What stockholder approval is necessary to sell a company?
Takeaway: Selling your company is a fundamental corporate action that requires the formal approval of your Board of Directors and, critically, a majority of your stockholders, with your preferred stock investors often holding a separate veto right.
The decision to sell your company is the most significant and final act in its lifecycle. It is a decision that cannot be made by the CEO or the founders alone. Because a sale fundamentally alters the ownership of the corporation and the rights of every stockholder, the process is governed by a strict set of approval requirements laid out in Delaware law and in your company's own governing documents.
Securing the proper stockholder approval is not just a formality; it is a legal prerequisite for closing any M&A transaction.
The Two Layers of Approval
To approve a sale of the company, you must clear two distinct hurdles:
Board of Directors Approval: The process always begins with the board. The board must fulfill its fiduciary duty by carefully evaluating the acquisition offer, determining that the deal is in the best interests of the company and all of its stockholders, and then formally passing a board resolution to approve the merger agreement and recommend it to the stockholders.
Stockholder Approval: After the board has approved the deal, it must be submitted to the stockholders for their vote. Under Delaware law, a merger typically requires the approval of a majority of all outstanding shares of stock entitled to vote.
The "Preferred Stock Veto" (The Protective Covenant)
This is where it gets more complicated. The "majority of all outstanding shares" is not the only stockholder vote you need. Your Certificate of Incorporation grants your preferred stockholders a set of protective covenants, or veto rights, and one of the most important of these is the right to approve a sale of the company.
How it Works: The protective provisions will state that the company cannot be sold without the approval of a majority of the preferred stock, voting together as a separate class.
The Practical Consequence: This means you effectively need to win two separate stockholder votes: a vote of the majority of all stock combined, and a separate vote of just the preferred stock investors. This gives your venture capital investors a powerful veto right over any acquisition, ensuring that the founders cannot sell the company without their consent.
The "Drag-Along" Agreement
Once the board and the required majority of stockholders have approved the sale, the drag-along provision in your Voting Agreement comes into play. This provision contractually obligates all minority stockholders to vote in favor of the approved deal and to sell their shares on the same terms, ensuring the acquirer can purchase 100% of the company.
The sale of your company is a carefully orchestrated legal process. It requires a formal recommendation from your board and the consent of your key stockholder constituencies, ensuring that all stakeholders are aligned before the final, transformative step is taken.
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.