Do I need to hold annual stockholder meetings?
Takeaway: While Delaware law requires annual stockholder meetings primarily to elect directors, early-stage startups with a small group of engaged investors almost always satisfy this requirement by obtaining a simple unanimous written consent.
Your corporation is owned by its stockholders. Delaware law provides those owners with certain fundamental rights, chief among them being the right to elect the board of directors who will govern the company on their behalf. The formal mechanism for this election is the annual meeting of stockholders.
For a large public company, the annual meeting is a major, formal event. For a private, early-stage startup, the legal requirement exists, but the way it is satisfied is typically much simpler and more efficient.
The Legal Requirement
The Delaware General Corporation Law (DGCL) states that an annual meeting of stockholders must be held for the election of directors on a date and at a time designated in the company's Bylaws. The law requires the company to provide formal notice to all stockholders in advance of the meeting.
The Startup Reality: Action by Written Consent
The vast majority of venture-backed startups do not hold a formal, in-person annual meeting. The time and expense of preparing for and conducting a physical meeting for a small group of stockholders is unnecessary. Instead, startups almost universally use a provision in the DGCL that allows stockholders to take action without a meeting by providing their approval in writing.
How it Works: The company's legal counsel will prepare a document called an "Action by Written Consent of the Stockholders." This document will contain the key resolutions that would have been voted on at an annual meeting, primarily the resolution to elect the slate of directors for the coming year.
Circulation and Signature: This written consent is then circulated to all of the company's stockholders for their signature.
The Voting Threshold: To be effective, the consent must be signed by stockholders holding at least the minimum number of shares that would have been required to approve the action at a meeting where all shares were present. For the election of directors, this is typically a plurality. For most startups with a small, cohesive group of founders and investors, obtaining a unanimous written consent is the standard practice.
Why Go Through the Formality?
Even if you are just getting your co-founders and your lead VC to sign a piece of paper, this formality is important.
It Maintains Corporate Hygiene: It creates a clean, annual record that the company is complying with the legal requirements of the DGCL. This record will be reviewed during the due diligence for any future financing or acquisition.
It Re-Affirms the Board's Authority: It provides a clear, annual re-affirmation of the board's composition and its authority to govern the company, as elected by the owners.
While you don't need to rent a hotel ballroom, you do need to formally satisfy the legal requirement of an annual stockholder meeting. For a startup, the simple, efficient mechanism of a written consent is the standard and appropriate way to do so.
Disclaimer: This post is for general informational purposes only and does not constitute legal, tax, or financial advice. Reading or relying on this content does not create an attorney–client relationship. Every startup’s situation is unique, and you should consult qualified legal or tax professionals before making decisions that may affect your business.