Board approval plays a significant role in the transactions we support companies with as corporate financiers. Navigating corporate governance is critical for the success and sustainability of any company. Board approval plays a pivotal role in ensuring that significant decisions align with the company’s strategic objectives and regulatory obligations. This article delves into the types of decisions that necessitate board approval, the mechanics of how board approval works, and the voting requirements involved.
Significant Changes Requiring Board Approval
1. Mergers and Acquisitions (M&A)
Mergers and acquisitions are transformative actions that can redefine a company’s market position and growth trajectory. These transactions typically require the board’s approval due to their complexity and potential impact on the company's strategic direction.
2. Issuance of Equity or Debt
Raising capital through the issuance of new shares or debt instruments often necessitates board approval. This includes initial public offerings (IPOs), private placements, and the issuance of bonds or other debt securities.
3. Strategic Partnerships and Joint Ventures
Entering into strategic partnerships or joint ventures can provide substantial growth opportunities. However, these arrangements also come with risks, making it essential for the board to scrutinise and approve them.
4. Significant Capital Expenditures
Large capital expenditures, such as acquiring new facilities, major equipment purchases, or significant investments in technology, typically require board approval due to their financial implications.
5. Amendments to the Company’s Bylaws or Articles of Association
Changes to the foundational documents of a company, such as the bylaws or articles of association, must be approved by the board. These changes can affect the governance and operational framework of the company.
6. Dividend Policy Changes
Decisions regarding the declaration and distribution of dividends are critical financial choices that require the board’s oversight and approval.
7. Executive Compensation and Appointments
Setting and adjusting executive compensation, as well as appointing or removing key executives, are decisions that fall under the board’s purview.
The Mechanics of Board Approval
Board Meetings
Board approvals are typically granted during board meetings, which can be regular (scheduled periodically) or special (called to address specific issues). These meetings ensure that all board members are adequately informed about the issues at hand.
Quorum Requirements
A quorum, the minimum number of board members required to conduct business, must be present for any decisions to be valid. The quorum is often defined in the company’s bylaws.
Voting Procedures
Board decisions can be made through various voting mechanisms:
Simple Majority: Most decisions require a simple majority of those present.
Supermajority: Some critical decisions may necessitate a higher threshold, such as a two-thirds majority.
Unanimous Consent: For particularly sensitive or high-stakes issues, unanimous approval may be required, although this is less common.
Does Board Approval Require Unanimous Approval or Just a Majority?
The necessity for unanimous or majority approval depends on the specific decision and the company’s governing documents. Typically:
Majority Approval: Most routine decisions require a simple majority.
Supermajority or Unanimous Approval: For significant decisions, such as mergers, amendments to the articles of association, or issuing new shares, a supermajority or unanimous consent might be mandated.
Q&A:
Q: What is a Quorum?
A: A quorum is the minimum number of board members required to be present to conduct official business and validate decisions made during the meeting.
Q: What is a Supermajority?
A: A supermajority is a requirement that a higher-than-normal percentage of votes is necessary to approve a decision, often two-thirds or three-quarters of the board members.
Q: What are Articles of Association?
A: Articles of association are a document that specifies the regulations for a company's operations and defines the company's purpose, along with the duties and responsibilities of its members.
Q: What is a Private Placement?
A: A private placement is a method of raising capital through the sale of securities to a small number of selected investors rather than through a public offering.
Q: What is an Initial Public Offering (IPO)?
A: An IPO is the process by which a private company offers shares to the public for the first time to raise capital from public investors.
Q: What is a Joint Venture?
A: A joint venture is a business arrangement where two or more parties agree to pool their resources for a specific task, project, or business activity, sharing both risks and rewards.
Enquiries
For further information, please contact info@langdoncap.com
About the Author
Sabbir Rahman is Managing Director of Langdon Capital. He has held prior roles with Morgan Stanley, Lazard, and Barclays Investment Bank. He has executed over £60 billion in notional value of debt, equity, M&A and derivatives transactions with global corporates, private equity funds and financial sponsor groups.
About Langdon Capital
Langdon Capital assists SMEs and mid-market companies with capital raising, M&A, and disposals up to £250m in transaction size; and innovative, high-growth companies with >£1m in annual revenue and >30% in annual revenue growth raise debt or equity, at Series A and later funding rounds, from a network of alternative investors spanning private equity firms, venture capital funds, corporate VC arms, family offices, venture debt funds, private credit funds, real estate funds and hedge funds.
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This is not financial advice or any offer, invitation or inducement to sell or provide financial products or services or to engage in any form of investment activity.
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