Corporations have a Board of Directors. The Board’s role is to make high-level decisions on behalf of the company’s shareholders and to oversee and appoint officers to run the corporation day-to-day.
The composition of the Board is among the foundational elements of the corporation. The board gets to set the agenda and steer the company long-term. Thus, investors are keen to influence the board.
Directors have fiduciary duties to the corporation such that they have to act in good faith and make informed decisions that benefit the company. The stockholders elect the Board and this election process can be structured in different ways depending on the company’s governing documents.
Once the Board is in place, the directors appoint the officers (like CEO or Secretary) to make day-to-day decisions on behalf of the company.
Voting Rights for Investors
Since the Board is such an integral part of any corporation, investors prefer to restructure the Board in a way that benefits them. Investors who receive Preferred Stock will almost always want a separate Board seat to be elected by the Preferred stockholders, voting as a separate class. Major decisions like amending the governing documents or issuing more stock will usually require the consent of the Preferred Director in addition to any other general consent requirements.
Board Composition
In addition to any special approval rights, investors may want to create a set structure for the Board. For example, investors may require the Board to be set at a certain number of Directors and that number cannot be increased or decreased without investor approval. Founders will usually advocate for maintaining majority control of the Board with a limited set of approval rights for the Director elected by the investors.
Board Observers
Some investors also want observer rights. A board observer can attend Board meetings and receive copies of any materials that are circulated to Directors for the meetings but does not have any voting rights. Observer rights are more common if the investor does not have a Director on the Board (either because there is no Board seat or because a Director has not yet been elected) or if there are multiple investors who want to be present for Board meetings. Sometimes observer rights are limited to third parties who are not directly competitive to the company and will usually be suspended for any information that would violate attorney-client privilege or result in a loss of intellectual property rights.
