crosses thresholds of 20 percent, 33-1/3 percent, or 50 percent of voting shares loses voting rights unless other shareholders vote to restore the lost voting rights). Opting out of subchapter 25G also has the effect of


21

opting out of subchapters 25I and 25J (see the definitions of “control-share approval” in sections 2581 and 2586).____ 33. Determine whether to opt out of subchapter 25H of the BCL (§ 2571 et seq.) (disgorgement of profits following certain attempts to acquire control).

E. Tax Issues

____ 34. Determine whether S corporation treatment of the corporation is desired for income tax pur-poses (i.e., whether the shareholders are to be taxed as partners).

Note: Election of S corporation status under the Internal Revenue Code of 1986 should normally be made within 75 days of incorporation and requires the signature of every shareholder. The availability and desirability of this election should be discussed with tax counsel. If the election is to be made, the corporation may not have more than one class of stock, except that the corporation can have two classes of stock where the sole difference is in their voting rights.

Note also: Pennsylvania has also adopted a form of S corporation treatment for corporations subject to tax in Pennsylvania. Election of Pennsylvania S corporation status is now automatic when a federal S corpo-ration election is made. Tax counsel should be consulted at the time a decision is made on federal S corpora-tion treatment to determine if the corporation may also avail itself of the Pennsylvania treatment.

____ 35. Review applicability of section 1244 of the Internal Revenue Code of 1986.

Note: Common stock is automatically IRC section 1244 stock (i.e., stock that will be entitled to ordinary loss treatment upon sale), if the following conditions are met: (1) at the time the stock was issued the corpora-tion was a “small business corporation” (defined below); (2) the stock was issued by the corporation for money or property other than stock or securities; and (3) for a corporation whose allowed deductions do not exceed gross income during the period of its five most recent taxable years—or a shorter period specified in the stat-ute if the corporation has not been in existence for five taxable years—ending before the date the loss on the stock was incurred, the corporation derived more than 50% of its aggregate gross receipts from other than certain passive sources—royalties, rents, dividends, interest, annuities, and sales or exchanges of stocks or securities. “Gross receipts” from sales or exchanges of stocks or securities is defined to be the gain therefrom for purposes of this condition.

A corporation is a “small business corporation” until the sum of all money and property received for stock, as a contribution to capital, or as paid-in surplus exceeds $1,000,000. Note that if shareholders want to take maximum advantage of IRC section 1244, they should not put money into the corporation by way of contributions to capital, but should take back new common stock in exchange until the $1 million limitation is saturated. Increases in basis of stock due to contributions to capital are treated as allocable to stock that is not IRC section 1244 stock.

F. Transfer Restrictions and Securities Law Issues

____ 36. Determine whether restrictions on the transferability of shares are desired.

Note: Restrictions on the transfer of shares may be placed in either the bylaws or a shareholders agree-ment (§ 1529).

____ 37. Determine whether to elect statutory close corporation status under BCL chapter 23.

Note: See chapter 9 in this book for a general discussion of BCL chapter 23.

____ 38. Determine whether to elect benefit corporation status under BCL chapter 33.

Note: See chapter 12 in this book for a general discussion of BCL chapter 33.

____ 39. Determine (1) to whom the shares of the corporation are to be sold, (2) whether any public me-dia advertisement or mass mailing is contemplated, and (3) whether any cash or securities are to be given

Appendix 1-B

22

or sold to “promoters.” Blue Sky and Federal Securities Act counsel should be consulted unless the corpora-tion is to be a wholly owned subsidiary.

Note: Section 203(r) of the Pennsylvania Securities Act of 1972 and Regulation 203.187 of the Pennsyl-vania Securities Commission exempt sales where stock in the corporation has not been sold to more than 10 persons. If the initial issue is to be made to more than 10 but less than 35 persons in Pennsylvania, Form 203-D must be filed with the Pennsylvania Securities Commission—unless regulation 203.184 (Offers and Sales to Principals) is applicable—and the corporation must (1) report the securities sales made and the use of proceeds on Form 209 and (2) disseminate to shareholders annual financial statements. The client should be advised by letter of its continuing reporting obligations. Larger stock issues or reliance upon regulation 203.184 or 211.010 should be discussed with Blue Sky and Federal Securities Act counsel.

III. Prepare and File Incorporation Papers

____ 40. Determine availability of and reserve corporate name.

Note: The availability of a name can be checked by contacting the Bureau of Corporations and Charita-ble Organizations. A name reservation should be filed if a delay before the filing of articles of incorporation is anticipated. A name reservation should also be filed whenever the client expresses a preference for a particu-lar name. If the name is not reserved and the articles of incorporation are rejected for filing by the Bureau of Corporations and Charitable Organizations, the name may be appropriated by an intervening filing before the rejected articles are returned to the Bureau of Corporations and Charitable Organizations in corrected form.

A name may be reserved by sending the Bureau of Corporations and Charitable Organizations a letter requesting the reservation. (See appendix 2-E.)

____ 41. Prepare any necessary consents to use a similar name.

Note: See appendix 2-F.

