Summary. Governance in a closely held company is not about complying with public company rules that do not apply. It is about making decisions defensibly and creating a record of how they were made. This guide covers the fiduciary duties directors and officers owe and the business judgment rule that protects a sound process, then the mechanics that produce it: meetings, minutes that record reasoning, written consents, and delegation. It addresses interested transactions, corporate opportunities, compensation, and the oversight duty — then shareholder agreements, books and records demands, derivative litigation and special committees, indemnification and insurance, and an annual calendar.

A three-shareholder company decides to buy the building it occupies. The building is owned by the majority shareholder's family trust. The price is $2.9 million, which the majority shareholder says is what an appraiser told him a year ago.

There is no board meeting. The majority shareholder signs the purchase agreement as president. The minority shareholders learn of the transaction from the closing statement.

Two years later, in a dispute over something else, the minority shareholders sue derivatively over the building purchase. Their theory is not that $2.9 million was too much — they do not know. Their theory is that an interested transaction was approved by nobody, disclosed to nobody, and documented nowhere.

Because the transaction was interested and was not approved by disinterested directors or shareholders after full disclosure, the business judgment rule does not apply. The burden shifts to the majority shareholder to prove entire fairness — fair dealing and fair price — and he must prove it years later, without a contemporaneous appraisal, without minutes, and without any record of the process.

The building may well have been worth $2.9 million. That is now expensive to establish, and it was free to establish at the time.

Governance in a private company is not bureaucracy. It is the difference between a decision that is presumed valid and one the decision-maker must justify.

What a private company board is for

Public company governance is largely a compliance exercise driven by exchange listing standards, SEC rules, and Sarbanes-Oxley. None of that applies to a closely held company. What does apply is the fiduciary duty framework and the corporate statute, and both are far more flexible than most owners assume.

A private company board has three genuine functions:

  1. Making and documenting the decisions that require board authority — issuing equity, borrowing, approving major transactions, setting officer compensation, and approving interested transactions.
  2. Oversight — ensuring that information systems exist to surface problems, and that identified problems are addressed.
  3. Providing the process protection of the business judgment rule for the decisions the company makes.

A board that never meets provides none of these.

Advisory boards are a different thing. An advisory board has no legal authority, its members owe no fiduciary duties, and its advice does not bind the company. It is a useful mechanism for obtaining outside perspective without ceding control or creating liability, and it should be documented as advisory — with a charter, a written acknowledgment from each member that they are not directors, no voting authority, and, ideally, indemnification for their service anyway.

Board composition for a private company: founders and significant owners; a representative of any institutional investor with a contractual designation right; and, where the company is ready for it, at least one genuinely independent director. The independent director matters disproportionately, because a disinterested majority is what makes the safe harbors and special committee mechanisms available.

The duties

The duty of care. Directors must act on an informed basis, with the care an ordinarily prudent person would exercise in like circumstances. The duty is about process: gathering material information reasonably available, taking sufficient time, and deliberating.

The duty of loyalty. Directors must act in the best interests of the corporation and its shareholders, not in their own interest. This duty is not subject to exculpation and covers self-dealing, corporate opportunities, competition with the company, and acting in bad faith.

Good faith is not an independent duty in Delaware but a condition of loyalty. Bad faith includes intentionally acting for a purpose other than advancing the corporation's interests, intentionally violating positive law, and intentionally failing to act in the face of a known duty to act — the Stone v. Ritter, 911 A.2d 362 (Del. 2006), formulation of oversight liability.

The business judgment rule is a presumption that in making a business decision, directors acted on an informed basis, in good faith, and in the honest belief that the action was in the best interests of the company. A plaintiff must rebut the presumption. If it stands, courts do not review the substance of the decision — a board may make a decision that turns out badly and still be protected.

When the presumption does not apply:

  • The director was interested in the transaction and it was not properly approved.
  • The board was not independent.
  • The board was grossly negligent in informing itself, the standard from Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985).
  • The board acted in bad faith or with a conscious disregard of its duties.
  • The transaction constituted waste — an exchange so one-sided that no business person of ordinary sound judgment could conclude the corporation received adequate consideration.
  • A controlling shareholder stands on both sides of the transaction, which triggers entire fairness review unless the transaction is conditioned from the outset on approval by both an independent special committee and a majority of the minority shareholders.

