Connect

LinkedIn-Logo-2C

Shadow CEO®

SPECIAL COVID-19 GOVERNANCE FORENSICS OFFER

Dennis is a native Californian and attended the University of California at Los Angeles where he majored in Economics. He left UCLA in his third year, impatient to begin a career he first enlisted in the USMC to satisfy his country’s service requirement.

Learn more »

 

GOVERNANCE FORENSICS: a new Caganco practice brief

 

 

MR. CAGAN’S BOARD BIOGRAPHY

Feature

The Board of Directors for a Private Enterprise, by Dennis J. Cagan.

A comprehensive inside look at creating and managing the boards of private companies of all types. What every entrepreneur, private company owner and CEO should know about boards. 

Contact Us

T: 805-570-1000

W: https://caganco.com
E: dennis@caganco.com

 

Services

Shadow CEO® | Boards  of Directors Practice | Governance Forensics | Interim CEO Assignments |Mentoring and Consulting

Mr. Cagan’s Primary Activities Include:

  • Shadow CEO
  • Board of Directors Practice
  • Governance Forensics
  • Active company management as a C-level interim executive
  • Working with entrepreneurs and leadership on a consulting/mentoring basis

Core Characteristics Include:

  • Charismatic, decisive, motivating, creative, strategic, innovative, consensus building, and broadly experienced.
  • Proven ability to build and motivate strong management teams, grow or turn-around companies, and increase revenue and profit.
  • Exceptionally creative in crafting strategy, solutions and business development opportunities.
  • Well-traveled with a deep, broad knowledge of business practices. Able to quickly gather pertinent information, get to the heart of the matter, and implement a solution.
  • Decisive decision-making ability, tempered with a practical and down to earth perspective.
  • Experienced and practiced in a wide variety of business types, able to effectively transfer knowledge across business models and categories. Extensive experience in public and private company management, public, investor and customer relations, fostering an enabling and motivating work environment, repairing old or implementing new techniques and technologies, and business turnaround.
  • Willing to make fast, tough decisions. Oriented to building long-term enterprise value.

Shadow CEO and Consulting

In his Shadow CEO role, Dennis literally steps in side-by-side with a CEO and helps them navigate through whatever circumstances and situations they need to deal with on a day-to-day basis, that the CEO has never experienced before in their career.

In a somewhat less active capacity, Dennis mentors and consults with entrepreneurs and company leaders. Often those who are forming and running early-stage high technology companies.

When Dennis begins a mentoring or consulting relationship he will sometimes become a member of the Board of Directors. Often he will be asked to form the Board by recruiting additional preeminent directors from the business and technology communities who can add substantial value.

Dennis will usually guide the company in the formation of appropriate corporate infrastructure and the relationships necessary to launch and build a successful technology business. He assists in arranging for necessary facilities and physical/IT infrastructure.

Dennis will guide and assist the company with raising additional capital at the appropriate time, and from appropriate sources – venture capital firms, angel investors, strategic partners, etc.

Board of Directors Practice

Dennis Cagan is frequently retained by private companies to conceive of, form, upgrade, and manage both fiduciary boards of directors and advisory boards. He works with company owners and leadership to understand the purpose and benefits of boards. He will then assist in profiling potential members, identify and recruit candidates, initiate the board, and help the various stakeholders to navigate the process of best-of-class corporate governance.

Governance Forensics

Overview: When a company leader has an issue with majority control of the enterprise – Inc or LLC, and they need to find a legitimate way to gain certain rights or goals, they engage Dennis’ Governance Forensics skills. Buried deep within a host of corporate documents there are often-ignored clauses that will either allow or disallow any number of actions. Finding a hidden path to accomplish the goals of a board of directors, owners or management, within the company’s incorporation and governance records, requires unique knowledge and breadth of experience. This process, known as “governance forensics,” is the discovery of those overlooked gems and loopholes that allow the client to accomplish their goals, even when attorneys have told then that they could not.

What is Governance Forensics?

Buried deep within a host of corporate documents there are often-ignored clauses that will either allow or disallow any number of actions. Finding a hidden path to accomplish the goals of a board of directors, owners or management, within the company’s incorporation and governance records, requires unique knowledge and breadth of experience. This process, known as “governance forensics,” is the discovery of those overlooked gems.

What’s the Problem?

When a company is initially incorporated the founders file an initial request with the Secretary of State of the state where they wish to incorporate. Whether the entity being formed is a corporation, a limited liability corporation, a for-profit or a not-for-profit, all states require a Certificate of Incorporation or Certificate of Formation. This establishes the proper legal structure, and puts on the public records certain details, like the name, the incorporator, the number of shares or units, and other details of the corporate structure.

In addition, the entity is also required to complete, sign and retain a variety of other documents that do not necessarily need to be filed with the state. Over time, as the company grows and evolves, many of the initial documents get changed. These changes can involve filing amended documents with the state, or just amending internal documents due to changes, additions or deletions, as approved by the board of directors or the shareholders. This can involve anything from a simple name change to a such actions as a complex acquisition, raising capital/selling equity, taking on debt, changing the bylaws, implementing a stock option plan, adding board members, and much more. One can imagine that over decades these changes can mount up, and it can sometimes take research and understanding to determine the exact status or rules about anything in particular.

