INSIGHTS

Board, Officer, or Stockholder Approval? When Each is Required

February 2, 2022

There are three distinct, yet often overlapping governing bodies of a company: the Board of Directors, the Officers, and the stockholders. These three governing bodies have different duties and responsibilities, therefore creating times in which one or multiple of the bodies need to give consent or approval before taking an action that affects the company as a whole.

Board of Directors

The Board of Directors is the body elected by the stockholders to make material decisions and set the strategy for the company as it moves through its lifecycle. These Directors are usually stockholders themselves, can be Officers as well, and can sit on the Board of other private or public companies too.

Approvals by the Board can be obtained two separate ways: (i) written consent or (ii) a vote at a meeting.

Often, when the company is small and all are agreeable on most matters, written consent can be obtained and signed off by the entire board. This written consent must be unanimous—if even one Director opposes the decision and refuses to sign, the written consent is not valid and a vote at a meeting of the Board must be obtained.

When written consent by a unanimous vote of the Board is unobtainable, a majority of the Board must approve of the matter in question at a Board meeting where a quorum is present.

The following are matters in which one of the two versions of Board approval are required:

• Amending governing documents (i.e. bylaws, charter, etc.).
• Issuing or amending the terms of securities (e.g., stock, options, convertible notes, SAFEs, etc.).
  • This is an especially important category as (i) approval is often needed PRIOR to issuance, (ii) there are almost always securities laws that must be complied with, sometimes also prior to issuance, and (iii) these issuances will impact your cap table.
• Entering into or amending material contracts (e.g., stockholder agreements).
• Entering into corporate transactions (e.g., a merger or asset sale).
• Appointing/removing Officers or Directors.
• Delegating certain authority to the company’s officers.
• Creating board committees (i.e. Compensation Committee, Audit Committee, Nominating Committee, etc.).
• Approving or amending debt-related agreements.
• Approving stock plans and amendments (i.e. Employee Stock Option Plan).
• Compensation of officers.

Officers

Officers are what are commonly referred to as the “C-Suite” level members of the company as they are often the ones with “Chief” in their title (think CEO, CFO, COO, etc.). Whereas the Board of Directors needs to approve larger matters that affect the company in the long-term, Officers generally deal with the “ordinary course” decisions of the company; that is, the day-to-day. As such, these decisions often don’t need written approval or any formal or informal voting.

The following matters fall under the purview of Officers:

• Negotiating the terms of material contracts/transactions to be approved by the board and/or stockholders.
• Entering into contracts in the ordinary course of business.
• Making lower-tier personnel decisions.
• Managing day-to-day affairs, bank accounts, etc.

Stockholders

It is often confusing to think of stockholders as a governing body, but when an individual or an entity holds even one share, that individual or entity theoretically has a say in how the company is run. Think of major public companies who are subject to self-described “activist investor” call for changes: for example, Blackwells Capital (who hold roughly 5% of Peloton’s issued and outstanding shares, or roughly $500 million worth of shares) has recently called for the termination of Peloton CEO John Foley.

That being said, stockholders often only have say in the most major company decisions (e.g. where their voting or financial interest in the company could be impacted). These types of decisions include:

• Amending governing documents (i.e. bylaws, charter, etc.).
• Permitting interested party transactions (i.e. were a director or officer has an interest in a transaction or agreement), including indemnification agreements.
• Entering into major corporate transactions (e.g., a merger or asset sale).
• Electing new directors (depending on corporate governance structure).
• Approving stock plans and amendments (i.e. Employee Stock Option Plan).

Depending on what the applicable corporate code and governing documents say, a matter may need a simple majority of the shares outstanding to vote in its favor, or something higher. In some cases, a matter may require a separate vote of a class of outstanding stock. In very small or closely held companies, the stockholder approval can often be obtained through written consent (just as with some Board approvals), though unanimous approval is not required.

Concluding Remarks

Overall, Officers make smaller, day-to-day decisions, the Board of Directors is called on to make bigger decisions and the stockholders are called on to make the biggest decisions. Often, two or even all three governing bodies have a hand in or are asked to approve a matter (think amending the bylaws) and in this way they all work together.

Most importantly, even though it may be easy in a startup environment to make quick decisions, investors, their lawyers, potential acquirers and maybe even the SEC will want to see those Board Consents and/or Stockholder Consents approving those early and simple, though critical decisions.