The Delaware Business Litigation Report flags Fogel v. U.S. Energy Systems, Inc., C.A. No. 3271-CC (December 13, 2007), which they summarize as follows:
Directors often think that if they get together that is a real board of directors' meeting. Not so. As this decision holds, a board meeting is a formal event that must be preceded by the appropriate notice, be conducted by voting on the issues and otherwise be properly called and conducted. Gatherings of even all the directors that do not meet these tests are void.
Moreover, the consequence of holding a meeting void is that actions taken cannot be ratified later. Thus, even when all but one of the company's directors wanted to fire the CEO, their attempt to do so at a haste gathering of all the directors was ineffective.
The ruling makes sense. As I explain in the chapter on boards of directors in my Corporation Law and Economics treatise:
The legal rules governing the board of directors ... put considerable emphasis on the need for collective rather than individual action. As the Restatement (Second) of Agency puts it, for example, a director ?has no power of his own to act on the corporation?s behalf, but only as one of a body of directors acting as a board.? Why this emphasis on collective action? Put another way, why not vest the ultimate power of fiat in an individual autocrat rather than a collegial group?
The commentary to the MBCA?s provisions on board meetings provides one answer:
A well-established principle of corporate common law accepted by implication in the Model Act is that directors may act only at a meeting unless otherwise expressly authorized by statute. The underlying theory is that the consultation and exchange of views is an integral part of the functioning of the board.
... Many of these housekeeping rules doubtless seem formalistic or even a little silly, but the requirement that the board act only after meeting as a collective body actually has a sound economic basis. Work by experimental psychologists has found that group decisionmaking, under certain circumstances, can be superior to decisionmaking by individuals. Where evaluation of complex problems requiring the exercise of critical judgment is concerned, the evidence is clear that the performance of a group will be superior to that of the group?s average member. This result has been confirmed by experiments requiring performance of a wide variety of tasks.
For more on the rationale for formalities, see my article Why a Board? Group Decisionmaking in Corporate Governance, which explains:
The board of directors is a collegial body that, for the most part, makes decisions by consensus. Accordingly, an individual director acting alone generally has neither rights nor powers. Instead, unless otherwise authorized by statute, only collective decisions taken at a meeting of the board at which a quorum is present are binding on the corporation. This common law principle is reflected, albeit by negative implication, in DGCL Section 141(b)?s statement that ?[t]he vote of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors . . . .? The MBCA?s drafters contend that the same requirement is implied by their statute?s provisions on board meetings. All of this doubtless seems formalistic and silly at first blush, but because interacting groups produce better decisions, the requirement that the board act only after meeting as a collective body actually has a sound basis.
Consider also the statutory requirement that directors may participate in board meetings by conference call or speakerphone only if all participants can hear one another. The requirement that members be able to ?hear? one another seems quaint in an era of electronic mail, instant messaging, and internet chat capabilities. Yet, when Delaware recently amended its corporation statute to permit much greater use of electronic forms of communication, it retained the requirement that board meetings be conducted in such a way that all members may hear one another. As it turns out, this appears to have been the right choice. Research on decision making has found that groups linked by computer make fewer remarks and take longer to reach decisions than do groups meeting face to face. Kiesler and Sproul, for example, not only found that meetings conducted through computers result in greater delays, but also that the decisions made in such meetings were more likely to exhibit the risky shift phenomenon. They also found that time-constrained groups exchanged much less information when meeting electronically than when meeting face-to-face.
As with other aspects of the rules governing board meetings, accordingly, there seems to be a legitimate basis for otherwise formalistic rules. Electronic communication takes place mostly through text-based mediums. For many people reading and typing are slower and require greater effort than verbal communication. Text-based communication also deprives participants of social cues, such as body language and tone of voice, that may be important signals. Social norms constraining behavior apparently function less well in text-based communication, as illustrated by the flame wars that plague Usenet newsgroups. Even such housekeeping rules as notice requirements prove to be consistent with the research on group decision making. Unless the articles of incorporation require otherwise, no notice of regularly scheduled board meetings is required. Special meetings require at least two days notice. As a matter of statutory law, the requisite notice need not announce the purpose of the meeting. Because the directors? duty of care requires them to make an informed decision, however, it is advisable whenever possible to provide directors of advance notice of the reason for calling a meeting and any relevant documentation. As with other requirements relating to board meetings, the notice rules are intended to ensure that the board functions as a collegial body, all of whose members participate and get the benefit of the participation by all other members. [A footnote here explains that: The statutory quorum and voting rules likewise reinforce the notion of the board as a collegial body, ?forcefully bringing the position of the dissenting member to the attention of the balance of the board of directors.? MBCA ? 8.24 cmt.]
That notice requirements effectively carry out that function is suggested by research on group performance. Michaelsen et al. conducted a study in which individuals were pre-tested and then re-tested as members of a group. Under those conditions, groups outperformed individuals. Michaelsen et al. analogize this testing order to organizational decision-making processes in which ?group members prepare a position paper and circulate it to other group members prior to problem-solving discussions.? A board meeting conducted after meaningful notice likewise replicates this testing order.
