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Corporation bylaws

(There have been some slight changes, mainly the CEO can be fired by 2 officers. To see new bylaws see the 2010 report, or click directly to  )


September 15, 1998
Ray Grogan 1998

Note 10-12-01 for this web version - some of the formating is a little squirrelly due to my laziness. Like possessives (Ray's) do not have their ' (so Rays). And same with some words the original has in quotation marks. And some indents, etc. I hope it is clear enough.

Summary and Introduction




Company name: Kipuka Wai, Inc. A Kipuka is one of those places on the Big Island where newer lava has completely surrounded an older part of the land, which often still has soil and forest life. Wai is fresh water.


Stock. The company will give shares of stock to the people who contribute the time and money to set it up and keep it going. The shares are listed in the company reports. We will start with about $14,000 in credits for the land bought and work done so far. There are two kinds of shares. Hard asset shares are given for tangible things like money used to buy the land or pay for taxes or supplies. Goodwill shares are given for intangible things like helping out clearing the weeds, planting trees, growing taro, or searching through tax records for access rights. Generally the hard asset shares will be given out at their real dollar value. For tax purposes these can be deducted from any gains you make if you ever sell your stock or if we sell the whole thing. The goodwill shares are way below what if would cost you to pay somebody to do the chore, but at least it is something. The rationale is that growing taro, etc. is fun and rewarding in other ways. We would do these things anyway whether we got any credit or not, just like any other landowner farting around on his land. For tax purposes these shares have no cost basis since you got them for free. If you sell a goodwill share, it is 100% profit and taxable when you sell it. For voting purposes both types of shares are the same.


Voting. Every once in a while (whenever anyone wants to) we will vote for the CEO. The CEO then runs the company. Your vote may be important sometimes. A majority of shares can change the CEO on the spot. When there is an election the votes are made public, usually by listing them in the next report. But generally your vote is meaningless if you are up against a majority. Your main right is to buy or sell stock.


Buying and selling stock. The most important feature of this stock plan is how we buy and sell stock. The CEO has to quote a price that he or she will either buy or sell one share of stock. The either part of this rule forces the CEO to come up with a fair value. The one part limits the gamesmanship to a tolerable level. The CEO can freeze the market if things are too out of control or if there is a need to get news out to all stockholders. If there is something big brewing (like some one offers us a nice price for the land), there will be an effort made to let everyone know in case they want to buy or sell stock, too. However, the most likely future is that we will just keep working and spending money (probably work ~$300 a year, and expenses for another $200) for which stock will be given. Right now our stock price is $14 a share (1,000 shares, so in effect saying the property is worth $14,000). So if you worked 5 hours at $3 you would pick up another share. Or if you paid taxes of $140, you would get 10 more. (With both Ray and Jim off-island, and Guy busy with other things, we may just fester for quite a few years.)


Valuation of stock. Since the CEO sets the price, it can change on a whim. However, the usual situation will be once a year or so the CEO will do a report like this last one, where everybodys contributions are added up. Then is usually when the price is set. The idea is to keep the total stock price at about what the property is worth, at least to us. When the stock value is changed, it affects all of us the same. For example, if the CEO has to make the stock real cheap (say $5 per share, or $5,000 for the total property) in order to get someone to cough up the taxes (i.e., buy stock), then all the stock we all own is now $5 per share. The reverse is true if something good happens, like if we got a right-of-way to drive down to our property. If people are begging to buy stock, the CEO will raise the price for all of our stock. If the place is sold, we each get our share of the net proceeds.


Who does what. The CEO is the source of all authority in the company. He or she can sell our land, lease it, mortgage it, decide what to plant where, etc. All three of the main owners (Guy, Jim & Ray) can act as junior CEOs unless the CEO jerks their authority away. So all three can spend money on our behalf (in effect buying stock), and can authorize others to also (in effect selling stock). We will probably also let long-time swampers like Kevin or Joseph act in the companys behalf also. If anyone does something for us, he or she should turn in a receipt or note if they want to get credit for it. Otherwise, thank you. The CEO will be solely responsible for the legal affairs of the company as a whole (corporate registration, annual corporate report to state, tax returns, etc.). However, our individual legal affairs (personal taxes, etc.) are the responsibility of both the CEO and the individual. If you sell some stock, for example, the CEO will not necessarily snap that, hey, you are going to owe taxes on some of that. The CEO will try to remember to do that. (We all know about Rays memory problems.) He/she will definitely help if you ask. He/she will be glad to tell you what your tax basis is, and give you a statement that you can use for filing. You can also look at our books to see how the company reported the transaction. The company will not do withholding, etc, at least not in the early years. (There are no tax issues if you do not sell stock. If we are just working and paying expenses, we have no taxes due.)



















