Board approval: Overview, definition, and example
What is board approval?
Board approval refers to the formal authorization or consent granted by a company's board of directors for specific actions, decisions, or transactions. Certain business activities, such as mergers, acquisitions, issuing shares, or entering into significant contracts, often require the board's approval to ensure proper governance and accountability.
Why is board approval important?
Board approval is crucial for maintaining transparency, accountability, and good corporate governance within a company. It ensures that major decisions align with the company’s strategic goals and comply with legal and regulatory requirements. By involving the board of directors, businesses can evaluate risks, explore alternatives, and make well-informed decisions.
For stakeholders, board approval acts as a safeguard, providing assurance that decisions have been thoroughly reviewed by a group of qualified individuals responsible for the company’s oversight.
Understanding board approval through an example
Imagine a technology startup considering an acquisition of a smaller competitor. The transaction involves significant financial investment and risks. Before proceeding, the company’s management team presents the acquisition plan to the board of directors. After reviewing the proposal, conducting due diligence, and discussing potential risks, the board gives its formal approval, allowing the management team to move forward.
In another example, a manufacturing company plans to issue additional shares to raise capital. The board of directors is required to review and approve this decision to ensure it aligns with the company’s financial strategy and protects shareholder interests.
An example of a board approval clause
Here’s how a board approval clause might appear in a corporate agreement:
“Any actions, transactions, or decisions under this Agreement that exceed a monetary threshold of [Insert Amount] or involve the sale, merger, or acquisition of the Company shall require prior written approval from the Company’s Board of Directors.”
Conclusion
Board approval is a vital mechanism for ensuring that significant business decisions are made responsibly and transparently. It protects the interests of the company, its shareholders, and other stakeholders by promoting informed decision-making and compliance with corporate governance standards. Including clear board approval provisions in agreements and policies ensures that critical decisions receive the necessary oversight and accountability.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.