Delaware, a popular jurisdiction for incorporation in the United States, requires a majority of shareholders to pass a written resolution in lieu of a meeting in most shareholder-level decisions, and unanimous approval from a board of directors on board-level decisions. Corporate officers must act with the authority of directors, elected by shareholders, for each and every corporate act  – but this seems superfluous in the case of a startup, where directors will simultaneously be shareholders and officers. Thus, rather than duplicate resolutions, the board may broadly authorize officers to take corporate actions without specifically documenting those actions. Though this may seem functionally redundant if the shareholders and directors and officers are all the same people, if you’re keeping to the letter of the law, every major corporate action must be authorized by the board.

Sometimes companies fail to pre-authorize corporate acts through their boards, but Delaware has a mechanism to fix that. Delaware allows you to create a corrective resolution in case a number of corporate actions were not documented beforehand. Section 204 of the Delaware General Corporation Law (DGCL) allows the board to “ratify” acts that weren’t previously authorized in a retroactive resolution containing:

  • The “defective” corporate acts (i.e., that unauthorized acts);
  • The date of each defective corporate act;
  • The nature of the failure to authorize the defective acts; and
  • A statement that the Board ratifies the defective acts.

Aside from legal compliance, documenting your resolutions well can be a huge point in your favour as you attempt to bring a big investor onboard. Having a clear trail of resolutions to document prior, smaller investment rounds can assist in clarity for the investor and yourself as you negotiate a share purchase.

Looking to learn more about incorporating in Delaware? Check out Clausehound’s Delaware Public Benefit Corporation By-Laws learning library template, and be sure to click through our tags to learn more about each clause!

Author: Phil Weiss and Sahil Kanaya

 

–  –  –

This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

What you don't know can hurt you! Subscribe to stay informed.

Sign up now and receive an email when we publish new content.

We will never give away, trade or sell your email address. You can unsubscribe at any time.