What do a company’s stockholders approve at formation?
Takeaway: While the board manages the company, stockholders are its ultimate owners. At formation, their primary role is to ratify the initial board’s actions—formally approving the company’s creation, governance documents, and their own stock issuances.
In a Delaware corporation, authority is divided between the board of directors, which manages the business, and the stockholders, who own it. While the board can make many decisions on its own, certain foundational actions benefit from or require stockholder approval.
Immediately after incorporation, the “stockholders” are usually just you and your co-founders. These initial approvals are typically handled through a Unanimous Written Consent of Stockholders rather than a formal meeting.
Key Approvals at Formation
Electing the Board of Directors
The sole incorporator appoints the initial board. The stockholders’ first action is to formally elect that same slate of directors, confirming them as the company’s governing body.
Adopting the Bylaws
The board adopts the initial Bylaws, and stockholders then ratify them. This extra approval strengthens certain provisions—such as director indemnification—by showing they were approved by the owners as well as the board.
Ratifying the Board’s Initial Actions
Stockholders generally ratify all actions taken by the board in its first consent, including:
Appointment of corporate officers.
Approval of the company’s standard stock purchase agreement and Proprietary Information and Inventions Agreement (PIIA).
Authorization of founder stock issuances.
Why This Ratification Matters
At first glance, the process may seem circular—the same individuals act as both directors and stockholders, approving the same set of actions twice. But it serves important purposes:
Creates a clear paper trail: Establishes that both the board and the owners approved all foundational actions from the start, which investors will expect to see during due diligence.
Mitigates conflicts of interest: The board’s approval of stock issuances to founders is a self-interested act. Stockholder ratification helps “cleanse” the transaction and strengthens its legal defensibility.
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.