Corporations typically have a three-tiered governing structure: the shareholders elect a Board of Directors to oversee operations and the Board appoints officers to run the day-to-day business. While a corporation’s officers make the vast majority of business decisions ad hoc, sometimes approval of the corporation’s Board and/or shareholders is required. Entrepreneurs are often dismayed by the legal formalities surrounding Board and shareholder approvals, but, frustrating as it may be, it is important to comply with these legal formalities because corporate actions that are not properly authorized are not legally effective (sometimes actions can be ratified after-the-fact, but not always). The good news is that with a little advance planning legal formalities are usually simple to comply with and should not stand in the way of a business’s normal operations.
States laws, including the Massachusetts Business Corporation Act, generally require a shareholder vote for electing directors and approving major corporate actions, such as amending the corporation’s Charter or selling the company. In addition, shareholder approval for other corporate actions is sometimes required by federal law, by a corporation’s Charter or by a contract between the corporation and its shareholders. Strategic investors, including venture capitalists, often insist on broadening the scope of actions requiring shareholder approval so as to exert some additional control over the decisions of company management.
When a privately-held corporation requires shareholder approval, it can either call a meeting for shareholders to vote on the matter or seek shareholders’ written consent to the action without holding a meeting. Where a corporation has only a handful of shareholders, obtaining written consent is often simpler because shareholder meetings require advance notice (at least seven days in Massachusetts) and compliance with other procedural formalities. In Massachusetts, written consents of a corporation’s shareholders must be unanimous unless the corporation’s Charter permits shareholders to approve actions by less-than unanimous consent. For corporations with a large number of shareholders, obtaining written consent is often impractical.
State laws are generally vague about when Board approval is required for a corporate action, but the Board should always be involved in decisions that could materially affect the company, including the hiring of officers, the issuance of equity, material business-to-business contracts and any merger, acquisition or similar transaction. As is the case with shareholders, the Board can approve actions of the company either by a vote taken at a meeting or by written consent (but unlike written consents of shareholders, written consents of the Board must always be unanimous). Board meetings, like shareholder meetings, require advance notice (at least two days in Massachusetts) and compliance with other procedural formalities.
Bottom line: there’s no need to sweat legal formalities, but it is important that corporate actions are properly authorized. If you’re not sure, ask your lawyer whether Board or shareholder approval is required.