Initial Board Actions - Explained
What are the Initial Board Actions?
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Table of ContentsWhat are Initial Board Actions?The Primary Initial Board Actions?Adopt Actions of IncorporatorAdopt Corporate BylawsAppoint OfficersIndemnifications AgreementsCorporate Identity IssuesIssuance of SharesCorporate RecordsFinancial AuthorizationIntellectual Property AgreementsEquity Plans
What are Initial Board Actions?
The initial board is charged with establishing the operations of the corporation. This begins with resolutions approving and authorizing certain corporate actions. Approving or setting these actions in motion are the core responsibilities of the board. The most common initial actions are discussed below.
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The Primary Initial Board Actions?
The Board of Directors will take the following organization and corporate governance matters through resolutions at a meeting or through resolutions via consent agreements:
Adopt Actions of Incorporator
This means that the board will officially ratify actions of incorporator in bringing the corporation into existence. This includes the solicitation of support and pledges from shareholders to fund the initial corporation. This action relieves the incorporator from liability for reasonable actions taken on behalf of the corporation and authorizes reimbursement for the organizational expenses incurred during formation.
- Note: Failure to ratify all of the actions of the incorporator may leave the incorporator potentially personally liable for those actions. Further, intentional misconduct (fraud) by the incorporator cannot be ratified by the corporation to relieve personal liability.
Adopt Corporate Bylaws
Often the corporate bylaws are adopted in the actions of incorporator. In this way, the bylaws provide the procedure for the initial board actions. If no, the corporation will adopt the Corporate Bylaws (if not done through the actions of incorporator)
- Note: The corporation may initially elect subchapter S tax status. This is generally not available for startup ventures if preferred shares are authorized in the articles. Also, this will not be available in the event of an equity round by institutional investors.
Much of the activity to bring about board operations must be carried out by officers. Under state corporate law, the board is not empowered to carry out many of the daily operations of the corporation. As such, the corporation must immediately undertake the process outlined in the bylaws to elect the board and appoint officers. This will include a designation of authority of officers or managers of the corporation.
- Note: It is assumed that executives or presidents of a corporation have authority to act in any manner on behalf of the corporation. Many of the activities to be undertaken by the officer, however, will require a resolution by the board of directors. For example, opening an account with a financial institution will generally require certified board resolutions authorizing this action by the officer charged with that responsibility.
As part of the appointment of officers, the board will often approve indemnification agreements with the officer. These agreements provide for indemnification of officers for personal liability for actions taken on behalf of the corporation. The board will also approve separate resolutions that approve indemnification for decisions made by directors.
- Note: Officers and directors of corporations generally receive a high degree of protection from liability pursuant to the business judgment rule. Nonetheless, it provides comfort to officers and directors that they will not be held personally liable for actions or decisions made on behalf of the corporation. Many states limit the ability of the corporation to indemnify against acts by officers or directors that are illegal or intend to harm the corporation.
- Sample Indemnification Agreement: https://www.orrick.com/Events-and-Publications/Documents/1956.rtf
Corporate Identity Issues
Much of the corporate identity information is required in the articles of incorporation. Establishing these things are outside the ordinary course of operations and must be adopted by the board of directors.
- Note: Examples of resolving to corporate identify information includes: Authorization of principal office, authorization of registered agent, foreign qualification to do business in given locations, establishing the corporations fiscal year, applying for a tax Employer Identification Number, D/B/A fictitious name filing in jurisdictions that require such filing, etc.
Issuance of Shares
The incorporator will have drummed up support for the corporation prior to formation. Only the board is capable of issuing shares. As such, the founders of the corporation will enter into subscription agreements with the corporation. The agreements will be pre-signed by the founders (soon-to-be shareholders). The board will approve the issuance of stock (or Options if Applicable) to the founders by resolving to enter into the applicable subscription agreement.
- Note: This will be executed through a subscription agreement, which is discussed in a separate lecture. Multiple classes of stock will generally be authorized. Preferred shares are generally not issued until an equity round is approved.
The board will establish the official records of the corporation.
- Note: The responsibility of maintaining the records rests with the corporate secretary; but, approving the minute books, corporate seal, and stock certificates is the role of the board.
Many institutions dealing with the corporation will requires specific board authorization to render services to the corporation. That is, officers of the corporations will have to take the board minutes or certified board record in order to deal with the third party.
- Note: Examples of action requiring specific board authorize includes: opening bank accounts, credit cards, lines of credit, payment systems, etc.
Intellectual Property Agreements
Often founders of the corporation will transfer their rights in intellectual property to the corporation. Remember, the business activity probably existed prior to the formation of the corporation. As such, the intellectual property rights held by inventors or business founders may need to be transferred to the corporation. These intellectual property rights may be extremely valuable (if not essential) assets to corporate operations. As such, the board may approve any agreements concerning proprietary information or inventions agreements transferred to the corporation.
- Note: In some cases the subscription agreement accepted by the corporation will reference the transfer of intellectual property rights to the corporation. Later, officers of the corporation may enter into intellectual property agreements on behalf of the corporation.
Stock plans of the corporation line out the types of stock (classes and characteristics of each class), the rights of stockholders, the rights or option or warrant holders, etc. These plans become incredibly important with the issuance of multiple classes of shares. Approve Stock Option/Stock Issuance Plan and forms of Option Agreements.
- Sample Approval of Stock Plan: https://www.orrick.com/Events-and-Publications/Documents/1966.pdf
- Sample Approval of Restricted Stock Grant: https://www.orrick.com/Events-and-Publications/Documents/Board-Approval-of-RSP-Grant.pdf
- Sample Approval of Option Grant: https://www.orrick.com/Events-and-Publications/Documents/1968.pdf