Question

True or False problems

Kinetic Solutions, LLC, is an Internet software business with 15 members. Five members are the only managers of the business; the other 10 members are only investors. The five managing members want to sell part of the business to public investors. Before doing so, they opt to organize the business as a corporation. The five controlling shareholders want to be able to manage the corporation with little interference from other shareholders, and they want to continue to be compensated as managers of the business. The other 10 shareholders want some management control because of their sizable investments, especially if the business is not profitable. They are also concerned about being able to sell their shares at some point in the future. All 15 shareholders plan to raise an additional $50 million in capital by selling shares in the corporation to 1,000 wealthy public shareholders. The 15 original shareholders are unwilling to give the new investors any power to control the corporation or its management. The original shareholders expect that by having 1,000 new shareholders, a public market will be created in their shares. Sketch an ownership control structure (a structure that determines how shareholders own and control the corporation through their rights as shareholders) that serves the ownership control interests of the five controlling shareholders and the 10 other shareholders.

1. The LLC members should create seven classes of shares. Five identical classes are issued to the member-managers, giving each the right to elect one director to the board of directors. Each of the five managers receives all the shares of one of the five classes. Each class owns 5% of the equity of the company. No amendment to the articles of incorporation may be made without the approval of each class.
2. A sixth class is issued to the 10 shareholders who were non-manager members. This class elects one director who sits on the board, but ordinarily is not entitled to vote, unless the corporation is unprofitable for two consecutive years.
3. The seventh class is created for issuance to the public shareholders. This class does not elect a director and cannot vote in director elections. However, any amendment to the articles that is in any way harmful to this class cannot be passed without the approval of this class.
4. Half of the shares owned by the five managers are convertible into shares of the public class, thereby permitting the five managers to maintain their control of the company and to be able to sell some of their shares on the open market and get greater returns on their investments if the business is highly profitable.
5. All of the shares of the other ten shareholders are convertible into shares of the public class.

Answer 1

1.) false:- The LLC members should not create seven classes of shares. Five identical classes are issued to the member-managers, giving each the right to elect one director to the board of directors. All 15 shareholders plan to raise an additional $50 million in capital by selling shares in the corporation to 1,000 wealthy public shareholders

2.) false:-  A sixth class is issued to the 10 shareholders who were non-manager members. there is five manager and 10 investor no any direcotors are elected.

3.) false:-The seventh class is not created for issuance to the public shareholders. This class does not elect a director and cannot vote in director elections. However, any amendment to the articles that is in any way harmful to this class cannot be passed without the approval of this class.

4.) false:-There is no Half of the shares owned by the five managers are convertible into shares of the public class, thereby permitting the five managers to maintain their control of the company and to be able to sell some of their shares on the open market and get greater returns on their investments if the business is highly profitable. All 15 shareholders plan to raise an additional $50 million in capital by selling shares in the corporation to 1,000 wealthy public shareholders

5.) true:-. All of the shares of the other ten shareholders are convertible into shares of the public class.