____ 42. Draft articles of incorporation.

Note: The articles are no longer required to state the purposes or duration of the corporation, but provi-sions on those subjects may be included if desired. See sections 1301 (purposes) and 1306(a)(6) (duration). See chapter 2 and appendix 2-B in this book. See also section 1914(c)(2)(ii) permitting the board to amend the articles to provide for perpetual existence.

____ 43. Prepare and sign proxy of incorporator.

Note: It is recommended that a proxy of incorporator always be signed at the same time as articles of incorporation. A proxy of incorporator permits the corporate documentation to be completed in the event that the incorporator becomes unavailable between filing the articles and finishing the paperwork. See § 1310(b).

____ 44. Draft docketing statement. (See appendices 2-H and 11-D.)____ 45. Prepare check for filing fee.____ 46. Draft letter of transmittal to Department of State.

IV. Immediate Post-incorporation Steps

____ 47. Advertise the fact of incorporation in the county where the initial registered office is located or in the county of venue if a commercial registered office provider has been designated.

Note: Failure to advertise renders the whole exercise void. See 45 Pa.C.S. § 307. The form of advertise-ment may be quite short. See § 1307. The impediment of 45 Pa.C.S. § 307 continues until proofs of publica-tion are filed in the minute book. See appendix 2-G for a sample form of advertisement.


23

____ 48. Order the corporate kit, i.e., seal, minute book, share certificates, and (if desired) share record book.

Note: If share transfer restrictions will exist, the language of the transfer restrictions should be sup-plied for imprinting on the share certificates. Typing the transfer restrictions on the share certificates ini-tially issued is not recommended because the failure of the client to repeat the process upon the preparation of later certificates may void the restrictions under the BCL and Uniform Commercial Code.

In the case of a statutory close corporation, the fact that it is a “Statutory Close Corporation” should be printed on the certificate immediately under the name of the corporation and the statutory notice should be added in a conspicuous fashion. See § 2321(c). See appendix 9-C.

____ 49. Prepare and file federal S corporation election, if applicable.____ 50. Consider delivering a letter to the chief executive officer of the corporation regarding compli-ance with the Pennsylvania Securities Act of 1972 and regulation 209.010 thereunder.____ 51. Prepare and file foreign registration documents.

V. Completion of Corporate Records

____ 52. Prepare bylaws. (See appendices 2-C and 2-D.)____ 53. Consider preparing a shareholders agreement.

Note: It is often desirable to restrict the transfer of shares in a business that is functioning in effect as an incorporated partnership. The parties may also wish to mandate certain corporate governance arrange-ments by contract, such as guaranteeing some or all of the shareholders a seat on the board of directors. Re-member that development of a shareholders agreement may trigger a requirement that each principal have separate legal representation. See item 1 of this outline.

____ 54. Prepare subscription agreements.

Note: The subscription agreement should provide subscribers with notice of their two-day right of re-scission under section 207(m) of the Pennsylvania Securities Act of 1972, if the shares are being sold pursu-ant to section 203(d) of that act.

If a shareholder will be waiving the right to annual financial information (see item 28 of this outline), the waiver may be included in the subscription agreement.

____ 55. Prepare Consent of Incorporator, and Unanimous Consent of Directors in Lieu of Organization Meeting. (See appendix 2-J.)____ 56. Prepare share certificates.

Note: Certificates are prepared in a manner similar to the execution of a check. The corporate seal need not be affixed. Any restrictive legend, if not printed on the certificate, should be typed across the face or be designated by a cross-reference referring to text on the reverse side. The legend should correspond with the legend, if any, in the subscription agreement, bylaws, or shareholders agreement. If more than one class or series is authorized, or if the board is authorized to fix and determine the designations, etc., of new classes or series, then a statement to the following effect should be typed or printed on the certificate (see § 1528(d)):

The corporation will furnish to any shareholder, upon request and without charge, a full or summary statement of the designations, voting rights, preferences, limitations, and special rights of the shares of each class or series authorized to be issued so far as they have been fixed and determined and the authority of the board of directors to fix and determine the designations, voting rights, preferences, limitations, and special rights of the classes and series of shares of the corporation.

Appendix 1-B

24

____ 57. Execute Consent of Incorporator. (See appendix 2-J.)

Note: The incorporator normally adopts the bylaws and elects the first directors.

____ 58. Secure unanimous consent of directors to election of officers and adoption of organizational min-utes, and execute: (1) subscription agreements, (2) shareholders agreement (if any), and (3) share certificates.____ 59. Insert initial corporate records in the minute book.____ 60. Prepare, sign as agent for the corporation, and file IRS Form SS-4 (Application for Employer Identification Number). (See appendix 2-I.)

Note: Other tax identification numbers should be obtained by the client’s accountants.

____ 61. Deliver share certificates to shareholders.

Note: The letter of transmittal should request that the shareholder acknowledge receipt of the certifi-cate by signing an appropriate acknowledgment of receipt on and returning an enclosed copy of the letter of transmittal.

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