Chapter 11Actions Binding the Corporation

Chapter 11Actions Binding the Corporation

Outline

(last updated 27 Sep 06)

Chapter 11Actions Binding the Corporation

Delegation of Board Authority to Corporate Executives
Introduction: Some Basic Agency Concepts

Authority to bind corporation
Actual authority
arises from internal relations / from perspective of corporate actors
express
board action: meeting rule
proof: board minutes, resolutions, secretary's certification
implied
inferences from express authority
acquiescence: course of conduct
Apparent authority
arises from external relations / from perspective of outside party / regardless of actual authority
reason for inferring authority: corporation-created appearances
who must protect against renegade agent?
extraordinary: burden on outsiders
ordinary: burden on insider
Compare to inherent authority
Agency in Corporations: The Authority of Officers
Summit Properties, INC, v. New Technology Electrical Contractors, INC.
Menard, Inc. v. Dage-MTI, Inc.

3.Ascertaining Corporate Authority

Formalities of Board Action
Board Action at a Meeting
one vote / no proxy voting
"meeting rule"
promote collegial decision-making
exception: unanimous consent
exception: all shareholders / majority of directors at Shs meeting
majority voting
Notice and Quorum
Committees of the Board
Legal Opinions
Overview of Legal Opinions
Negotiation and Qualification of Legal Opinions
Procedures for Issuing legal opinions

Class Notes

A. Delegation of Board Authority t Corporate Executives
Allocation of Corporate Powers
Shareholder powers / NC Bus Corp Act § 55-8-03. Number and election of directors.
(d) Directors are elected at the first annual shareholders' meeting and at each annual meeting thereafter ...
NC Bus Corp Act § 55-8-08. Removal of directors by shareholders.
(a) The shareholders may remove one or more directors with or without cause unless the articles of incorporation provide that directors may be removed only for cause.
Shareholders must approve: mergers, share exchanges, sale of substantially all assets, dissolution
Director powers / NC Bus Corp Act § 55-8-01. Requirement for and duties of board of directors.
(b) All corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation managed under the direction of, its board of directors, ...
Officer powers / NC Bus Corp Act § 55-8-40. Officers.
(a) A corporation has the officers described in its bylaws or appointed by the board of directors in accordance with the bylaws.
NC Bus Corp Act § 55-8-41. Duties of officers.
Each officer has the authority and duties set forth in the bylaws or, to the extent consistent with the bylaws, the authority and duties prescribed by the board of directors or by direction of an officer authorized by the board of directors to prescribe the authority and duties of other officers.
Agent authority
Actual authority - express
"You can sell my horse Hoppalong for $2000" / Restatement of Agency (Second) § 140 -
"The liability of the principal to a third person upon a transaction conducted by an agent .... may be based upon the fact that: ... (a) the agent was authorized ...
Restatement of Agency (Second) § 320 -
"Unless otherwise agreed, a person making or purporting to make a contract with another as agent for a disclosed principal does not become a party to the contract."
Actual authority - implied
"Nice sale. Have you found any other buyers?" / Restatement of Agency (Second) § 26 -
""... authority to do an act can be created by written or spoken words or other conduct of the principal which, reasonably interpreted, causes the agent to believe that the principal desires him so to act on the principal's account."
Apparent authority
"Mr. Jones, this is my trusted agent, you can deal with her" / Restatement of Agency (Second) § 140 -
"The liability of the principal to a third person upon a transaction conducted by an agent .... may be based upon the fact that: ... (b) the agent was apparently authorized ...
Restatement of Agency (Second) § 8 [Comment] -
"Apparent authority results from a manifestation by a person that another is his agent, the manifestation being made to a third person ... It is entirely distinct from authority, either express or implied."
Inherent authority
"Bob, run those horses up to Kentucky in the van. Drive carefully."
[Bob, trusted and long-time general manager, sells Secretariat." / Restatement of Agency (Second) § 8A -
"Inherent agency authority ... is derived ... solely from the agency relation and exists for the protection of persons harmed by or dealing with a servant or other agent."
Restatement of Agency (Second) § 161
A general agent for a disclosed ... principal subjects the principal to liability for acts done on his account which usually accompany or are incidental to transactions which the agent is authorized to conduct if, although they are forbidden by the principal,
the other party reasonably believes that the agent is authorized to do them and has no notice that he is not so authorized.
Restatement of Agency (Second) § 219 -
"A master is subject to liability for the torts of his servants committed while acting in the scope of their employment."
Restatement of Agency (Second) § 343 -
"An agent who does an act otherwise a tort is not relieved from liability be the fact that he acted at the command of the principal or on account of the principal ... "
Ratification
"I didn't expect him to sell Secretariat. But what the heck, it's OK." / Restatement of Agency (Second) § 82 -
"Ratification is the affirmance by a person of a prior act which did not bind him, but which was done or professedly done on his account, whereby the act, as to some or all persons, is given effect as if originally authorized by him."
Inherent corporate authority?
Menard, Inc v. Dage-MTI, Inc. (Ind 2000)
Dage-MTI, a small manufacturing company, owned a tract of commercial real estate. Its longtime president, one Arthur Sterling, negotiated and signed a sales agreement to sell the tract to a sophisticated home improvement chain.
Dage-MTI's board had made clear to Sterling that he could not sell without board approval. When Menard made a first offer, Sterling forwarded it to the board - which said no. When Menard made a second offer, Sterling went ahead on his own. He said he had authority.
Menard sought to enforce the contract.