Beginning stockholders report


List of stockholders 1

Balance sheet 2




Stockholders Agreement


Preamble 3

How the stock plan works 4



Stock market

Price of stock

How I set price of stock



Company organization 6

Accounting system 7

Evolution of bylaws 8

Changes in agreement 9

Consent 10

Stockholders rights 11

References & endnotes 13-17

Consent (extra copy) 18 (sign & return this page)












Stockholders as of September 15, 1998

(Word version)


Cash stock

Hard asset shares @$14 / share

Goodwill (from Kala Puaa*)

Goodwill from Hana Hui**

Total goodwill stock

Goodwill shares @$14 / share

Total stock

Total stock as percent of total stock

Total Shares




























































Guys $5K is to cover 3.33 initial investment, .67 for part of what he has paid in taxes so far, and 1 new investment. Rays 1 is to go to bank. Jims 5 is new investment.











* Kala Puaa Hui is the group of capitalist pigs putting in cash.





** Hana Hui is the original group of working stiffs/surf bums who surveyed, cleared and planted the land.

** based on total value for Hana Hui as set in this scenario, =





(Peoples percents as in








8/21/98 Ownership Shares








for Hana Hui)



















***Rest=rest of Hana Hui





















Total shares sold so far: 1,000 shares at $14 each.

Shares still owned by company: 99,000 shares

Total shares issued: 100,000 shares



The stock has zero par value, which makes the accounting more understandable:


Book value $ 11,000 (This is our only real money, the cash used to buy the land, pay taxes, and set up cash balance. This is also called paid in capital.)

Goodwill 3,000 (Our people are our real future and value)

Total 14,000



Kipuka Wai Hui

August 25, 1998




Company Assets:

1. All rights to the piece of land we have called the swamp, which is Hawaii Tax Map Key (1) 6-6-009-011. It is a little less than a half-acre of old taro land in Haleiwa.


2. Cash of $1,000 to open our company accounts. (Some of this will be spent recording deeds and other incidentals.)


Company Liabilities:


1. None at start up.




Exclusions: These items are what the company does not own nor expect to own and are the private property of the company people (owners, managers, and employees) or others. Specifically not included in company assets are any claims on:


Any other land or assets of the company people. For example, historically we have used Rays truck (now sold) and tools (sprayer, etc., still owned but may be gone someday) to maintain the property. And the Mountain House as a staging area/surf shop. We may well have to manage without those things (the Mountain House is for sale).


Any contract for any services from any of the company people. All company people may resign at any time for any reason. People can move to distant places with either no water (Iowa) or cold water (San Francisco), and do nothing to the property for eons. It is hoped the CEO will at least pay our taxes and otherwise defend our title, and put out a scroungy report from time to time, but nothing is promised.


Any legal access to the land. We have always been in a semi-trespassing mode to get there, but with Lennys tacit permission. Others who seem to be there only on weekend afternoons have given us specific notices not to cross their land. This situation could easily deteriorate into helicopter only access. PS: we do not have a helicopter.




(This agreement is our corporations bylaws, and we will all agree to operate like this until changed by a majority of shares. Read this and sign the last page.)






Please keep the following in mind:


We are limited to 25 stockholders before we start getting into regulations that require expensive audits. We do not want to approach that limitation until we are ready to go into whatever is the next major step in our financing. (We treat groups such as the Hana Hui and the Tantog family as a single stockholder in the same sense we would if Bishop Estate or Amfac was a stockholder.)


The other limitations are common sense, that no one should risk anything unless they can well afford to lose it and all stockholders should have a good understanding of what we are doing.


All stockholders should understand the following three concepts:


1.      The value of a land owning company is based almost solely on the enjoyment of the land. It is hard to buy land, improve it, and sell it at a profit under any conditions. Think of it as buying and enjoying a toy.

2.      If a land company does get lucky and finds itself owning land that is suddenly far more valuable than the price paid, it is common to either miss the opportunity to sell, or to spend so much time and money selling that it becomes unprofitable to sell.

3.      The valuation of any company, any time, is a very inexact process. If you let it, it can also be a very time consuming and expensive process. Most stock systems have several layers of agents, regulators, and specialists between the stockholder and the company. The system I use has none of that, and none of the costs or benefits either.





