Louisiana's New Business Corporation Act Permits Issuance of Shares for Promissory Notes, Contracts for Future Services

In a departure from prior corporate law, La. R.S. 12:1-621B of Louisiana's new Business Corporation Act, adopted pursuant to Act No. 328 of the 2014 Louisiana Legislative Session and scheduled to take effect January 1, 2015, permits corporate boards of directors to issue shares as consideration for promissory notes and contracts for services to be performed, among other property or benefit to the corporation for which shares may be issued.

Under existing La. R.S. 12:52(C), with certain exceptions (e.g., for shares issued in payment of a stock dividend or with respect to a reclassification), consideration for the issuance of shares must be in cash, property, or services actually rendered to the corporation. While current law expressly prohibits payment by a purchaser's note, providing that, in the event of delivery of a note in payment for shares, the shares are not deemed issued until the note is paid in full,[1] in contrast, the new corporate law soon to take effect in Louisiana expressly permits the issuance of shares in return for a promissory note or a contract for future services. Prior to issuance, the board of directors must determine that the consideration to be received by the corporation in exchange for the shares is adequate, which determination the statute provides shall be conclusive. Gone from the new law is the requirement that the fair value of consideration to be received by the corporation be not less than the dollar amount of the consideration fixed for the shares.

Upon receipt by the corporation of the consideration for which the issuance of shares was authorized, i.e. the performance of certain services or, presumably, the funds evidenced by a promissory note, the shares are deemed fully paid and non-assessable. To this end, the statute permits the escrow of shares issued for a contract for future services, or for the benefit of a promissory note, and further affords discretion with respect to restrictions on transfers of shares so issued, as well as allowing distributions to serve as a credit against the purchase price for the to-be performed services or as yet unreceived benefits of a note. Accordingly, for services unrendered, in whole or in part, or an unpaid note, the shares issued in connection therewith, if escrowed or otherwise restricted, can be cancelled, in whole or in part. As Louisiana’s new Business Corporation Act permits issuance of shares for future benefits or services, in so issuing any such shares, a corporation should consider whether to escrow the shares or impose other appropriate restrictions to ensure that the contemplated consideration is actually received by the corporation.

For additional information about Louisiana's New Business Corporation Act and what implications it may have on you, please contact us.

[1] But see Ogden v. Culpepper, 474 So.2d 1346 (La. Ct. App.1985), and Hotard v. Diabetes Self Mgmt. Ctr., Inc., 2002-944 (La.App. 3 Cir. 2/5/03); 838 So.2d 94, writ denied, 2003-0649 (La. 5/30/03); 845 So.2d 1056, providing that improper (for failure to receive consideration at time of issuance) issuance of shares could be rectified and shares deemed fully paid upon receipt of fixed consideration.

             Author: Lucie R. Kantrow              Practice Area: Corporate Law              Date: October 15, 2014

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