DId Sterling have actual authority?
Did he have apparent authority - was the transaction ordinary / extraordinary?
Did the board ratify his transaction?
Did Sterling bind the corporation as "president"?

Dissent
In the end, it is difficult to know how lawyers will advise their clients after today's decision. Where all parties to a corporate transaction understand that board approval is required and that it may or may not be forthcoming, the black letter law cited in today's opinion points toward a conclusion that the buyer's offer was not accepted by the seller.
/ Apparent authority - trial court
"the record persuasively demonstrates that the land transaction in question was an extraordinary transaction" for Dage, which manufactures electronic video products. * * * Thus, the court concluded that "Sterling was not performing an act that was appropriate in the ordinary course of Dage's business."
Inherent authority - Indiana Supreme Court
On occasion, Indiana has taken an expansive view of apparent authority, including within the discussion the concept of "inherent agency power."
And while "representations of the principal to the third party are central for defining apparent authority," the concept of inherent authority differs and "originates from the customary authority of a person in the particular type of agency relationship so that no representations beyond the fact of the existence of the agency need be shown.
Menard dealt with the president of the corporation, whom “the law recognizes . . . [as one of] the officers [who] are the means, the hands and the head, by which corporations normally act.”
[1] Sterling, as president of the company since its inception, had managed its affairs for an extended period of time with little or no Board oversight and, in particular, had purchased real estate for Dage in the past without Board approval
[2] Menard reasonably believed that Sterling was authorized to contract for the sale and purchase of Dage real estate. ... Menard was aware that Dage's corporate counsel, Patrick Donoghue, was involved in the review of the terms of the agreement.
[3] Sterling signed the agreement with Menard during the week of December 14, 1993; ... when Dage's lawyers contacted Menard on March 29, 1994, it "was the first notice given by Dage to Menard that there was any issue regarding the enforceability of the agreement."
INVESTIGATING CORPORATE AUTHORITY
You represent Construx, Inc, a large construction company, that is negotiating a contract to build a new office building for Precision Tools Corp. Construx is nervous about PTC's financial capability, so Michael, the PTC president, says that he can get a guarantee from their main supplier - Big Tools, Inc. He presents the following documents:
Guarantee
Big Tools, Inc., duly incorporated under the laws of the State of Delaware, guarantees the obligations of Precision Tools Corp in the construction contract to be entered into with Construx Inc - up to $10 million.
Big Tools, Inc.
Charles Krafty
By: Charles Krafty
Vice President / Treasurer / Bylaws
Big Tools Inc.
Article 9: The Treasurer or Assistant Treasurer shall have the custody of all the funds and securities of the Company, and shall have power on behalf of the Company to sign checks, notes, drafts, bills of exchange and other evidences of indebtedness, to borrow money for the current needs of the business of the Company and assign and deliver for money so borrowed stocks and securities and warehouse receipts or other documents representing metals in store or transit and to make short-term investments of surplus funds of the Company and shall perform such other duties as may be assigned to him from time to time by the Board of Directors, the Chairman of the Board, the Vice Chairman of the Board or the President.
You do some checking:

Public documents:You read the SEC-filed annual report for Big Tools, Inc, a publicly traded company. You notice the report shows a picture of Charles Krafty - Treasurer.
Reasons for transaction. You ask why Big Tools would be willing to commit to a $10 million guarantee, and Michael explains that it has big plans for Precision Tools, which Big Tools hopes will become the largest outlet for its products in the Southeast.
Other authority: Michael goes on to say that Big Tools has guaranteed similar construction contracts of other Big Tool customers.