Please understand the rules, and how they would affect you in good times and in bad times. In any land venture the chances of getting back absolutely nothing far overwhelm the chances of making a profit. In this particular venture, all we have is a piece of swampland that is virtually inaccessible in a legal sense. We are also in a tsunami zone (the salt water from a tsunami would probably kill our cypress trees, which is our only chance of rising above the swamp). We are only a few feet above sea level in an era when many expect sea levels to be rising. Our CEO is aged far past his prime, may be losing his mind, and is way too far away to be of any help anyway. There are many, many reasons why it will be very difficult to make money in the swamp business.




The essence of the stock plan is as follows:


Start-up. We all make contributions[1] that start the company. The CEO will give these a value as they are put in. Then we add up all the contributions for the total value of our shared equity. All contributors own whatever share they put in, and, as we start, the value of those shares is the original value.


As we get going. What ever we do together as a company will change the value of our total, and therefore the values of the individual shares. The CEO will set a price for shares, and the rest of us may buy and sell shares at that price. For fairness, the CEO must offer to either buy or sell at the same price.







Ownership. All stockholders[2] must be approved by the CEO. You may own as much or as little as you like. Shares may be divided down to an even dollars worth. The CEO will keep track of who owns what, which will be published in the stockholders reports along with all stock trades.

Reports. All stockholders will receive all reports[3]. Access to company records will be allowed with a little notice. If anything really big (good or bad) happens, no one will be allowed to buy or sell stock until a good effort has been made to let all stockholders know.


The Stock Market. Shares of stock may be traded among approved owners for any price they agree on as long as the CEO is notified of the trade. The usual way stock will be bought and sold will be through the CEO. He/she will be responsible to keep personal liquid reserves[4] for about 10% of the outstanding stock value and be prepared to buy or place the remainder over approximately six months. Having said this, no investors should place themselves in such a position that they would suffer if their stock were not as liquid as this seems. Chances are, if something really bad happened to the company as a whole or to the CEO, you would be stuck.


Price of the stock. Given normal conditions, the CEO will always quote a price per share at which he/she will personally[5] either buy or sell one share. This is the most important feature of the plan. The easiest way to think of it is that it is like two kids splitting a candy bar: the first one splits the bar, the second one chooses. In this case, I am the one who splits the bar, and you choose. In other words, I set a price on the share, and you decide to buy it, sell it, or do nothing. (If you want, we may reverse the roles. You set a price and I will buy one of your shares, sell you one of my shares, or do nothing. Either way, all three options must be open, and for only one share.) The advantages of this system are that it 1) forces fairness in the stock price, and 2) keeps the value current. It also helps to keep your shares liquid, at least much more so than any other small equity plan I have ever seen. The one share provision limits the CEOs exposure to a single transaction at any one time. Then the CEO can move the price up or down for the next share. Typically, when someone wants to buy or sell more than one share, a trade is made on a block basis, at an average price, and the trade goes like this: I would like to buy 10 shares, how much? I quote a price and the deal is done[6]. But, all I am committed to trade at a time is the one share and I will invoke that rule if I get boxed in. I will also close down the market[7] if things get too tricky, and notify all the owners before resuming trading. (If not much is happening, the price of the stock only gets set when I make a report.)


How I set the price of the stock. It is just my net opinion about the general future of the company. If things are improving, and particularly if everyone seems to think so and is buying shares, I will be raising the price. Or if the opposite is true, and people are selling shares, then I will be lowering the price. Stockholders other than the CEO are welcome to play the market, as this is good for us as long as it does not become a distraction. The CEO does not profiteer in any way in the market, and in particular does not exploit the fact that he or she will obviously know more about what is happening than the average stockholder. Also, there are no fees or commissions on stock trades. (A small part of the CEOs salary is for running the market.) We all benefit from a healthy stock market, especially the CEO who owns plenty of stock.


Elections. (This only concerns voting stock if we set up two classes; all shares issued so far are voting shares.) The CEO will be elected more or less once a year, just for drill, and certainly any reasonable time a stockholder requests it. A simple majority of shares may replace the CEO on the spot. The three biggest stockholders are automatically candidates for CEO[8]. Any other stockholder may run. All candidates may put a reasonable amount of campaign notes, propaganda, etc.[9] in the company reports. The way people vote also goes in the reports so everyone can see it[10]. Each share of stock gets a first choice and a second choice vote. The majority of first choices wins. The purpose of the second choice is to express confidence in other, perhaps future, leaders. Up to 25% of our votes may be assigned by the CEO to outside interests[11], such as our largest customers, suppliers, and employees. These interests are critical to our company as a whole, and they should have a specific voice in our affairs.







