Delaware law generally provides that a board of directors (the Board) will manage or direct the business and affairs of a corporation. While the Board typically delegates day-to-day management to the corporation’s officers, failure to secure necessary Board approval for certain corporate actions introduces risk. For example, potential investors will typically request corporation records as part of their due diligence prior to investing. A company that does not follow the proper protocol with regard to Board approvals may seriously impede its ability to secure funding.
A single, comprehensive list of decisions or transactions that require Board approval does not exist, so some companies use signing authority schedules to help provide guidelines for when contracts or other actions require Board approval. In addition, a number of actions will always require Board approval. The following list includes several common actions and transactions contemplated by startups that generally require Board approval, either under Delaware law, the corporation’s governing documents and/or by market practice, and, in certain cases, also require stockholder approval.
- Amending the Certificate of Incorporation or Bylaws
- Granting or transferring equity (this includes all issuances of securities, including stock, stock options, convertible promissory notes and warrants)
- Adopting or amending employee equity and benefit plans
- Hiring or firing senior officers
- Entering into employment agreements, or amending the terms of employment, for senior officers
- Borrowing or lending money
- Adopting an annual budget
- Entering into agreements of material importance to the corporation (e.g., financing agreements, material license agreements and leases)
If a company is unsure whether a particular action that it plans to take requires Board approval, the company should consult with a lawyer. Obtaining proper Board approval in advance of an action is always better than needing to obtain approval after the fact, which in certain cases may involve additional stockholder notices and actions. In addition, companies should consult with a lawyer to identify which actions will require stockholder approval in addition to Board approval.
What are the next steps after a company has established that it is planning to engage in an activity that requires Board approval?
Board approvals may be accomplished in one of two ways:
- At a duly called meeting in person or by phone/videoconference. The process for calling a meeting is typically included in the corporation’s bylaws, which describe who is allowed to call a meeting, the allowable methods for providing notice (g., in person or by email) and how far in advance of the meeting notice must be delivered.
- By unanimous written consent (approved and delivered by all directors) or by written consent of the sole director (if the corporation only has one director)
It is important to maintain a written record of the approval. Minutes from a Board meeting should document the actions that were approved by the Board and be approved by the Board at a subsequent meeting and then signed by the secretary and filed in the corporation’s minute book. All directors must sign and date written consents (or approve them by email if allowed under the corporation’s bylaws). A copy of the written consent (including any email approvals received) should be filed in the corporation’s minute book. The written consent filed in the corporation’s minute book must also include any attachments that were included with the resolutions approved (i.e., copies of agreements approved).
Navigating the board approval process is part art, part science. Companies should work closely with legal counsel to identify which actions require Board approval if uncertainties arise. In addition, companies should maintain comprehensive documentation of all approvals, whether in minutes of Board meetings or actions taken by unanimous written consent. By following these best practices, companies can help establish good corporate record keeping.