Aren't these manifestations of authority sufficient? Why should Construx be put to the trouble and expense of finding out of Big Tools' agent is authorized?
Krafty presents you the following documents. Must you investigate further?
Big Tools, Inc.
I am secretary of Big Tools Inc, and the attached minutes are a true and complete copy of the minutes of the meeting of September 28, 2001 of the Corporation's board of directors.
Sincerely yours,
U. R. Minion
U.R. Minion, Secretary / MINUTES
After due notice and at a meeting at which a quorum of directors was present, the board unanimously resolved:
RESOLVED, that the board of directors, after due notice and with a quorum present, authorizes Charles Krafty, Vice President & Treasurer of the Company to guarantee construction contract of Precision Tools Inc up to $10 million.
Respectfully submitted,
UR Minion
UR Minion, Secretary
What are the obligations of a lawyer who is asked by a corporate client to assure a third party of the corporate agent's authority? See
[or click here]
B. Formalities of board action
You are the corporate secretary of Big Tools, Inc. You have been asked to certify that board action was properly taken. What does it mean that "the board at a meeting, duly called, at which a quorum was present properly approved [the action]"?

who can call a board meeting?
what notice is required for the meeting?
what is a quorum for a board meeting?
what vote is necessary for action to be taken?
can action be taken without a meeting?
can directors meet by conference call?
can directors consent unanimously?

Who do these formalities protect? / NC Bus Corp Act § 55-8-20. Meetings.
(a) The board of directors may hold regular or special meetings in or out of this State.
(b) Unless otherwise provided by the articles of incorporation, the bylaws or the board of directors, any or all directors may participate in a regular or special meeting by, or conduct the meeting through the use of, any means of communication by which all directors participating may simultaneously hear each other during the meeting. A director participating in a meeting by this means is deemed to be present in person at the meeting.
§ 55-8-21. Action without meeting.
(a) Unless the articles of incorporation or bylaws provide otherwise, action required or permitted by this Chapter to be taken at a board of directors' meeting may be taken without a meeting if the action is taken by all members of the board. The action must be evidenced by one or more written consents signed by each director before or after such action, describing the action taken, and included in the minutes or filed with the corporate records.
§ 55-8-22. Notice of meeting.
(a) Unless the articles of incorporation or bylaws provide otherwise, regular meetings of the board of directors may be held without notice of the date, time, place, or purpose of the meeting.
(b) Special meetings of the board of directors shall be held upon such notice as is provided in the articles of incorporation or bylaws, or in the absence of any such provision, upon notice sent by any usual means of communication not less than five days before the meeting.
§ 55-8-23. Waiver of notice.
(a) A director may waive any notice required by this Chapter, the articles of incorporation, or bylaws before or after the date and time stated in the notice. Except as provided by subsection (b), the waiver must be in writing, signed by the director entitled to the notice, and filed with the minutes or corporate records.
(b) A director's attendance at or participation in a meeting waives any required notice to him of the meeting unless the director at the beginning of the meeting (or promptly upon his arrival) objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to action taken at the meeting.
§ 55-8-24. Quorum and voting.
(a) Unless the articles of incorporation or bylaws require a greater number, a quorum of a board of directors
consists of:
(1) A majority of the fixed number of directors if the corporation has a fixed board size; or
(2) A majority of the number of directors prescribed, or if no number is prescribed the number in office immediately before the meeting begins, if the corporation has a variable-range size board.
(b) The articles of incorporation or a bylaw adopted by the shareholders may authorize a quorum of a board of directors to consist of no fewer than one-third of the fixed or prescribed number of directors determined undersubsection (a).
(c) If a quorum is present when a vote is taken, the affirmative vote of a majority of directors present is the act of the board of directors unless the articles of incorporation or bylaws require the vote of a greater number of directors.

Corporations: Law & Policy Page

Chapter 11 – Actions Binding the Corporation