Board of Directors 101

In this post I’m going to go over some of the basic points of corporate boards of directors.

Number of Directors

Technically, the number of directors can be set to any number by the stockholders or the board itself, as described in either the articles of incorporation or the company bylaws. Either document can set a minimum number, or a range, and permit the board to set its own number pursuant to those limitations, or require the stockholders to approve a change in the number. Any changes in limitations set forth in the articles or bylaws generally have to be approved by both the board and the stockholders.

By default, in Massachusetts, a corporation only need one director if there is only one stockholder, at least two directors if there are two stockholders, and at least three directors if there are three or more stockholders. Again, these default minimums can be changed.

Qualifications

A director must be a person (it cannot be another company or other business entity), but a director need not be a stockholder. Generally, directors can be nominated by any stockholder according to the process, if any, outlined by the articles of incorporation or bylaws

It is possible to designate certain board seats to be elected by certain classes of stock. This often occurs when startups are funded by angel investors or venture capital firms — as part of the deal they will generally require they be given the right to select one or more directors, usually in addition to the existing directors elected by the common stockholders (who are often the founders of the company).

Election and Removal

By default, directors serve until they resign or are removed from office; however, it is possible to have a set term, and even term limits.

Stockholders may be asked to vote for a slate of directors, or vote each for each seat individually, or may even be permitted to do cumulative voting. Cumulative voting works by giving each share of stock entitled to vote one vote (or a multiple thereof if the stock has super-voting rights) for each board seat, which the shareholder can then apportion to one or more director candidates as they choose — for example, if there are five board seats, a stockholder with 100 shares and one share per vote then has 500 votes, of which he or she can give all of them to one candidate, or 400 to one candidate and 100 to another, or 300 to one candidate and 50 each to candidates for the other board seats.

Removal of a director is sometimes permitted, for cause, by the board itself; however, the stockholders usually have the authority to remove a director for any reason or no reason. If a director is selected by a certain class of stock, those directors generally can only be removed, sometimes by other directors selected by that same class of stock, and always by the holders of that particular class of stock.

Action by the Board

The board can take action by holding a meeting (either in person or by teleconference) and voting on a resolution; alternatively, the board may act by unanimous written consent — if each director signs onto a resolution, the action is taken as if a meeting were held, though no meeting of any kind need to be held.

If acting by meeting, a quorum of the board must be present and voting at the meeting — a quorum is by default a majority of the directors in office, though can be set in the articles or bylaws to any fraction of the board.