Some companies manage to keep their documents current over the years, and their archives well organized, and they have been careful to retain only the actual approved and signed versions of documents – not several different draft versions. When they have brought in investors, or borrowed money, the subscription agreements, shareholder agreements, promissory notes, etc. have all been properly executed and filed. When they have awarded incentive equity, or authorized other actions requiring board or shareholder approval, all the documentation is properly worded, executed and retained. The keywords here are – some companies. Large corporations can afford legal and administrative staff, and outside attorneys, to make sure that all these details are properly attended to. However, most companies that are smaller, and particularly those that are privately held, often cannot afford this level of diligence. They resort to using anyone available, including the founders or executives, to attend to these tasks, and it the rule rather than the exception that the company’s document files are less than organized. Therefore, when something comes up, as it often does, where founders, owners, boards, minority shareholders, or even majority shareholders want to take specific actions or find a creative way to accomplish something, they often find that documentation allowing the action is actually not in place.

The first stop in these circumstances is usually a lawyer. Sometimes the one who drafted the documents, but often not the same one. They will review the best available information they are given, but more frequently than not, the documentation is incomplete, or inaccurate, or both. The attorneys will usually stop there with a prompt conclusion that you cannot do what you want to do. Those actions are not allowed under the existing corporate governance structure, and it may be too late to change anything – or you simply do not have the votes.

This is the time you need to involve someone who has the breadth of experience and understanding to be able to drill down, reviewing every available piece of information, following the thread of actions over all the proceeding years, looking for any telltale clause or resolution that could shed light on a way to accomplish the objective – in other words, governance forensics.

Documents & Materials

Clues to what can and cannot be done, and how to do it, can be hidden in any number of places. Documents can be in draft or final versions and can be signed or unsigned, sometimes even in multiple conflicting copies. The enterprise can be a corporation (C corporation), an LLC, an S or sub-S corporation, a B Corporation, or even a partnership. Each one will include some version of the following documents:

Certificate of Incorporation/Formation

Bylaws/Operating Agreement

Organizational Consents/Joint Consents/Unanimous Written Consents

Board of Directors (or Managers) minutes

Plans for Equity Incentive, profit-sharing, or synthetic (phantom) equity

Grant notices/documents for equity grants

Resolutions

Amendments to documents

Capitalization schedules

Promissory Notes

Investment Documents including Subscription Agreements and Shareholder Agreements

Loan Agreements

… and more.

If the entity has been operating over a number of years this can add up to a substantial stack of very confusing content.

Process

Generally speaking, the process starts when the company’s Board of Directors, management, founders, or shareholders want to either do something, or not do something, and one or more lawyers tell them that they cannot accomplish what they wish to. Typically, this is when a friend or colleague hears about their problem and refers them to a Governance Forensics expert (GFE) – of which there are actually very few who are qualified. The first thing the GFE does is ask a lot of questions to get a full understanding of the problem or issues, and what they have been told by the previous advisors (lawyers).

The GFE will then request all the available documents, in whatever forms they exist. The professional will then go back to the very start. What were the original terms of governance and company legal structure, what changes or amendments were made, and what was further added in the form of resolutions and amendments? How did the ownership evolve from the original holders to the present holders? This will include all transactions for buying or selling equity, awarding equity, etc. It is also affected by other transactions like debt – personal, corporate, bank, private, etc. What rights, particularly voting, were granted to which equity holders over the years, and under what circumstances? Looking for that potential gem of information or term within this mass of content often involves asking the right questions as much as anything else.

Conclusion

Some of the time the GFE will simply confirm the original verdict that ‘there is nothing you can do.’ Retaining the GFE simply assured you that you have done everything possible to accomplish your goal, but the company’s structure and history did not offer the necessary circumstances. However, some of the time the GFE will discover a clause, or term, or other details that had been hidden from less knowledgeable and experienced eyes, which will enable you to accomplish your goal – often with surprising ease. If the goal is important enough, it may be worth the additional investment in a qualified Governance Forensics Expert. The following vignettes will give some actual examples of surprising outcomes for real clients.

Case Study Vignettes

Private Investor

Background: A private investor (“Larry”) in Houston directly owned 5% of a financial software company in Silicon Valley, and he was on the board of directors. The company was in need of capital, and Larry was willing to invest additional capital under one condition – the company needed to appoint him as the CEO. The bylaws of the company exclusively allowed the board to appoint the CEO. The other members of the board did not like Larry and refused to make him the CEO. Larry went to two different prestigious law firms in Houston to have them review the circumstances. After studying the situation, they informed him that there was nothing he could do, beyond being appointed by the board. Larry was introduced to and engaged Caganco.

Actions: Caganco reviewed all the applicable historical documents and asked a number of additional questions. Based on a deep analysis and an acquired understanding of all the relevant circumstances, Caganco authored two written consents, delivered by Larry to the company board by email. Upon receipt of these emails, Larry was automatically and unilaterally elected CEO. After checking with their counsel and determining that Larry’s actions were completely legal, two of the board members resigned. Caganco authored two additional written consents, also delivered by email, electing two new directors, who then elected Larry as the chairman of the board.

