Understanding What Requires Board Approval in a Delaware Corporation

Delaware’s prominence as the preferred state for corporate incorporation isn’t just a coincidence – it’s the result of well-established business laws and a sophisticated legal framework that provides clarity and protection for corporations. At the heart of this framework lies the board of directors, whose approval is crucial for many corporate decisions. Understanding which decisions require board approval is essential for maintaining legal compliance and ensuring smooth corporate operations.

Why Delaware Law Places Emphasis on Board Decisions

The Delaware General Corporation Law (DGCL) serves as the cornerstone of corporate governance, establishing clear guidelines for board responsibilities and corporate decision-making. This comprehensive legal framework places significant emphasis on the board’s role due to their fiduciary duties to the corporation and its shareholders.

Board members must fulfill three primary fiduciary duties: the duty of care, requiring informed decision-making; the duty of loyalty, demanding actions in the corporation’s best interest; and the duty of good faith, ensuring honest and ethical conduct. Delaware’s rich history of case law has created precise interpretations of these duties, providing clear guidance for corporate governance.

Key Decisions Requiring Board Approval

Major Corporate Transactions

Under DGCL §251, the board must approve all significant corporate transactions. This includes:

• Mergers and acquisitions, regardless of whether the corporation is the buyer or seller
• Sale, lease, or exchange of substantially all corporate assets
• Formation of strategic partnerships or joint ventures that significantly impact corporate operations
• Major business expansion or diversification initiatives

Issuance of Stock and Equity Decisions

Stock-related decisions are fundamental to corporate governance and require careful board oversight. According to DGCL §151, the board must approve:

• Issuance of new shares of stock
• Implementation of stock option plans and equity compensation programs
• Stock splits and reverse splits
• Declaration of dividends and determination of dividend amounts
• Creation of new classes or series of stock

Corporate Governance and Bylaws

The board plays a crucial role in establishing and maintaining corporate governance structures:

• Adoption, amendment, or repeal of corporate bylaws (DGCL §109)
• Appointment or removal of corporate officers
• Changes to board composition or size
• Formation of board committees and delegation of authority
• Approval of significant corporate policies

Financial and Operational Decisions

The board’s oversight extends to major financial decisions:

• Approval of annual budgets and business plans
• Authorization of significant capital expenditures
• Approval of loans or debt financing arrangements
• Major contracts exceeding specified dollar thresholds
• Selection of independent auditors

Consequences of Not Seeking Board Approval

Failing to obtain necessary board approval can have serious consequences. The landmark case of Smith v. Van Gorkom demonstrates how inadequate board oversight can result in significant liability. In this case, the Delaware Supreme Court held directors personally liable for approving a merger without properly informing themselves of the company’s value.

Potential consequences include:

• Nullification of unauthorized corporate actions
• Personal liability for directors and officers
• Shareholder derivative lawsuits
• Damage to corporate reputation and stakeholder trust
• Regulatory scrutiny and potential penalties

Practical Tips for Ensuring Compliance

To maintain proper board oversight and compliance:

1. Develop a comprehensive approval matrix outlining which decisions require board input
2. Maintain detailed minutes of board meetings and written consents
3. Establish clear communication channels between management and the board
4. Regular review and updates of corporate governance policies
5. Implementation of internal controls to flag actions requiring board approval

Frequently Asked Questions About Delaware Board Approvals

When should decisions be escalated to shareholders?

While the board handles most corporate decisions, certain fundamental changes require shareholder approval, including:

• Mergers and consolidations
• Sale of all or substantially all corporate assets
• Amendments to the certificate of incorporation
• Dissolution of the corporation

Are there specific thresholds for requiring board approval?

Delaware law doesn’t set specific dollar thresholds for board approval. However, corporations typically establish their own thresholds through their bylaws or board resolutions for matters such as:

• Capital expenditures above certain amounts
• Contracts exceeding specified values
• Transactions with related parties
• Compensation arrangements

What role does the board play in day-to-day management decisions?

While the board oversees major corporate decisions, day-to-day operations typically fall under management’s purview. The board’s role is strategic rather than operational, focusing on oversight and major decisions rather than routine management matters.

Final Thoughts

Understanding and adhering to board approval requirements is crucial for maintaining effective corporate governance and legal compliance in Delaware corporations. Whether dealing with major transactions, equity decisions, or governance matters, proper board oversight protects both the corporation and its stakeholders.

Ready to ensure your Delaware corporation maintains proper board governance? Contact the Fridman Law Firm today – contact us online or call 646-859-1351. Our team of experienced attorneys is here to help you navigate the complexities of corporate governance, allowing you to focus on what you do best—growing your business.