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Do You Need Board Approval Before Signing Large Commercial Contracts?

As an HR or operations professional, you may find yourself in a situation where you need to sign a significant commercial contract on behalf of your company. However, before putting pen to paper, it's crucial to understand whether you require board approval for such a transaction. The answer to this question depends on several factors, including the size and nature of the contract, your company's bylaws and corporate governance policies, and the potential impact on the business.

Generally speaking, most states' corporate laws grant the board of directors the authority to manage and oversee the affairs of the corporation. This includes the power to approve major transactions, such as large commercial contracts, that could significantly impact the company's operations, finances, or strategic direction. recommends that boards establish policies and procedures to ensure that significant contracts and transactions are properly reviewed and approved.

When Board Approval Is Typically Required

While there is no universal threshold for when board approval is required, there are certain situations where it is generally advisable or even mandatory to seek board approval before signing a large commercial contract:

1. Contracts exceeding a certain dollar value: Many companies have policies that require board approval for contracts above a specified dollar amount, such as $1 million or more. This threshold may vary depending on the size and industry of the company.

2. Long-term or strategic contracts: Contracts that commit the company to a long-term relationship or have significant strategic implications, such as joint ventures, licensing agreements, or major supplier contracts, often require board approval.

3. Contracts outside the ordinary course of business: If a contract involves activities or transactions that are outside the company's normal operations or business scope, board approval may be necessary.

4. Conflicts of interest: If a contract involves a potential conflict of interest with a board member, officer, or other related party, board approval is typically required to ensure proper disclosure and management of the conflict.

5. Corporate governance requirements: Some companies' bylaws or corporate governance policies explicitly require board approval for certain types of contracts or transactions, regardless of the dollar value.

Consequences of Failing to Obtain Board Approval

Failing to obtain board approval when required can have serious consequences for the company and the individuals involved. In some cases, the contract may be deemed void or unenforceable if it was not properly authorized. Additionally, directors and officers who enter into unauthorized contracts could potentially face personal liability for breaching their fiduciary duties to the company.

To mitigate these risks, it's essential to review your company's bylaws, corporate governance policies, and any relevant state laws to determine when board approval is required for commercial contracts. are available to help guide this process.

Best Practices for Seeking Board Approval

If board approval is required for a particular contract, it's important to follow proper procedures and provide the board with sufficient information to make an informed decision. This may include:

1. Preparing a detailed summary of the contract terms, including the parties involved, the scope of services or products, the financial implications, and any potential risks or conflicts of interest.

2. Explaining the business rationale and strategic importance of the contract.

3. Providing a risk assessment and mitigation plan, if applicable.

4. Allowing sufficient time for the board to review the materials and ask questions before the meeting where approval will be sought.

5. Documenting the board's decision and any conditions or limitations on the approval in the meeting minutes.

By following these best practices and seeking board approval when required, you can help ensure that your company's commercial contracts are properly authorized and aligned with its strategic objectives and risk tolerance.

What qualifies as a material contract?

A material contract is one that is significant to a company's operations, finances, or business strategy. There is no precise legal definition, but examples could include major customer or supplier agreements, financing arrangements, acquisitions, or real estate leases. The key factors are the contract's size, duration, and potential impact on the company. For public companies, the SEC requires disclosure of in regulatory filings. Ultimately, materiality involves judgment and companies should consult legal counsel for guidance on .

Can authority be delegated?

Yes, authority can be delegated within an organization, but the extent of delegation depends on the company's bylaws and policies. The board of directors can delegate certain contract approval authority to officers or management. However, significant or extraordinary contracts may still require board approval.

According to the , boards should establish approval thresholds and procedures for different types of contracts. Proper delegation of authority can streamline operations while maintaining oversight. For practical advice, consult your company's and seek legal counsel if needed.

Should you document board resolutions?

Yes, it's generally a good practice to document board resolutions, especially for significant decisions like approving major contracts or transactions. Proper documentation helps establish a clear record of the board's actions and decisions, which can be important for legal and governance purposes. The board resolutions should be recorded in the official minutes of the meeting and maintained as part of the company's corporate records.

For publicly traded companies, the requires disclosure of certain board resolutions and actions in regulatory filings. Even for private companies, documenting board resolutions can help demonstrate proper oversight and decision-making processes to stakeholders, investors, and regulators if needed. Consult with legal counsel or refer to for guidance on properly documenting and maintaining board resolutions.

What's common practice in SMEs?

For small and medium-sized enterprises (SMEs), it's generally not feasible to obtain formal board approval for every significant contract. Common practice is to establish internal approval policies that delegate authority to executives or managers up to certain dollar thresholds or risk levels. The provides guidance on governance best practices for smaller companies.

That said, it's still advisable to have the board review and approve contracts that are highly material, involve conflicts of interest, or relate to major corporate actions like acquisitions or financings. The has more on balancing oversight with operational efficiency.

Are there liability risks?

Yes, there are potential liability risks if board approval is not obtained for significant contracts. Directors have a fiduciary duty to oversee major corporate decisions, and failing to do so could expose them to liability for breach of duty. Additionally, unauthorized contracts may be voidable, leading to legal disputes and financial losses. emphasizes the importance of board oversight and approval processes for material contracts and transactions.

To mitigate risks, companies should have clear policies and procedures for determining which contracts require board approval, based on factors like dollar value, duration, and strategic importance. Proper documentation and legal review can also help protect the company and its directors. Ultimately, seeking board approval for major contracts is a prudent risk management practice.

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