Although the executive officers (such as the Chief Executive Officer and Chief Financial Officer) generally handle the day-to-day operations of the business, the board of directors is ultimately responsible for the management and oversight of a corporation. The board of directors should meet on a regular basis in order to discuss the business and ensure that the directors are satisfying their fiduciary duty of due care. Most venture-backed companies hold regular board meetings approximately six to eight times per year, with additional special meetings scheduled as needed (such as to approve a transaction or discuss a specific matter that requires the input of the board).
Notice and Quorum
It is important to follow the applicable notice procedures when calling a board meeting, which are generally set forth in the company’s bylaws. However, notice is waived by attendance at a meeting (unless a director is attending to object to the calling of the meeting), which companies frequently rely on to hold special meetings at short notice. You must also ensure that a quorum is present at a board meeting in order to transact business, which for a Delaware corporation generally means a majority of the total number of directors are present at the meeting (unless the certificate of incorporation or bylaws provide otherwise). While most regular board meetings are held in person, directors frequently participate by telephone or web conference and can still be included in the determination of a quorum.
There is no required agenda or format for a board meeting. However, regular board meetings for venture-backed companies generally cover the following items:
- corporate “housekeeping,” such as the approval of the minutes of the last board meeting and the grant of stock options;
- a business overview provided by the CEO in order to update the board regarding recent developments, achievements, challenges and/or opportunities;
- a review of the recent financial results and cash position;
- a more detailed update regarding specific aspects of the business (such as business development, sales, marketing and product development) provided by the executive officers primarily responsible for such aspects; and
- an “executive session” in which the management team is not present, which many venture capitalists and independent directors consider good practice to conduct at each meeting (even if there are no specific concerns regarding management) to avoid sending a negative signal if a separate discussion is desired.
Before each meeting, the management team should distribute the agenda, financial reports and other documents for discussion so that the directors have sufficient time to carefully review the materials before the meeting.
A company should keep written minutes of each board meeting, which are customarily drafted by counsel. While there is no required format, board minutes typically track the agenda of the meeting and should include:
- the date, time and place of the meeting;
- the people in attendance;
- a statement that a quorum of directors was present;
- the general topics discussed by the board; and
- the actions taken and matters approved by the board.
It is important to keep in mind that the most likely audiences for the minutes are potential investors and acquirers during the course of due diligence and/or litigants. As such, the minutes should accurately memorialize the topics discussed by the board at a high-level but should not include sensitive information that may not be appropriate or desirable to disclose to third parties.
Required Board Approvals
As a general rule, the board of directors should approve any material action or transaction that is outside the ordinary course of business.
Examples of matters that require board approval are:
- election of corporate officers;
- amendments to governing documents;
- issuances of equity securities, including all option grants;
- sales or other dispositions of material assets;
- corporate borrowing and lending; and
- a sale of the company or any other transaction resulting in a change of control.
Learn more about board approvals in our article What Decisions Need Approval From Your Board of Directors?
Good recordkeeping will save you time and money
Good recordkeeping practices help to reduce the risk of potential liability due to failure to observe corporate formalities. In addition, good recordkeeping practices facilitate a smooth due diligence process with potential investors or acquirers. Good corporate records inspire confidence; sloppy corporate records undermine it. Some of the records that you will want to make sure you prepare on a timely basis and retain in the company’s files include, among others:
- minutes of each meeting of the board of directors, each committee of the board of directors, and stockholders;
- actions by written consent taken by the board (which must be unanimous in Delaware and California) and by stockholders in lieu of a meeting;
- an up-to-date stock ledger, option ledger and capitalization table;
- income, sales, employment and other tax returns;
- payroll records;
- permits and governmental filings; and
- all agreements to which the company is a party, including leases, loan agreements, intellectual property licenses, commercial agreements, employment agreements, employee proprietary information agreements, stock purchase agreements, option agreements, etc.
Many venture-backed companies now maintain company records in an electronic dataroom. In addition to providing both management and counsel with easy access to the documents, a dataroom is also an efficient tool to use for due diligence purposes.