The CEO (Chief Executive Officer) will be elected directly by the stockholders and will then manage the company as he or she decides. All other officers, directors, and managers will be appointed by the CEO and will serve at his or her pleasure. The CEO will be responsible for fulfilling all government obligations. In the event of incapacitation of the CEO, the vice-president will assume immediate responsibility.

Our officers are:


Ray Grogan, 2464 Halelaau Pl.

President (CEO) Honolulu, HI 96816

and Director (808) 732-7476 (or)

2608 East Court St.

Iowa City, IA 52245

(319) 358-8605

fax c/o Mary Spreen) (319) 335-3604

Jim Hayes

Vice President and Director 1082 Ashbury

San Francisco, CA 94117

(415) 731-4760

wk (415) 495-7110

fax (415) 495-7107


Guy Miller

Director 59-240 Pupukea Rd.

Haleiwa, HI 96712

(808) 638-7895









A few notes about stock and taxes. The initial shares that are given to you for goodwill are not taxable until you sell them. When you do sell them, they are taxable for the full sale price[12].


Work and taxes and stock. Once you start actually performing services for the company in exchange for stock, it is clearly income. Here is how we will be handling these issues now with our beginning system and low cash reserves.


If you just go out to the swamp because you want to, and do a little spraying or fertilizing, and take home some taro, just keep track of your hours. Do not do it in expectation of getting more stock. The CEO may or may not give out more stock. If you want to work in expectation of stock, you have to go through the payroll procedure below, and you have to finance it yourself, and you must have the CEOs OK.


Payroll (Look in the yellow pages for a payroll service, they will do all this for about 1/3 of the paycheck.)


So if you are due a paycheck of $1800, here is how it would work: You want to get credit for stock. You have to pay, with your own reserves, about $600 with your timecard to get your paycheck for about $1500. You get stock credit for contributing both your net paycheck (1500) and the 600 cash. (You may also later get some of your withholding back in your normal tax return.) So you put in a lot of work, plus $600 in cash, and get back stock that is (allegedly) worth $2100.


The companys total cost is the total, $2100. Our accounting would look something like this:


(assume we have a balance of at least 1500)


from you + 600

to payroll service - 2100

redeposit your paycheck + 1500

(which is now company

money in exchange for

your stock)

(the other transaction is a stock trade of 2100 from the company to you.)




(You can see how this little merry-go-round could quickly eat up our limited working capital even if we all worked for stock, but did not also provide the withholding.)

Once we start any accounting whatsoever, we will put out a stockholders report. Everything that is relevant to our internal balance is included, including pay rates.


Expenses. In the early phases it will be easier to just pay for small expense out of our own pockets, let the CEO know, and maybe get a little goodwill stock for it. Once again, you can not do it in expectation of stock because the CEO may or may not give you more stock for covering these items. However, expenses are no big deal accounting-wise. Bigger ticket items can be paid for and turned in for stock (or cash refund once we have any cash). For a budget let us use $200 / director / year limit for now, unless okayed by the CEO.








As we grow and prosper many things will change, maybe very quickly. There may be a gradual shift to a traditional corporate structure. The major changes you should be ready for are:


The stockholders electing a board of directors (BOD), which in turn elects the CEO and corporate officers.


The BOD will in effect take over many of the current functions of the CEO, or at least supervise them, because the BOD can fire the CEO.




Generally, this change will occur as


1. We develop a team of directors. Please nominate candidates.


2. We develop ways to have meetings that do not cost a fortune in time on the part of the directors. Even a coordinated conference call would be a serious commitment. For starters we might try a letter like this one, with room for comments. We can respond with either a new letter, or make written comments. Then we need to figure out a way to get the comments around to everyone, and get some kind of give and take.


3. We develop a business size that justifies the management time and effort a more traditional structure requires. We should certainly re-evaluate our structure if we pass any of these milestones:


Sales of over $1 million per year.


Profits of over $100,000 per year.


Outside equity contributions of over $200,000. (People other than the CEO putting in equity other than goodwill.)


Company assets of over $500,000


Ownership becomes so dispersed that a meeting is necessary to include a majority of shares.