Justification: The original attorneys that Larry consulted had failed to fully investigate the overall ownership of the company, beyond Larry’s 5% ownership. Further investigation by Caganco determined that a separate LLC owned 48% of the company. This LLC was formed specifically to invest in the company. The operating agreement of the LLC dictated that a majority vote of the LLC members controlled the LLC. Caganco’s research determined that Larry owned 70% of the LLC units. Therefore by voting the 48% of the company shares owned by the LLC and the 5% he owned directly, Larry was able to submit a written consent, as the majority shareholder of the company (voting 53%), which amended the company bylaws changing the election of the CEO from the board to a majority of shareholders. This was followed by the second resolution that elected himself as CEO.

Software Company

Background: A small software company, co-founded by a husband and wife, had a modest number of minority shareholders. Two of these minority stockholders together owned 15% of the company. These two individuals had originally been granted restricted stock in return for business development activities, which they never accomplished before the restrictions expired and they owned the stock. For many years the co-founders remained upset by the prospects that these two shareholders would eventually benefit to that degree (15%) from the sale of the company.

Actions: Caganco reviewed all the applicable historical documents and asked a number of additional questions. Based on a deep analysis and an acquired understanding of all the relevant circumstances, Caganco authored one board resolution. This resolution served to effectively reduce the two minority shareholders’ ownership percentage to 7% from 15%.

Justification: The company was very closely held and all the shareholders beyond the two individuals were actually employees of the company. This allowed the board to grand a large number of previously authorized, but unissued shares, in the form of restricted stock, to all the employee-shareholders. Thereby diluting the two individuals.

Family-Owned Company

Background: A mid-sized family-owned business was originally founded in 1973 by the father of the current CEO. The company’s original incorporation included only a very basic Record of Authorization (Certificate of Incorporation) and bylaws. Forty-six years later the oldest son is the CEO. Over four-plus decades the company records had been severely obfuscated by multiple name changes, transfer of 100% of the original shares to other entities, including an LLC, issuance of additional shares (with questionable documentation), and distribution of the LLC units into six different trusts – all ultimately controlled by the widow of the founder (CEO’s mother). At some point, the son/CEO was appointed to the board by the founder/father. Although the bylaws required a third director, no one was ever appointed. Upon the mother’s passing, the trusts would be dissolved, and the company shares would be split 50/50 between the CEO and his younger brother. The brother was not involved in the company in any way, although he did receive a monthly salary. The CEO was concerned that upon the mother’s passing, the control of the company would come into question since it would be owned equally by the brothers. The CEO simply wanted to acquire a few additional shares to ensure that he could continue to manage the company, to the benefit of the families, without the potential inference of his brother. The CEO consulted with multiple attorneys in his home state and was told that the only resolution would be for the mother to release (or sell) some shares to the CEO son, in advance of the expiration of the trusts, so that when the trusts were divided 50/50, he would retain a slim controlling position.

Actions: Caganco reviewed all the applicable historical documents and asked a number of additional questions. Based on a deep analysis and an acquired understanding of all the relevant circumstances, Caganco authored one board resolution, to be signed by the board, that would give the CEO controlling interest in the company. Although this action would have been completely legal, the CEO was concerned that this action could cause some problems within the family. Instead, he used the possibility of his issuing this resolution to encourage his mother to gift him some shares out of the trusts. The balance of trust-held shares would later be divided 50/50.

Justification: In following the thread of share ownership from 1976 to present, Caganco determined that the original bylaws had never been changed, and they actually contained some very rare language (easily overlooked by attorneys with weak corporate governance experience) which allowed this straight-forward solution. There were originally authorized but unissued shares. The bylaws authorized the board (CEO only at this point) to dispose of those shares in any way they see fit. These details had been buried under many hundreds of pages of corporate and trust documents.

Interim Executive Assignments

Dennis Cagan has taken a number of interim or temporary C-level Executive assignments.

Since 1987 Dennis, often as a member of a firm’s board of directors, has been called on in emergencies or opportunities to step into active senior management as a C-level executive.

Past interim positions include CEO, COO, President, and Senior Vice President of Sales, Marketing, Business Development, Strategy (CSO), and even Human Resources.

These assignments have lasted for as little as ninety days (Message Media, a public company controlled by SoftBank, as CEO transitioning to Chief Strategy Officer), and for as long as four years (Century Computer Marketing, SVP Sales & Marketing). At the end of most assignments, Dennis remained on the board.

Examples of situations requiring Dennis have included substantial insolvency and imminent bankruptcy (TWL Corporation: TWLO.OB), a desire to sell a profitable company for substantially more than the current market value (Century Computer Marketing), the necessity of integrating several acquisitions into a public company (StarPress), an underperforming President and the desire to relocate the company and integrate two acquisitions (Message Media), the desire for the company to enter new and larger markets (Design1), and the need to rapidly scale a newly formed company after a large capital infusion (Software.com).