Many corporate actions require board of directors approval for various reasons. For example:
- State corporate law requires board approval for many things, such as when a company issues shares;
- A company’s charter or other governance documents (such as an investor rights agreement) may have a long list of actions, including operational matters, that require board approval; and
- Often times, board approval is required by a third party, such as the other party to a significant contract.
The practical impact is that startup boards are often asked to give final, formal approval to corporate actions on a rush basis, such as when the negotiation on final documents of a financing transaction are not completed till the closing day (though presumably after the board has had a long period of consideration and discussion). In these situations, formal board approval cannot wait for the next regular board meeting. And, without knowing when the documents will be final for approval, it can be hard to assemble a board call with far flung directors on short notice (even assuming you can give proper notice).
Formal Board Approval: Under Delaware law (and many other states), a corporate board can give formal approval to matters either at a meeting of the board (either in person or telephonically/online meeting, so long as everyone can hear everyone else) or by unanimous written consent (“UWC” for short).
Because of time constraints, boards often end up giving final approval by UWC. UWCs are convenient because they allow boards to approve corporate actions without the difficulty of getting all the board members in a room or on the phone at the same time. Historically, getting a UWC has meant a lot of hunting people down to provide scanned copies of signature pages, which means getting to directors where they have both a printer and some kind of scanner (though a .jpeg from a smartphone can fill in as well).
But getting final board approval via UWC can be further streamlined under many state’s laws.
Unanimity: As the name suggests, approval in writing and without a meeting requires unanimous approval. Some states may have a lower standard but Delaware is not one of them.
When you can use a UWC: UWC is a good option where the board is approving a routine matter that can’t wait for the next regular meeting or a more significant event that the board has previously discussed. For instance, if you are working on closing an equity financing, the financing terms and status of negotiations are frequently discussed and considered by the board as the deal evolves over time. A UWC in that circumstance is appropriate to give final approval when the deal documents are complete and the package is ready for stockholder approval.
You also need to make sure your bylaws don’t restrict written consent – usually they won’t, and frequently, bylaws merely restate a lot of the applicable state law on the subject.
What needs to be in a UWC: The resolutions that the board is approving, the agreements the board is approving, and sufficient information to allow the directors to make an informed judgment. This may take the form of a transmittal email with an update since the last discussion, or copies of marked documents (redlines) showing changes.
Email, “Vote Yes”, Electronic Approval: The Delaware statute on unanimous consent by electronic transmission (DGCL Section 141(f)) was adopted back in 2000, so it is not new, but many companies still document unanimous board approval through written consents where board members physically sign a printed out copy of the consent and scan it back. Some of this probably is influenced by counsel who is thinking of how the closing book for the deal will look.
Nevertheless, under Delaware law Section 141, a director can consent via electronic transmission, which means “any form of communication, not directly involving the physical transmission of paper, that creates a record that may be retained, retrieved and reviewed by a recipient thereof” (for instance, a reply email) and “that may be directly reproduced in paper form by such a recipient through an automated process” (meaning, being able to print out an email).
Thus, your board members could reply in an email with something like “Agree”. There are also board portal sites that can help manage this process and distribute information to the board, as well as functioning as the repository of past board actions.
Other states laws are not as forgiving as Delaware, so if your corporation is formed other than in Delaware, you need to get specific advice.
When does a UWC become effective: The UWC will be effective when all the directors have consented. As to whether the consent can be effective as of a prior date, this varies somewhat based on state law, but the best practice is to make it clear in the resolution itself that the consent is effective no earlier than the date the last director approves it. Some of this comes out of reaction to backdating scandals of the early 2000s, which gave rise to the practice of having directors manually date the consent below their ink signatures. However, an email consent from a director provides a time stamp establishing the date on which such consent was given, which serves the same purpose
Keeping Records: The board consent by electronic transmission needs to be filed with the minutes of the proceedings of the board, electronically if those records are generally kept electronically or in hard copy if generally kept that way.