4. We are forced to in order to merge with a major corporation. They will probably not want to be bothered with having to learn a new set of rules. They are quite happy with the standard method, which is to give minority shareholders statutory minimum rights (that is what standard bylaws are), and, guess who gets to be the majority shareholder. A major challenge we will face will be to convince them that we will both be far better off with our system, but that may be impossible. We almost have to be allied with some other landowner to get a legal right of way. It may be a simple one-time payment to Lennys family, but it could be as complex as a merger with a corporation that owns the shopping center on Kam Hwy (or all the landlocked landowners plus one with access). You may see this whole stock plan go poof right before your eyes. And you may have the pleasure of watching me eat my words and say being a minority stockholder under a standard format is not that bad!







This agreement may be changed at any time by a simple majority of shares. However, the worst the changes can be will be to the statutory minimum (standard bylaws). Changes do not have to be recorded here in any special way. Most changes would just be noted in the next stockholders report.




I consent to this stockholders agreement. I fully realize that there are several provisions that give me less rights than a standard stockholders agreement, and they are listed below. I specifically agree to these provisions, in consideration for the other benefits of our agreement.


1.      To dispense with a required annual stockholders meeting. We may or may not have a stockholders meeting, but it is not required, nor is it required to get my permission each year not to have the meeting.


2.      To dispense with a required annual stockholders election, as above.


3. To empower the CEO to perform all duties normally performed by a board of directors, specifically:

declaring dividends or other distributions,

making recommendations to stockholders,

nominating and appointing corporate officers,

amending bylaws,

approving a plan of merger,

selling the remainder of the companys start-up stock shares, and any other issues authorized by a majority of shares,

buying and selling the CEOs personal stock,

functioning as a stock market for our shares,

and in general having the power to set values on just about everything we each put into or take out of the company.


4. To empower the CEO to perform all duties normally performed by an individual landowner, specifically:

selling, leasing, and/or renting our land,

signing deeds, leases, etc. in behalf of our corporation

signing mortgages and otherwise borrowing money in behalf of our corporation



Check to release CEO of stock liquidity requirements for your shares.

Check to vote for Ray as CEO. Or

Check to vote for Guy as CEO. Or

Check to vote for Jim as CEO. Or

Check to vote for someone else as CEO:


Signed and dated by stockholder



(and joint tenant if owned jointly)





To a large degree, by signing this unanimous agreement we are giving up the traditional rights of minority stockholders. I would like to make the case that in exchange we are getting a far better system, and, therefore, greater rights.


This should already be quite clear from everything you have seen so far. If you are not 100% sure that this system is the best for you and for all of us together, please tell me now. If you need outside advice, you might first try your library, or better, a university bookstore that has business courses. Another source is friends or relatives with business experience. It is OK to show others our business plans and other confidential items if there is good reason. If you have a good attorney or CPA who helps you with business, ask them. Another interesting source might be your local business arbitration council. They deal with after-the-fact horror stories daily.



Traditional rights. I do not think any of us would have to look far in our circle of friends or family to find someone who has been shafted as a traditional minority stockholder in a small business. The fundamental problem is that once your money is in, you can not get it back without expensive court proceedings. Given this, all of your other rights are meaningless. The only rights you had anyway were the right to elect directors, and to have an annual meeting. Since the majority of shares elects the majority of the directors who in turn rule the company, this right is pointless. Since the meeting may be either canceled or reduced to you sitting across the table from a bored CEO with a stack of proxies that outvote you, this is equally pointless. Not only do minority shares get shafted for the entire course of the company, but also when a company with this system is sold, it is common to give one price for the majority shares and a lower price for the minority shares. This system is so bad I would have a real hard time asking you to take such a position. I have never known a soul who had a good outcome as a pure minority stockholder in a small everyday business. (Of course I have seen it work out fine to be primarily an employee and also get a few shares as a benefit. And of course, if the business takes off like a rocket things go fine for all.)



The biggest disadvantage of the standard format is that it encourages brain drain. Many small companies never grow because their equity system is so inflexible and exploitative that potentially great partners are lost.



Your rights in my system. Let us face it, with one percent of my company you are not going to run the company in this system either. However, the primary difference is that if you do not like the way things are being run you can sell out, very easily, and with no penalty, and at a price that is as fair as possible. That one right, even though it is limited in many ways, is more meaningful than any other minority right.


I also like our election system far more than just electing a board or voting by proxy.



