What's Happening?
A recent decision by the Delaware Chancery Court has highlighted the significant risks associated with not adhering to corporate formalities. The case, Foley v. Session Corp., involved a CEO's unilateral
attempt to cancel and redeem shares of the company's four co-founders without proper board authorization. The court found that such actions, which have 'fundamental legal significance' under Delaware law, require strict board approval. Despite all four founders signing the agreements, the CEO's actions were deemed ineffective because the board's consent was not obtained. This decision underscores the importance of following corporate governance procedures, even when all parties appear to agree on the transaction.
Why It's Important?
The ruling serves as a critical reminder for corporations, especially startups, about the necessity of adhering to corporate governance protocols. Failure to do so can lead to legal challenges and the invalidation of significant corporate actions, such as stock issuance or redemption. This case illustrates the potential for legal confusion and financial risk when corporate formalities are overlooked. It emphasizes the need for companies to ensure that all board members are involved in decision-making processes and that corporate actions are properly authorized. This is particularly important for startups, where founders may focus more on business development than on governance structures.
What's Next?
Following this decision, companies may need to reassess their governance practices to ensure compliance with legal requirements. This could involve reviewing corporate charters and bylaws, as well as ensuring that all board members are actively engaged in decision-making processes. Legal advisors may also need to be more diligent in verifying the corporate structure and the authority of individuals to act on behalf of the company. The case may prompt other companies to take a closer look at their governance practices to avoid similar legal pitfalls.