Entire fairness requires the defendant to prove fair dealing (how the transaction was initiated, structured, negotiated, disclosed, and approved) and fair price. It is the most demanding standard in corporate law, and the burden is on the fiduciary.

Officers owe the same duties as directors, and Gantler v. Stephens, 965 A.2d 695 (Del. 2009), confirmed it — but statutory exculpation provisions historically protected only directors, with Delaware amending § 102(b)(7) to permit exculpation of certain officers for direct claims only. Officers of a private company are frequently the defendants in these cases, and they are frequently less protected than the directors.

Duties to whom. Directors owe duties to the corporation and its shareholders generally, not to any individual shareholder who elected them — a point investor-designated directors need to understand. When the company approaches insolvency, creditors do not acquire direct fiduciary claims in Delaware, but they gain standing to sue derivatively on the corporation's behalf, North American Catholic Educational Programming Foundation, Inc. v. Gheewalla, 930 A.2d 92 (Del. 2007).

Minority shareholder protection varies dramatically by state. Delaware generally requires a plaintiff to fit within existing fiduciary doctrines. Many other states — Massachusetts, New York, and others — recognize a direct duty among shareholders in a close corporation, or a statutory oppression remedy including court-ordered buyout, which changes the litigation landscape entirely.

Meetings, consents, and minutes

Annual meetings. Most corporate statutes require an annual shareholders' meeting to elect directors, and permit a court to order one if it is not held. The board's own annual organizational meeting elects officers. Both are commonly satisfied by written consent in a private company, which is entirely proper — but the consent must actually be signed and retained.

Notice. Follow the bylaws. Special meetings usually require notice of the time, place, and, in some cases, the purpose. Waivers of notice signed by all directors cure defects and should be a standard part of the minute book.

Quorum and voting thresholds come from the bylaws and the statute. Confirm what they are before relying on a vote.

Meetings by remote communication are permitted under most modern statutes if all participants can hear one another; confirm the statute and the bylaws.

Action by written consent is available to boards, generally requiring unanimity, and to shareholders, in most states by the vote that would be required at a meeting unless the charter provides otherwise. It is the workhorse of private company governance. Two cautions: a consent must be signed by everyone required, and a consent that recites deliberation that never occurred is worse than no consent at all.

Minutes are the most valuable governance document a private company produces, and they are almost always written badly.

What bad minutes look like: "The board discussed the acquisition. After discussion, the board approved the transaction. There being no further business, the meeting adjourned."

That paragraph proves that a meeting happened and nothing else. It does not establish that the board was informed, considered alternatives, or had any basis for its decision — which are precisely the elements the business judgment rule requires.

What good minutes contain:

  • Date, time, place, and who attended, including who participated remotely and who was present for only part.
  • The materials distributed in advance, identified and, ideally, retained with the minutes.
  • Presentations made, by whom, and their substance in summary.
  • The alternatives considered and why they were rejected.
  • Questions asked by directors and the answers given. This is the single most persuasive content in a minute book, because it shows an engaged board.
  • Advisors consulted — counsel, accountants, appraisers, bankers — and the substance of their advice, described carefully so as not to waive privilege.
  • Recusals — who left the room for which item, and when they returned.
  • The resolution, in operative language, and the vote including abstentions and dissents.
  • Any conditions attached to the approval.

What minutes should not contain: verbatim transcripts, argumentative characterizations, speculation, or a recitation of privileged legal advice in a way that risks waiver. Record that counsel advised on a subject and that the board considered the advice; be careful about reproducing the advice.

Timing. Draft minutes within days, circulate for comment, and approve at the next meeting. Minutes drafted a year later, from memory, in anticipation of litigation are worth very little and look worse.

The minute book should contain, in one place: the charter and all amendments; the bylaws and all amendments; all board and shareholder minutes and consents; the stock ledger and all equity issuance documents; the shareholder agreement; officer appointments; banking and borrowing resolutions; annual reports and good standing evidence; and material contracts approved by the board. Maintaining it continuously is a fraction of the cost of reconstructing it during a financing or a sale, which is when its absence is always discovered.

