Board Purpose
The Board of Directors is the highest executive power in the company. We will call it “the Board” as well. If you think about legal analogies to describe the purpose of the Board, the similarity between state authorities may come to your mind. In this case, Shareholders’ Meetings act as parliament – the main legislative body in any democratic jurisdiction, while the Board acts as a Cabinet of Ministers.
The most common setup when the Board is naturally created is when new investors join the startup as shareholders. Each of them would want to delegate their Director to the Board to lead and participate in decision-making. You can hardly avoid this scenario as this is usually the condition under the Term Sheet and SPA at a later stage of investment.
The other scenario is when the Board is not much needed but it makes the whole decision-making process in the company easier. If there is only one shareholder in the company, they can initiate the Board formation and appoint main company officers to the Board – CEO, CFO, CTO, General Counsel, etc. This Board will serve primarily as an advisory body to the main shareholder but still will be defining company strategy and implementing the highest level decisions.
The main purpose of the Board lies in supervising the financial performance of the business. When the CEO reports to the Board at the Board Meeting, this is the crucial event in the company lifecycle. It concludes if the current financial strategy is appropriate or if it should be revised.
The Board oversees the strategic planning for the company and risk management, but mainly in the form of approval of proposals made by the company chief officers like the Head of Business Development, CMO, HR Business Partner. If you are the CEO, I don’t envy you at the Board Meeting – the expectations and level of pressure are very high.
Board Formation
I have seen multiple times when shareholders and CEOs thought they had a Board of Directors – they have been conducting regular Board Meetings, passing decisions, and even sometimes the Board Minutes have been sent over email. But what’s wrong with that you may ask?
Nothing except those Boards have never existed legally. Which means their resolutions as well and the responsibility attributed to them.
The Board of Directors exists when it’s created under the Articles of Association (AoA) and those Articles are submitted to the Official Register (Registrar, State Secretary or any other official authority that keeps company records). This means that the company needs to declare in the statutory documents – in the AoA approved by the Shareholders’ Resolution, there is a Board and how many directors the Board is composed of. No need to mention their names in the AoA as Directors are replaced very often and this will cause constant changes in the AoA, approving it by the Board resolution and submitting it to the Register. Not the most intelligent way to move forward since each submission costs fees.
Sometimes the Board is created only by the Shareholders' resolution, skipping the step with AoA. My recommendation is to not use such an approach as this will create inconsistency between company statutory documents – AoA and Resolutions. Such inconsistency is dangerous in terms of defining the responsibility of the Board. Any Board decision may be disputed to the terms that the Board was not authorized to make such a decision. Or was it approved by the Board? For the shareholder, such tension is not desirable. This is an imaginary situation but already quite unpleasant.
Thus, to create a Board of Directors you as a founder need:
- Specify a separate Section in the Articles of Association that defines that the Company has a Board of Directors, the exact number of directors, and in general – corporate governance (order of Board Meetings, quorum for decision making, fields of responsibility);
- Pass Shareholders’ resolution approving the AoA and defining the Board. In this case, you will also need to mention each director who will be appointed to the Board;
- Submit AoA and Shareholders’ Resolution to the Register.
Congrats, you do have a Board now.
Few Words about Directors
Founders often learn from mistakes but sometimes they have very high costs for business. In the situation I described earlier when the Board is composed of management, not of shareholders’ representatives, the step to officially appoint those Board members is usually forgotten.
This is not a correct approach as the Board should be comprised of real directors – appointed officially in the Register. Otherwise, what will be those “officers” motivation to act in the best interest of the company and suggest the best and well-developed strategy if they don’t bear any responsibility as the Directors?
Therefore, the main outcome here is to always appoint officers to the Board officially as directors. Not as CFO, CTO, or CMO only, as in this case, they act only as employees, or worse – as advisors under the contract. Which means zero responsibility in decision-making.
On the other hand, each member should be properly considered to be appointed to the Board as the powers of such a director will be quite wide.
Signing Documents by the Board
I will slightly touch on the topic of the executing documents by the Board and will overview it in more detail in the next article, otherwise, this one will never end.
Founders often ask: if I have 5 Directors on the Board and need to sign the Term Sheet with an investor, how many Directors should sign?
What each Board member should keep in mind is that, first of all, you need a quorum within the Board to pass the Resolution. For example, 2 Directors out of 3 Directors should vote positively on the Resolution to pass it (majority of Directors). This does not relate to the reserved matters which can be passed only unanimously (for example, expenses over $500,000).
However, for any legal document which requires signatures of Directors, to be legally valid, it should be signed by all the Directors from the Board. Not only those who constituted a quorum to pass the resolutions. But all of them. So if you have 5 Directors on the Board and need to sign a Term Sheet with the investor – each of them should sign. This does not relate to any matters related to quorum, only to the legal form of the document.
The exception may be when not all Directors should sign, is a special clause in the separate Shareholders’ or Board Resolution that grants signatory powers to anyone of the Directors or any number of Directors. It can sound like this:
"We, the Directors of XYZ Company, grant authority to each of the Directors of the Board to sign any legal documents, except those which will result in Company expenses over $100,000"
or like this:
"We, the Directors of XYZ Company, grant authority to the majority of the Directors of the Board to sign any legal documents".
Although it may seem like simplifying the process of documents signing by the Board (it may be hell sometimes because all Directors are usually super busy), from my experience if there are less than 7 directors you should avoid such wordings in your corporate governance documents. Whenever you get the document signed by the majority of the Directors and not all of them, you will need to communicate the fact of the signing to the rest of them – a lot of unnecessary work. And the rest of the Directors will have a hard time keeping track of all the documents and their importance to the business. So, it’s always better to apply an approach where all Directors sign the documents.
The only case when you don’t need all of the directors to sign is the day-to-day activity documents – contracts with clients, suppliers, employers, etc. These are usually signed by one Director – the Managing Director, often appointed as CEO. This authorization always should be separately specified as described above in the separate Board Resolution.
To conclude
The Board of Directors is a crucial executive body at the Company. However, sometimes the formalities of its formation may be neglected and as a result, no one will be responsible for the short-sighted decisions, except the founder. And this one director who is the only one appointed officially in the Register.
Be mindful and appoint your Directors carefully.
Author – Yuliia Verhun, IT Lawyer
All intellectual property rights to this Article belong to Yuliia Verhun.
