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When Is Board Approval Required?

Under Delaware law, the business and affairs of all Delaware corporations shall be conducted under the supervision of the board of directors.[1] The board is responsible for establishing and overseeing the corporation’s long-term business strategy, appointing its officers, and ensuring that the corporation’s actions are in the best interests of its stockholders. The statute confers upon the board the power to delegate day-to-day management duties to the corporation’s officers. However, the board is involved in all matters of fundamental importance undertaken by the corporation. This includes, but is not limited to, the authority to control tasks related to raising capital, investment decisions, resource management, capitalization structure, and other matters that significantly impact the corporation. The following is a summary of corporate matters that require board and/or stockholder approval under the Delaware General Corporation Law (DGCL) and common law. Unless otherwise specified in the corporation’s certificate of incorporation or its bylaws, all matters voted upon require majority approval.

Items requiring only board approval:

  • Certain amendments to the certificate of incorporation or bylaws: [2]
    • Changing the corporate name
    • Deleting (a) provisions of the original certificate of incorporation that named the incorporator or incorporators, the initial board of directors and the original subscribers for shares, and (b) provisions contained in any amendment to the certificate of incorporation necessary to effect a change, exchange, reclassification, subdivision, combination or cancellation of stock, if such change, exchange reclassification, subdivision, combination or cancellation has become effective
  • Equity grants or transfers
  • Stockholder dividends and distributions
  • Employment decisions regarding senior management members
  • Adopting employee benefit plans (401(k), health insurance, etc.)
  • All other matters that may impact the corporation’s execution of its business strategies and the interest of the stockholders

Day-to-day matters such as purchases covered by a board-approved budget, hiring rank-and-file employees, and other routine operational purchases typically do not require board approval.

Matters that may require only stockholder approval:

  1. Election/removal of directors, unless otherwise indicated in the bylaws[3]
  2. Interested transactions: Disinterested stockholders may approve a transaction involving board members who are financially interested in the transaction in order to “cleanse” the transaction of the presumption that the director has breached its duty of loyalty; for example, if the corporation is outsourcing clinical trials through a consulting company in which a board member has a financial interest, the transaction may be cleansed through stockholder approval[4]

In most instances, shareholder action can take place in a shareholder meeting or by written consent, both of which must conform to the guidelines established in the corporation’s articles of incorporation and bylaws.

Items requiring board and stockholder approval:

  • Amendments to the corporation’s certificate of incorporation or bylaws
  • Fundamental changes to the corporation, including the sale of the company, a merger/acquisition, the sale of substantially all assets of the corporation, recapitalization, or dissolution[5]
  • Conversion to another type of entity[6]
  • Transfer of the corporation’s domicile[7]
  • Revocation or voluntary dissolution[8]

Delaware law does not provide a comprehensive list of matters that require board approval. In addition, many times a company’s certificate of incorporation, bylaws and/or stockholders’ agreements provide stockholders and directors with certain special voting rights. As a result, all matters not enumerated on the list above should be evaluated on a case-by-case basis with the company’s legal counsel.

For more information, please contact a member of our Early Stage & Emerging Companies practice group.

[1] DGCL §141(a)

[2] DGCL §242(a)(1), (a)(7),(b)(1)

[3] DGCL §141

[4] DGCL §144

[5] DGCL §§ 271, 251

[6] DGCL §266

[7] DGCL §390

[8] DGCL §311