Interested transactions, opportunities, and compensation

Interested director transactions are the most common source of private company fiduciary litigation, and every state's statute provides a safe harbor. Delaware's § 144 is representative: an interested transaction is not void or voidable solely for that reason if:

  • The material facts as to the director's relationship or interest and as to the transaction are disclosed or known to the board, and the board in good faith authorizes it by a majority of the disinterested directors; or
  • The material facts are disclosed or known to the shareholders and the transaction is approved in good faith by shareholder vote; or
  • The transaction is fair to the corporation as of the time it is authorized.

Note the structure: the first two are process safe harbors; the third puts the burden on the fiduciary. Use the process.

The procedure that works:

  1. Disclose in writing, before the discussion, the nature and extent of the interest and all material facts.
  2. The interested director presents the facts, answers questions, and leaves the room.
  3. The disinterested directors deliberate independently, obtain an independent valuation or comparables where the transaction is material, and negotiate terms.
  4. Approve or reject by a vote of the disinterested directors, recorded in minutes that document the disclosure, the recusal, the information considered, and the reasoning.
  5. Where there is no disinterested majority, obtain disinterested shareholder approval after full disclosure — or engage an independent third party to negotiate on the company's behalf.

Controlling shareholder transactions are held to a higher standard. Under Delaware's MFW framework, business judgment review of a controller transaction is available only if it is conditioned ab initio on both an independent, empowered special committee that meets its duty of care and an informed, uncoerced majority-of-the-minority vote. Absent that structure, entire fairness applies.

Corporate opportunities. A director or officer may not take for themselves an opportunity that belongs to the corporation. The Delaware line of cases asks whether the corporation is financially able to exploit the opportunity, whether it is in the corporation's line of business, whether the corporation has an interest or expectancy in it, and whether taking it would place the fiduciary in a position inimical to their duties.

The safe procedure: present the opportunity to the board, in writing, with the material facts; abstain; and obtain a documented decision to decline. Charter waivers are permitted in Delaware under § 122(17) and in many other states, and are standard for venture investors whose funds hold portfolio companies in adjacent spaces. Draft the waiver to identify what is and is not covered rather than as a blanket disclaimer.

Compensation. Setting officer compensation where the officers are also the directors and the shareholders is an interested transaction in substance. The defensible process: obtain comparable market data, have the disinterested directors (or a compensation committee) decide, document the analysis and the reasoning, and confirm the amount is reasonable. This matters twice over — as a fiduciary matter, and because the IRS challenges unreasonable compensation in a C corporation as a disguised dividend and inadequate compensation in an S corporation as an attempt to avoid employment tax.

Related-party leases, loans, and service arrangements follow the same analysis. Document them with written agreements at market terms, approved by disinterested decision-makers, with the comparables in the file.

Oversight, compliance, and the board's information systems

In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996), and Stone v. Ritter establish that oversight liability requires either that the directors utterly failed to implement any reporting or information system or controls, or that having implemented such a system, they consciously failed to monitor it, thereby disabling themselves from being informed of risks requiring attention.

Marchand v. Barnhill, 212 A.3d 805 (Del. 2019), gave the doctrine new force by holding that a board must make a good faith effort to put in place a reasonable board-level system of monitoring and reporting as to the company's mission-critical operations — in that case, food safety for an ice cream manufacturer. Subsequent decisions have applied the principle across industries.

What this means for a private company board:

  • Identify the company's mission-critical risks — the two or three failures that would be existential. For a food company, safety. For a healthcare company, billing compliance. For a manufacturer, product safety and environmental. For a technology company, data security.
  • Establish a board-level reporting system for those risks: a standing agenda item, defined metrics, and a named executive who reports.
  • Document that the reports occurred and that the board engaged with them.
  • Act on red flags. The doctrine punishes conscious disregard, and a board that receives a report of a serious problem and does nothing is squarely within it.
  • Maintain a whistleblower channel and ensure reports reach the board.

None of this requires a public company compliance infrastructure. It requires that the board be able to show it knew what could destroy the company and had a mechanism for hearing about it.