I think we would all enjoy a board meeting, and we would actually get a lot done. As soon as it is reasonable we will do so, and all of us will be welcome to attend, of course. My only problem is with requiring it, every year, with all the quorums, proxies, etc, just to keep on doing what we are doing. It can make simple corporate housekeeping a major trouble and expense, and we just do not need it.



I am interested in your comments about our stock plan or anything else.








[1] Justification for goodwill


Goodwill defined. Goodwill is used to describe a value that is real in an accounting sense, but cannot be described in normal accounting terms. If you look in accounting or financial textbooks, such as Brighams Financial Management(1st ed.), page 752, you will see it used when someone buys a company for more than its book value: Goodwill represents the excess paid for a firm over and above the appraised value of the physical assets purchased. Goodwill represents payment both for intangibles such as patents and also for organization value that might arise [for example] from having an effective sales force. We will be using it to describe the value of having a person in our organization. Bear in mind that we are starting from essentially nothing in a book value sense - just a patch of swamp land, a few cypress trees, and very little commitment to do much besides watching the trees grow. This is why the values are as low as they are.



Ray Grogan. (Thats me.) I have my share of the goodwill because of, um, my great vision to plant the cypress trees as a potential building foundation. Another value that I bring to the group is a fair training in science and business (BS in tropical ag, MBA in finance). I designed this stock plan. I have a fair amount of drive to see this project through, and tend to get up there and take care of those trees more than anyone else does. Hey, and do not forget the truck.


Jim Hayes. Jim helped with the original survey and cypress planting. He found the cattail area and cleared / planted it while the rest of us were squandering time out in the California grass trying to find property corners. Jim has helped the longest / steadiest, albeit with some gaps while off-island. Jim greatly enlarged the surf club and surf skills of the members, which made possible a steady stream of helpers on post-surfing swamp forays. Jim has also shaped / made most of the surfboards, which made it possible to come to our current level of mastery of the waves at Haleiwa Alii beach, which made trips to the swamp fun and feasible.


Guy Miller. It was Guy who found this fine opportunity in the first place, organized the survey trip, and gave us surf bums a chance to jump in. Guy held all of the real estate and financial ends together over the years. He followed through with his original verbal promise of the Hana Hui getting up to 20% of his original third. Guy got and deserved a few extra percentage points in the set up for being old money and long money.



[2] Corporate owners. If a company owns our stock, the CEO will treat whomever it is we deal with as if they were the owner. We will assume this person is empowered by their own company to be buying and selling in behalf of their company. If our company owns stock of other companies, our CEO will act in our behalf.


[3] Reports to lost stockholders, etc. If you havent gotten a stockholders report, you should ask. If you do not keep the CEO posted on your mailing address, it may be tough toodles. We wont jerk your stock away just because we lose track of you for a few years, but if something is finalized without you, then you do miss out. The obvious example is if we sell the property and distribute all the money. If you show up after its all gone you do not get your share. Another reports issue is these bylaws. No way am I going to print up copies for everyone and mail them out at company expense. Most people just get a little mumbo-jumbo in my noisy truck on the way to surf at 4 AM. (However, you are welcome to a copy if you ask and buy me a beer for postage.) Now, even though you do not usually get a copy of the bylaws, it is still your responsibility to keep up with how our stupid little rules affect you. A similar issue is the stock clubs. Generally if youre just a member of a stock club like the Hana Hui, youll just get Hana Hui reports, which will be little summaries.



[4] Liquid reserves for stock market. By shares outstanding I mean shares that I do not own. In the present case, this would be:


Total shares sold now: 1,000

Less my shares 155

Shares outstanding 845

@ $14 per share $11,830

10% of this is $ 1,183


That is too much for me to handle, so I asked Guy and Jim to release me from this provision for their shares:

Shares outstanding 845

Less Guys shares -388

Less Jims shares -400

Shares outstanding now 57 (ie, the rest of the Hana Hui)

@ $14 per share $802

10% of this is $ 80 (about 5 shares)



So I am required to maintain $ 80 of my own instantly liquid reserves to buy back shares. This may be in cash, cash equivalents like CDs or securities, or in an unused line of credit such as a home equity account.


I may ask large, independently wealthy, stockholders to release me from this requirement for their shares.




