September 21, 2021

Volume XI, Number 264

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September 20, 2021

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What You Need to Know to Be an Effective Board Member for A Private Company

  1.  INTRODUCTION

The roles and responsibilities of members of the board of directors of private companies are generally dictated by the fiduciary duties that such directors owe to the corporation and its stockholders.  While many materials exist to instruct directors on the requirements imposed on them by their fiduciary duties, there are fewer resources available addressing the practical, day-to-day responsibilities delegated to directors.  The roles and responsibilities of directors are determined by the statutes and laws of the state of incorporation and the governing documents of the company.  Because each state has different statutory requirements and applicable laws, the roles and responsibilities of directors can vary.  The purpose of this article is to help directors and companies understand the general areas of responsibility of directors.

  1. ENGAGEMENT OF DIRECTORS

Unlike consultants and other advisors, board members do not sign engagement agreements with the company in order to serve as a director.  Thus, the director’s roles and responsibilities are not outlined in an agreement.  Instead, their duties are defined under corporate law.  The ability of the board to modify or abridge those duties is limited and must be set forth in the company’s certificate of incorporation or bylaws.

Additionally, a director is not awarded their role on the board in the same way that an employee or independent contractor is hired for a position.  An individual becomes a director, and a member of the board, when they are either elected by the stockholders or, if permitted by the charter documents, appointed by the then-sitting directors to fill an existing vacancy on the board. 

  1. BOARD COMPENSATION

An important role of the board is to determine whether a director will receive compensation for their role, and, if so, the form of compensation that the director will receive.  The board’s decision to grant compensation to a director for their service will likely depend on the type of company and the particular director.  Generally, compensation is only provided to independent, non-employee directors serving on the board of private companies.  Additionally, director compensation usually is made in the form of options to acquire shares of stock of the company, which typically vest on a quarterly basis over two to three years of service as a director.  Cash compensation is unusual, other than as reimbursement for expenses related to the director’s attendance at board or committee meetings.

As good corporate governance practice, the board may want to consider setting director equity compensation in a way that would align the interests of the director with the interests of stockholders, thus promoting and enhancing the long-term value of the company for its stockholders.  This is typically achieved as noted above by granting nonemployee directors options to acquire shares of stock of the company.  Options are not typically granted to directors who are founders, because founders generally already hold a substantial portion of the company’s securities, or to outside investors serving as directors, because the director would already be viewed as having aligned interests with the stockholders. 

  1. BOARD APPROVALS

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

  • Amending the governing documents (certificate of incorporation or bylaws).

  • Amending or adopting the company’s employee benefits plan.

  • Awarding equity grants or approving equity transfers.

  • Distributions and dividends to stockholders.

  • Making employment decisions regarding senior management, such as whether to hire or fire a particular executive-level employee.

  • Other matters which may impact the business strategy of the company and stockholders’ interests, such as conversion of the company to another type of corporate entity, the sale of the company or a majority of its assets, and the voluntary dissolution of the company. 

  1. COMMITTEE DELEGATION

While public companies are required to establish and utilize board committees, private companies do not have such an obligation.  Many private companies, however, choose to implement committees for a variety of reasons.  For example, a board may establish a special committee to handle particular matters where there would otherwise be a conflict of interest on the full board of directors.  A board may consider implementing other committees as a way to prepare the company for future operation as a public company or to otherwise promote more substantial corporate governance.  These other committees generally include a compensation committee, to set the compensation for executive level employees, an audit committee to monitor the company’s financial results and hire and work with the outside auditors, and/or a corporate governance committee to vet current and future board members and adopt and implement other corporate governance initiatives, such as training, diversity or environmental, social or governance (”ESG”) goals.

However, there are limits on what the board may delegate to these committees.  While the specific limitations are determined by the corporation statutes of the state of incorporation of the company, boards are typically not permitted to delegate (i) the election of officers, (ii) the approval, adoption or recommendation of any action that requires the approval of stockholders, (iii) the adoption, amendment, and/or repeal of any bylaw, (iv) the approval of a share exchange or merger, (v) the filling of a vacancy on the board or board committee, (vi) the authorization or declaration of dividend payments to stockholders, or (vii) the authorization of stock issuance.

  1. RESOLUTIONS OF CONFLICTS OF INTERESTS

Directors are not prohibited from serving on the board if they have a conflict of interest.  But, if a director does have a conflict of interest, that conflict must be disclosed to the board in a complete and timely manner.  A conflict occurs where a director may benefit from a set of business decisions, even if there is only a chance of self-dealing.  Additionally, if the board would have a quorum without such conflicted director present, then the director should recuse themself from the decision-making process.  However, a director may not recuse themself if such recusal would result 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.  Additionally, recusal is not permitted to avoid signing a unanimous written consent.

  1.  CONCLUSION

Fiduciary duties owed by directors are generally consistent across states and companies.  Accordingly, lots of materials exist to guide directors regarding the fiduciary duties they owe to the company and its stockholders.  Unlike fiduciary duties, the roles and responsibilities of private company directors will vary depending on the state of incorporation and governing documents of the company.  Because of this variance, it is important for directors to be aware of their general areas of responsibility, so that directors may efficiently determine the roles which are specifically delegated to them.

©1994-2021 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.National Law Review, Volume XI, Number 229
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About this Author

M. Bertie Magit Corporate Merger Acquisition Associate Attorney Mintz Levin Cohn Ferris Glovsky and Popeo PC
Associate

Bertie focuses her practice on corporate matters such as mergers and acquisitions, capital markets transactions, and corporate governance. Her clients include businesses of all sizes, including emerging companies.

While earning her JD, Bertie worked as a legal clerk at BET Networks (a subsidiary of Viacom Inc.), a legal extern for WGBH, and a legal intern for California Lawyers for the Arts. In addition, she was a staff editor of the Boston College Intellectual Property and Technology Forum.

Prior to...

858-314-1573
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