Shareholder agreements and control arrangements

The charter and bylaws govern the corporation. The shareholder agreement governs the relationships among the owners, and it is where private company governance is actually built.

Provisions that belong in it:

  • Board composition — designation rights, the size of the board, and how vacancies are filled. Backed by a voting agreement obligating shareholders to vote their shares to elect the designees, which most statutes expressly permit.
  • Protective provisions — the actions requiring approval of a specified holder or class regardless of board approval.
  • Transfer restrictions — a general prohibition with permitted transfers, a right of first refusal, tag-along and drag-along rights, and a joinder requirement.
  • Buy-sell provisions on death, disability, termination of employment, divorce, bankruptcy, and voluntary exit, with a valuation mechanism, payment terms, and funding.
  • Information rights beyond the statutory minimum, with delivery deadlines.
  • Preemptive rights on new issuances.
  • Employment and non-compete obligations of shareholder-employees.
  • Deadlock resolution, in any company where deadlock is possible.
  • Dispute resolution and governing law.
  • Legend requirements on certificates, and a stop-transfer instruction to the transfer agent, so the restrictions are actually enforceable against a transferee.

Close corporation elections. Several statutes permit a corporation with a small number of holders to elect close corporation status and to dispense with a board entirely, managing by shareholder agreement. Delaware §§ 341-356 and comparable provisions elsewhere. This can be the right structure for a two-person company, and it makes the shareholder agreement the operative governance document.

Bylaws should be reviewed against actual practice. Bylaws requiring quarterly meetings in a company that meets twice a year create a documented pattern of non-compliance. Amend them to match reality, or comply.

Books and records, derivative suits, and special committees

Books and records demands are the opening move in most private company disputes. Delaware § 220 gives a stockholder the right to inspect books and records for a proper purpose reasonably related to their interest as a stockholder — investigating mismanagement, valuing shares, or communicating with other stockholders. Nearly every state has an analogue, and several are broader.

The practical dynamics: a demand must state a proper purpose with particularity and, where mismanagement is alleged, show a credible basis to infer wrongdoing. The scope is limited to what is necessary and essential to the stated purpose. Delaware's amended § 220 now enumerates the categories of records subject to inspection and addresses the treatment of informal communications. Companies frequently over-resist these demands, which produces a fee award and a bad opening posture; the better approach is usually to negotiate scope, produce under a confidentiality agreement, and reserve the substantive fight.

Derivative suits are brought by a shareholder on the corporation's behalf. The plaintiff must have been a shareholder at the time of the wrong and remain one, and must either make a demand on the board or plead with particularity that demand would be futile.

Delaware's United Food & Commercial Workers Union v. Zuckerberg, 262 A.3d 1034 (Del. 2021), consolidated the demand futility test into three questions asked director by director: whether the director received a material personal benefit from the challenged conduct; whether the director faces a substantial likelihood of liability; and whether the director lacks independence from someone who does. If the answer is yes for half or more of the board, demand is excused.

If demand is made and refused, the refusal is protected by the business judgment rule unless the plaintiff pleads particularized facts showing the refusal was wrongful. Making a demand therefore concedes board independence for most purposes, which is why plaintiffs usually plead futility instead.

Special committees are the board's principal tool. Where a transaction or a claim involves interested directors, the board delegates to a committee of genuinely independent directors with:

  • A written charter defining scope and authority.
  • Real authority, including the power to say no and, in a transaction, to negotiate and to reject.
  • Its own independent advisors — counsel and, where valuation matters, a financial advisor — selected by the committee.
  • A documented process, with minutes.

A committee whose members are not independent, or that lacks the power to reject, provides no protection and can make the record worse.

Special litigation committees address a filed derivative claim: an independent committee investigates and determines whether pursuing the claim is in the corporation's best interests, and moves to dismiss on that basis. Delaware applies the two-step Zapata Corp. v. Maldonado, 430 A.2d 779 (Del. 1981), review — the court examines the committee's independence, good faith, and the reasonableness of its investigation, and then may apply its own business judgment.

Indemnification, advancement, and insurance

Mandatory indemnification is generally required where a director or officer succeeds on the merits or otherwise in defending a proceeding. Permissive indemnification is available where they acted in good faith and in a manner reasonably believed to be in or not opposed to the corporation's best interests, with an additional standard for criminal proceedings. Indemnification is unavailable for a claim by or in the right of the corporation where the person is adjudged liable, absent court approval.