[5] Shares that are traded. By personally I mean my own shares, not company shares, and with my own money, not company money. The whole point of this rule is to force me to put my money where my mouth is. The exception to this is when we have a large block of company owned stock such as right now. In this case I will be selling company shares instead of my own. Indeed, I may be buying them myself for either personal investment or if the company needs the money. (My purchases will be at the same price as everyone elses; see the discussions below about insider trading.) However, the CEO can never sell his or her shares to the company, nor have the company buy shares from others. (Well, there might be some reason, so lets say never without the express permission of the majority of shares other than his or her own shares.)


[6] Oral instructions. Note that we will buy and sell stock with nothing more than a conversation. I will write a note for my accounting. If you want a written receipt I will gladly give you one. We do not have printed stock certificates, etc. Your next stockholders report will list what you bought or sold, and what you now own, and that is your record. If you see I made a mistake, I will correct it if I have some memory or record of it. Please help me by keeping your own records and by letting me know if the report is wrong.



[7] Trading of stock when it is apparent something is brewing. Lets first use an example from my fantasies. Lets say Lennys family gives us a right of way for $3K. And, lets say our test build goes fine (the cypress trees along the creek get to be 6in diameter fairly soon, we build a platform bridge there, and it is solid 5 years later). And, hell, lets say by then the main house trees are a foot around at the base. Its to the point that it is obvious that we could really build some kind of house there, and park a car there. And get utilities. And the Haleiwa real estate market has taken off. And taro land is king. The rest of the swamp is beautiful green taro leaves. No mosquitoes, no California grass. We have trails and bridges down to the beach. Tourists are taking canoe rides through the canals lined with cypress trees. Did I leave out anything? During this slow growth phase, there may have been some stock bought and sold. Lets say our stock is trading at about $30 a share (i.e., our original valuation of $14 has more than doubled). But then we get to something that qualifies as something big enough to close the stock market. We make a deal to build and rent out a pretty nice house, and we think we will have an income of $12,000 per year net. (If we have 1,000 shares, thats $12/share income; at a 20% return, that income is worth about $60/share.) The closing of this deal is of course major news, and the market would be closed while everyone was notified. Let us presume many of us decide to purchase more shares ourselves because of this good news. I would take all of the buy orders and treat them equally and sell them all at the same price, lets say $40 a share, and then reopen the market at that price. If some people continued to want to buy shares, and our forecasts looked reasonable, I would keep raising the price per share, and keep the market open as long as the blocks were of reasonable size. We could even go above about $60 a share. These later stock trades would not be considered unusual, and would just be reported in the regular monthly stockholders report.

Now lets use an example of bad times. Things are not going great and we are all low on funds and confidence. Salt has killed the trees, the roots are rotting and wont make a foundation; we still have no access. Our stock price is actually still fairly high, because we are all sort of bravely hanging on. (The price usually doesnt change unless someone wants to buy or sell, and usually in this situation no one wants to make things worse by selling, and certainly no one wants to buy.) I am so low on funds I can barely cover the 10% liquidity rule. All of a sudden one of us has an emergency that requires him to sell a big chunk of stock, that would wipe out my reserves. I would have to close the market and do something. The guy that had to sell would get a very low price per share for his block. I would have to make the price low enough to reflect how bad things were going already, and to some degree reflecting the fact that the rest of us would be stuck with stock that no longer had any liquidity. If the lack of liquidity spooked others into selling, the price per share could be as low as the reserves divided by all the shares for sale. If all shares outstanding were to be sold, that would be about ten cents on the dollar. The owners of the big blocks of shares that released the CEO from the liquidity rule (Guy and Jim) are essentially in the same boat as the CEO, you can not sell out under the liquidity rule. However, that is not to say they will not have made some stock sales as we neared the bottom. It is up to the CEO to give some balance to keeping the market alive for the small stockholders versus some kind of fairness to the people who are doing the most to keep the project going. The CEO may decide to throw them into the final bottom feeding stock sale. Then we could end up with $80 to cover about 850 shares (all the stock except the CEOs, who cant sell out). That works out to less that a dime for stock we now say is worth $14. I hope it is clear that if things go bad we all lose everything. (You would think that surely we could liquidate the whole project and get more than $80, but that is not always true. For example, I didnt go into an example with a credit problem, but we could stupidly borrow money on the land, then squander it, and end up owing more than the property is worth. People do it all the time.)


The main point of these examples is that the rules are set up such that nobody gets special privileges to buy or sell large blocks unfairly.


