Meaning
Formal approval by the board of directors is the necessary legal step to create a valid right to stock or options. A written resolution or unanimous consent document provides the primary evidence of equity grant authorization. Without this specific act, any promise of shares is void under most state laws.
This process governs the moment of creation for an ownership interest and ends once the individual stock certificates are issued.
Approval Record
Minutes of a board meeting must show that a quorum was present and that the directors voted to approve a specific grant to a specific person. This dated line in the corporate records is what an auditor or acquirer looks for during due diligence. Missing resolutions signify nullity.
Timing Accuracy
Backdating these approvals to a lower strike price is a violation of tax and securities laws. The authorization must reflect the actual date the board made its decision. Keeping accurate records of these dates prevents future disputes with tax authorities.
Authority Boundary
Officers often lack the power to grant equity without board consent. Even a chief executive cannot bypass the directors when it comes to the capital structure of the firm. Strict adherence to this rule protects the integrity of the company’s ownership.