Advancement of expenses is separate and, in practice, more important. It requires the corporation to pay defense costs as incurred, subject to an undertaking to repay if indemnification is ultimately unavailable. Advancement is not conditioned on the merits — a director credibly accused of misconduct is entitled to advancement if the charter or bylaws provide it. Companies frequently discover this after a dispute begins and are unpleasantly surprised. Decide the policy in advance, and state it clearly.

Where to put it. Charter and bylaw provisions can be amended, potentially eliminating protection for past service. Individual indemnification agreements are the durable answer — they are contracts, they survive changes in control and in the bylaws, and they can address procedure, presumptions, burden of proof, the process for determining entitlement, and priority against other sources.

Exculpation. Delaware § 102(b)(7) permits a charter provision eliminating director monetary liability for duty of care breaches — not for loyalty, bad faith, intentional misconduct, knowing violations of law, unlawful distributions, or improper personal benefit. The provision has been extended to permit exculpation of certain officers for direct claims, but not for derivative claims. Confirm the charter has one; many private company charters do not.

D&O insurance. Even a private company should carry it, and especially one with outside investors, employees, or a plan to raise capital. Points to check: whether Side A coverage exists for individuals where the company cannot indemnify; the insured versus insured exclusion and its carve-outs for derivative claims; the conduct exclusions and whether they require a final, non-appealable adjudication; severability of the application; whether defense costs erode limits; and prior acts coverage and the retroactive date.

An annual governance calendar

Quarterly

  • Board meeting with an agenda circulated in advance and materials distributed at least several days ahead.
  • Financial review against budget.
  • Report on mission-critical risks, from the responsible executive.
  • Litigation, regulatory, and compliance report.
  • Minutes drafted within a week and approved at the following meeting.

Annually

  • Shareholder annual meeting or written consent electing directors.
  • Board organizational meeting or consent electing officers.
  • Approval of the annual budget.
  • Officer compensation review with comparable data, decided by disinterested directors.
  • Review and confirmation of all related-party arrangements, with renewed approval.
  • Confirmation of D&O insurance renewal and of indemnification agreements for any new director or officer.
  • Cap table reconciliation and confirmation that the stock ledger matches.
  • Confirmation of good standing in the state of incorporation and every state of qualification; annual reports and franchise taxes filed.
  • Beneficial ownership reporting confirmed, where applicable.
  • Review of the bylaws against actual practice.
  • Conflict of interest questionnaires from directors and officers.

On any material event

  • Board approval by resolution or consent, with real minutes.
  • Interested transaction procedure where applicable.
  • Charter amendment and stockholder approval where required.
  • Update of the minute book and the cap table the same week.

A worked example

Return to the building purchase, redone properly.

Step 1. The majority shareholder informs the board in writing that his family trust owns the building and that he will not participate in the decision. The letter discloses the trust's acquisition price, the current mortgage balance, and the rent the company currently pays.

Step 2. The board forms a special committee of the two minority shareholders' designee and one independent director recruited for the purpose, with a written charter authorizing it to evaluate, negotiate, and reject the transaction, and to retain its own counsel and appraiser at company expense.

Step 3. The committee obtains an independent appraisal, a broker's opinion on comparable lease rates, and an analysis of the alternative — renewing the lease or relocating.

Step 4. The committee negotiates. The appraisal comes in at $2.65 million; the committee counters and settles at $2.7 million with the seller paying transfer taxes and providing a survey and environmental report.

Step 5. The committee recommends; the disinterested directors approve; and, because the counterparty is a controller, the transaction is also conditioned on approval by a majority of the minority shareholders after disclosure of the appraisal and the committee's process.

Step 6. Minutes record the disclosure, the recusal, the committee's charter and authority, the advisors retained, the analysis considered, the negotiation, the alternatives, and the vote.

Cost: an appraisal, a broker's opinion, and a few hours of counsel time. Result: a transaction protected by the business judgment rule, a record that answers the questions a plaintiff would ask, and — not incidentally — a price $200,000 lower than the one that would have been paid without a process.