[8] Yikes, responsibility! (Big stockholders automatically being candidates for CEO.) If you are one of these, you can weasel out of this, and the next guy down gets on the hot seat. The point of this rule is not to terrorize everyone with a lot of responsibility they do not want, although it may seem that way. The idea is to make it painless to run against even a well-entrenched CEO, and that has a multitude of advantages. First of all, it will tend to keep the CEO from making the salary and perks excessively lucrative. It also gives us, at least in this case, two very reasonable candidates who could do a splendid job of running our company.


[9] Propaganda in reports. In our free press you can also just express dissident views. The reports will also note all requests for an election, even if there was not enough support for one.


[10] The votes are reported. Hardly a secret ballot, which does have advantages, but here is why. We can all see who is voting for whom, which will tell us if anyone is dissatisfied with the CEO, which could be very important information. Also, if you are the dissatisfied voter, you really get to express yourself, and perhaps even find kindred spirits. You can also check for accuracy, cheaply, whereas secret ballots would require more elaborate measures to prevent rigging. This system may need a little more evolution; perhaps each vote could also have a rating, say 1 to 10, so you could still vote for the guy but express room for improvement. Comments?



[11] Votes for outside interests. This may seem like a highly unusual provision, but it is similar to getting endorsements, etc., just more direct. It is also similar to many companies that are owned in part by employee groups. If you have business experience, I think you will see what I am driving at by giving these outside interests voting power. All three of these, employees, customers, and suppliers, are absolutely critical to the company. (For our land venture, these groups may include the neighbors who give us right of way, the renters in whatever we build, and the people doing the work.) Every move the CEO makes affects the balance between all interests. If the CEO is not being reasonable to these groups, in the long run we will pay for that. We should see it, in the form of losing votes, if there is some imbalance festering. For example, if the employees are being shafted, then they can vote against the CEO. Since the votes are recorded, this will be as plain as day in the election report.


Here is how the mechanics go: We now have 1,000 shares, or votes. We could create say 300 extra votes and still be within the 25% rule. (300/1300 = 23%). So we do it something like this:


employees: 100 votes (Then this gets further divided, like to the three biggest employees according to number of hours, or paychecks or something.)


renters or neighbors: 100 votes (Same thing, say divided amongst the 3 room mates or taro farmers.)


right-of-way owners: 100 votes (These might be divided amongst the members of the Tantog family, to include even the guys that most want to exclude us. The idea is to give them some control over us.)



[12] Taxes. The goodwill shares are called section 351 shares. The reason there is no tax when you get them is because nothing taxable has occurred. It is the same as if you incorporated yourself and declared your corporation to be worth a million dollars. However, once you sell or otherwise realize this income, it is reportable and taxable then. From the companys point of view, it is the same. If we turn around and sell the land for a million, we will have to pay taxes on the full amount (well, less our meager cash basis). If you (or your accountant) would like a more detailed explanation, see Federal Taxation of Corporations, Kramer 1989, Prentice-Hall, chapter 2, esp. pages 32 and 37. I can also show you the income tax returns from a similar corporation, which have been accepted by the IRS and State of HI since 1990 without grief.




CONSENT OF STOCKHOLDER (Repeated from above. I have not asked people to do this yet, but someday please print out, sign, and return)


I consent to this stockholders agreement. I fully realize that there are several provisions that give me less rights than a standard stockholders agreement, and they are listed below. I specifically agree to these provisions, in consideration for the other benefits of our agreement.


1.      To dispense with a required annual stockholders meeting. We may or may not have a stockholders meeting, but it is not required, nor is it required to get my permission each year not to have the meeting.


2.      To dispense with a required annual stockholders election, as above.


3. To empower the CEO to perform all duties normally performed by a board of directors, specifically:

declaring dividends or other distributions,

making recommendations to stockholders,

nominating and appointing corporate officers,

amending bylaws,

approving a plan of merger,

selling the remainder of the companys start-up stock shares, and any other issues authorized by a majority of shares,

buying and selling the CEOs personal stock,

functioning as a stock market for our shares,

and in general having the power to set values on just about everything we each put into or take out of the company.


4. To empower the CEO to perform all duties normally performed by an individual landowner, specifically:

selling, leasing, and/or renting our land,

signing deeds, leases, etc. in behalf of our corporation

signing mortgages and otherwise borrowing money in behalf of our corporation



Check to release CEO of stock liquidity requirements for your shares.

Check to vote for Ray as CEO. Or

Check to vote for Guy as CEO. Or

Check to vote for Jim as CEO. Or

Check to vote for someone else as CEO:



Signed and dated by stockholder



(and joint tenant if owned jointly)