Private Company Board of Directors FAQs

Inevitably, the best topics for my posts come from questions I get from my clients. Hot off the press, these questions (and answers) came up on a seed round financing that I am working on this week!

Who makes the final decision on the number of Board members?

In Delaware, a Company's bylaws will typically allow the Board of Directors to fix the total number of directors, provided that any decrease in the total authorized number of directors will not remove from office any incumbent director. The bylaws may also fix a specific number of directors or specify a range (e.g., like in California), such that changing the number of directors from such specific number or to a number outside the range will require amendment of the bylaws.

In financings, the total number of directors that constitute the entire board will be negotiated with the investors, who will often insist that the number of directors may not be changed without their consent. (For those who like the technical details, in equity financings you will usually find this in the protective provisions of the certificate of incorporation and in debt financings, in the negative covenants.)

What are the qualifications for Board membership?

There are no special requirements as to who can be a Board member, so long as it’s an individual (and not a corporation). A Board member may, but does not have to be, a stakeholder of the Company.

What percent ownership of the Company entitles a stakeholder to designate a Board member?

Unlike certain foreign jurisdictions, in the US, there is no statutory right based on (a minority) percent ownership to nominate a Board member. Practically speaking, a majority stockholder will, in the absence of a voting agreement, be able to put his own designees on the Board. In certain states, like California, cumulative voting applies to election and removal of directors.

Normally, whether an investor gets a Board seat is negotiated at the term sheet stage and subsequently built into the charter (certificate/articles of incorporation) and voting agreement. The right to nominate an investor will usually be conditional on such investor maintaining some number or percent of shares initially purchased by such investor.

How long is the term of a Board member?

Normally, directors are elected to the Board to serve until they resign or are replaced by another director. It is possible to elect directors for a set term, e.g., for 3 years, but that is not usually done in small privately-held companies.

What is the process for removing a Board member?

A board member who does not voluntarily resign may be removed by the stockholders who had the right to appoint such Board member in the first place. In the absence of special provisions, a majority of the outstanding shares will be able to remove a director. If special rights have been negotiated, such that the preferred stock holders designate a director, the vote of the preferred stock holders will be required to remove the director designated by them. In certain states, like California, cumulative voting applies to election and removal of directors.

How does the Board vote?

The Board can vote (1) at a meeting, or (2) by unanimous written consent. There are no special rules about which type of vote needs to be obtained for which type of action. This is at the discretion of the Company. But there are some differences in the mechanics:
• Meetings of the Board can be held by teleconference, so everyone does not have to be in the same room. At a meeting, assuming notice requirements have been met, a majority of directors will usually constitute quorum (which means that it’s enough to start the meeting and vote on matters before the Board), unless a higher threshold is set in the bylaws. A majority of the directors present at the meeting (in person or otherwise) is required to pass a resolution. So, technically, in a board of 5 members, if 3 members attend and only 2 vote on a particular matter, that will be sufficient, though less than the actual majority of the whole Board. Practically, however, Boards that are not dysfunctional try to vote on matters unanimously, and if 2 of 5 directors can’t make it, they will probably reschedule the meeting.

• Actions by written consent have to be signed by every director. When the Board is small--one or two co-founders--written consents are the typical way to approve matters, so that there is a written record of Board action.

Happy company making!

Inna

Inna Efimchik at White Summers Caffee & James LLP, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.

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