As our entrepreneur clients grow and enter into commercial transactions and take on financing, questions frequently asked include how to manage the composition of the potentially growing board. This includes:
- determining/confirming who is a board member;
- locking in one or more board nominations (seats) for the founder(s) or officer(s); and
- locking in one or more board nominations for the officer(s) or investor(s) who are non-founder(s).
This article will deal with the first point.
How does one go about determining/confirming who is a board member?
One would think that this is an easy answer - but in a transactional setting, lawyers are often digging back through the corporate documents to determine who has been appointed to the board of a corporation. The reason for this is that board members may be coming and going and the minute book and/or the government register may or may not be properly updated. For a large company this is less of an issue because a law firm and/or accounting firm will take on this responsibility to keep the documents properly organized.
However, for a small company with a limited legal budget this information tracking can easily fall into disarray. A director resignation does not have a strict legal form, and can be effected by email or otherwise. You can find a sample director resignation by linking here. The acceptance of the resignation is also not strictly required, as a director cannot be locked into holding their role.
It is important to note that the corporation cannot operate without the required minimum number of directors. This is an especially tricky situation in the event that the company is operating poorly, as directors may decide to “jump ship” to avoid potential liability such as the liability for unpaid wages owed to employees, for example. Please also note that if the resigning director is holding an officer role within the company, that such officer role is not automatically resigned.
Once the resignations are received, the Founder/Administrator/CFO/Corporate Secretary/Lawyer - whoever is in charge of updating the minute book - should be notified. The registers should reflect that the director (and possibly an officer - if the director also resigned an officer position) has resigned. It is important to keep these registers updated. When corporate decisions need to be made, unless the proper signatories have approved documents in accordance with the signing rules set out in the company’s articles, by-laws or shareholders’ agreement, or as required by law (yes - all four of those company governance rules will need to be checked to see who is required to sign a particular instrument), a corporate, commercial, financing, acquisition or really any transaction or decision made by the company might not be properly authorized. And in many of these agreements there is a clause that requires that the company is properly authorized.
The work of the Administrator/Corporate Secretary/Lawyer is still not completed at this point. The lawyer will need to file an update to the government register to indicate that a director has resigned and that a new director has replaced that director. This formality is required by law within a certain number of days after a board vacancy. The government register is a useful reference point for a contracting counter-party to determine whether an agreement they are entering into with a company has been properly approved.
Stay tuned for Part II of our Corporate Transactions Series!