Frequently asked questions

We are three people who see each other daily. Do we need meetings? You need a record of the decisions that require board authority. Written consents are fine. What you cannot do is make those decisions informally and have no documentation.

Can our board act by written consent instead of meeting? Yes, generally by unanimous written consent for boards. It is standard practice and entirely proper.

What should minutes actually say? What was considered, what alternatives were weighed, what advisors said, who recused, and why the decision was made. Outcomes without reasoning prove nothing.

Can a director also be an officer and a shareholder? Yes, routinely in a private company. It means many decisions are interested transactions in substance, and it makes disinterested approval mechanisms more important, not less.

Do we need an independent director? Not legally. But without a disinterested majority, the safe harbors for interested transactions and the special committee mechanism are unavailable — which is a real cost.

A shareholder demanded our books. Must we produce them? If the demand states a proper purpose and meets the statutory requirements, generally yes, within a scope limited to what is necessary and essential. Negotiate scope and produce under confidentiality rather than reflexively refusing.

Are we exposed for failing to catch a compliance problem? Under Caremark and Marchand, the duty is to establish a reasonable board-level reporting system for mission-critical risks and to respond to red flags. A board with no system, or one that ignored a report, is exposed. A board that had a system and was deceived generally is not.

Should we buy D&O insurance? Yes. And confirm the company has indemnification agreements with each director and officer, because bylaw provisions can be amended away.

Conclusion

Private company governance is worth exactly what it costs, which is not much: quarterly meetings, minutes that record reasoning, written consents that are actually signed, a disinterested process for interested transactions, and a board that knows what could destroy the company and hears about it regularly.

The return is a legal presumption. A decision made through that process is presumed valid and is not second-guessed. The identical decision made informally, by an interested person, with no record, must be justified years later under the most demanding standard in corporate law, by someone whose memory is being tested by a lawyer with the benefit of hindsight.

That asymmetry is the entire argument for governance in a company where everyone knows each other and nobody thinks it is necessary.

Governance as the company changes

The right governance structure for a five-person company is wrong for a fifty-person company, and the transitions are predictable.

On the first outside investment. An investor will require a board seat or an observer right, protective provisions listing actions requiring its consent, information rights with delivery deadlines, and preemptive rights. It will also require a charter amendment creating the preferred class, an amended and restated shareholder or investors' rights agreement, and — usually — a corporate opportunity waiver covering its other investments. This is the moment to clean up the minute book, because the investor's counsel will read it, and gaps become closing conditions.

On the first employee equity grants. Adopt a board- and shareholder-approved plan, obtain a valuation, approve every grant by resolution on the stated date, and confirm a securities exemption. Backdating is not a gray area, and reconstructed grant approvals are a standard diligence finding.

On the first significant debt. The credit agreement will impose its own governance constraints — restrictions on distributions, on additional debt, on acquisitions, and on changes in management — that override the board's discretion. Read them against the shareholder agreement's protective provisions to be sure the two are compatible; a board that can be blocked by an investor from doing something a lender requires is in an untenable position.

On the first independent director. Recruit for a specific gap, define expectations in a written offer letter (time commitment, term, compensation, and expectations for committee service), execute an indemnification agreement, and confirm D&O coverage before the first meeting. An independent director who is not indemnified and insured is being asked to take unpaid personal risk.

On preparing for a sale. Governance becomes a diligence item. Buyers examine the minute book for authorization of every equity issuance, every borrowing, and every material contract; the cap table for consistency with the ledger and the consents; and related-party transactions for whether they were approved. The remediation work — confirmatory consents, corrected records, and disclosure of what could not be cured — is far cheaper eighteen months before a process than during one.

On a founder's departure or death. The buy-sell provisions, the voting agreement, and the board designation rights all activate simultaneously, and a company that has never tested them discovers the gaps at the worst moment. Reading those three documents together once a year, and confirming the insurance funding is current, takes an hour.

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This guide is provided for general informational purposes and does not constitute legal advice. Corporate statutes and fiduciary doctrine vary by state, particularly on minority shareholder protection and oppression remedies. Consult qualified corporate counsel before approving an interested transaction or responding to a books and records demand.