Tips for being an effective member of the board of directors of a private company

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  1. INTRODUCTION

The roles and responsibilities of members of the board of directors of private companies are generally dictated by the fiduciary duties that these directors owe to the company and its shareholders. While there are many documents to inform directors of the demands placed on them by their fiduciary duties, fewer resources are available regarding the practical and day-to-day responsibilities delegated to directors. The roles and responsibilities of the directors are determined by the articles of association and the laws of the State of incorporation and the constituting documents of the company. Because each state has different statutory requirements and applicable laws, the roles and responsibilities of directors may vary. The purpose of this article is to help directors and businesses understand the general areas of directors’ responsibility.

  1. COMMITMENT OF DIRECTORS

Unlike consultants and other advisers, board members do not sign engagement agreements with the company to serve as a director. Thus, the roles and responsibilities of the director are not defined in an agreement. Instead, their duties are defined by company law. The ability of the board of directors to modify or shorten these obligations is limited and must be set out in the certificate of incorporation or the articles of association of the company.

In addition, a director is not assigned his role on the board in the same way that an employee or independent contractor is hired for a position. A person becomes a director and a member of the board of directors when they are either elected by the shareholders or, if the charter documents allow it, appointed by the directors in office to fill a vacant position on the board of directors.

  1. REMUNERATION OF THE BOARD

An important role of the board is to determine whether a director will receive compensation for their role and, if so, what form of compensation they will receive. The board’s decision to compensate a director for their services will likely depend on the type of business and the director in question. As a general rule, compensation is only paid to independent non-employee directors serving on the board of directors of private companies. In addition, director compensation generally takes the form of company stock options, which typically vest on a quarterly basis after two to three years of service as a director. Cash compensation is unusual, other than reimbursement of expenses related to the director’s attendance at board or committee meetings.

As a good corporate governance practice, the board may consider setting the share-based compensation of directors in such a way as to align the interests of the director with the interests of shareholders, thereby promoting and enhancing long-term value. term of the company for its shareholders. This is generally achieved, as noted above, by granting non-employee directors options to acquire shares in the company. Options are generally not granted to directors who are founders, as the founders usually already own a significant portion of the securities of the company, or to outside investors acting as directors, as the director would already be considered to have interests aligned with shareholders.

  1. BOARD APPROVALS

Crown corporation laws dictate specific items or actions of the business that require the approval of the board of directors, and a corporation’s charter and bylaws may list additional items that require the consent of the board. board of directors. Section 141 (a) of the Delaware General Corporation Law (“DGCL”) states that the board of directors has full authority over the management of the company. Such managerial responsibility would likely include approval or consent to the following actions:

  • Amendment of the constituting documents (certificate of incorporation or articles of association).

  • Modify or adopt the company’s benefits plan.

  • Award capital grants or approve equity transfers.

  • Distributions and dividends to shareholders.

  • Make senior management employment decisions, such as hiring or firing a particular executive level employee.

  • Other matters that may affect the business strategy of the business and the interests of shareholders, such as the conversion of the business to another type of legal person, the sale of the business or the majority of its assets and the voluntary dissolution of the company.

  1. DELEGATION COMMITTEE

While public companies are required to establish and operate board committees, private companies do not have such an obligation. However, many private companies choose to set up committees for various reasons. For example, a board may establish a special committee to deal with specific matters where there would otherwise be a conflict of interest within the full board of directors. A board of directors may consider establishing other committees to prepare the company for its future operation as a public company or to promote more substantial corporate governance. These other committees typically include a compensation committee, to set compensation for executive-level employees, an audit committee to oversee the company’s financial results and hire and work with external auditors, and / or a governance committee. to review current and future board members. and adopt and implement other corporate governance initiatives, such as training, diversity or environmental, social or governance (“ESG”) objectives.

However, there are limits to what the board can delegate to these committees. Although the specific limitations are determined by the articles of association of the state of incorporation of the company, boards are generally not allowed to delegate (i) election of officers, (ii) approval, approval, adoption or recommendation of any action requiring shareholder approval, (iii) the adoption, modification and / or repeal of any by-law, (iv) the approval of a share exchange or a merger, (v) the filling of a vacant position on the board or a board committee, (vi) the authorization or declaration of payment of dividends to shareholders, or (vii) the authorization of issuance of shares.

  1. RESOLUTIONS OF CONFLICTS OF INTEREST

Directors are not prohibited from serving on the board if they have a conflict of interest. But, if a director has a conflict of interest, that conflict must be fully and timely disclosed to the board. A conflict arises when an administrator can benefit from a set of business decisions, even if there is only one chance to act on their own. In addition, if the board of directors had a quorum without the presence of such a conflicting director, then the director would have to withdraw from the decision-making process. However, an administrator cannot recuse himself if such a challenge results in a lack of quorum. The participation of an interested director in a vote would not render the vote invalid under laws such as the DGCL. In addition, recusation is not allowed to avoid signing a unanimous written consent.

  1. CONCLUSION

Fiduciary obligations owed by directors are generally consistent between states and corporations. As a result, many documents exist to guide directors regarding the fiduciary obligations they owe to the company and its shareholders. Unlike fiduciary duties, the roles and responsibilities of directors of private companies vary depending on the state of incorporation and the constituting documents of the company. Because of this discrepancy, it is important for directors to be aware of their general areas of responsibility, so that they can effectively determine the roles that are specifically delegated to them.

© 1994-2021 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, PC All rights reserved.Revue nationale de droit, volume XI, number 229


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