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Actions Binding the Corporations A. Delegation of Board Authority to Corporate Executives i. All power exercised by a corporation's officers derive from the statutory power assigned to the board of directors. ii. An agency is a consensual relationship between two parties, the principal and the agent. iii. The principal selects the agent, who then must agree to act on the principal's behalf. iv. The principal has the power to terminate the agency relationship unilaterally and can dictate to the agent how the agent will perform his duties v. The agent is a fiduciary of the principal, which means that the agent owes the principal duties of care, loyalty and obedience. a) The agent must always put the interests of the principal above his own. b) The agent has "a duty to obey all reasonable directions" of the principal given within the scope of the agent's services. vi. An agent has the legal power to bind the principal in legal relationships with third parties (4 ways): a) (1) Actual Authority: the agent's power to affect the legal relations of the principal when the principal manifests consent.
? Express: explicit words or conduct granting the agent power to bind the principal OR
? Implied: from words or conduct taken in the context of the relations between the principal and the agent
?????Whether express or implied, authority is created by "written or spoken words or other conduct of the principal which, reasonably interpreted, causes the agent to believe the that the principal desires him so to act on the principal's account." Menard, Inc. v. Dage-MTI, Inc. - pg. 309 b) (2) Apparent Authority
? Authority is created by written or spoken words or any other conduct that, reasonably interpreted, causes a third person to believe that the principal consents to have the act done on his behalf by the agent
?????"What matters is whether third parties . . . reasonably relied on representations made to the general public." Summit Prop., Inc. v. New Tech. Elec. Contractors, Inc. - pg. 306 c) (3) Inherent Agency Power
? Looks to how the principal ordinarily would conduct his business
? "[T]he inherent agency theory 'originates from the customary authority of a person in the particular type of agency relationship . . . .'" Menard, Inc. v. Dage-MTI, Inc. pg. 310
? Inherent agency power is "the power of an agent which is derived . . . solely from the agency relation and exists for the protection of persons harmed by or dealing with a
servant or other agent." Menard, Inc. v. Dage-MTI, Inc. pg. 309
?????"[A]n agent's inherent authority subjects his principal to liability for acts done on his account which [(1)] usually accompany or are incidental to transactions which the agent is authorized to conduct if, although they are forbidden by the principal, [(2)] the other party reasonably believes that the agent is authorized to do them and [(3)] has no notice that he is not so authorized." Menard, Inc. v. Dage-MTI, Inc. - pg. 309-10 (citing Restatement (Second) of Agency SS
161) d) (4) Ratification
? A principal can become obligated to a third party by later ratifying the act of another who, at the time of the act, lacked the power to bind the principal
? Ratification relates back so it is as though the principal had conferred the authority before the act
? Ratification can be shown by a party accepting the benefits of a contract. See Summit Prop., Inc. v. New Tech. Elec. Contractors, Inc. - pg. 306 vii. The CEO, whether known as the President or some other title, has the authority to bind the corporation in transactions entered into in the ordinary course of business a) "[T]he president [or CEO] only has the authority to bind his company by acts arising in the usual and regular course of business but not for contracts of an 'extraordinary' nature" Lee v. Jenkins Bros. - pg. 301 viii. The authority of subordinate officers depends on how a board has delegated responsibility within the corporation's management structure. a) A third party generally bears the burden of demonstrating that an act was within the officer's authority. ix. Courts require that a third party who knows that a given transaction will benefit some officer to inquire further whether that officer has the valid authority to enter into the transaction. See, e.g., Branding Iron Motel Inc. v. Sandlian Equity, Inc.; Schmidt v. Farm Credit Services pg. 302 x. Estoppel: Where the authority is unclear, in the absence of repudiation by the corporation, the actions may nonetheless bind the corporation. See, e.g., Scientific Holding Co., Ltd. v. Plessey Inc. - pg. 302 xi. "'[I]f one of two innocent parties must suffer due to a betrayal of trust either principal or third party - the loss should fall on the party most at fault. Because the principal puts the agent in a position of trust, the principal should bear the loss'" Menard, Inc. v. Dage-MTI, Inc. - pg. 310 (quoting Koval) xii. Evidence that an officer has been delegated authority: (1) a provision of statutory law, (2) the articles of incorporation, (3) a bylaw of the company, (4) a resolution of the board of directors, or (5) evidence that the corporation had allowed the officer to act in similar matters and has recognized, approved or ratified these actions.
B. Formalities of Board Action i. Board Action at a Meeting a) THE MEETING RULE: To pass a resolution, both (1) a quorum and (2) an affirmative vote of the majority of the directors at a board meeting is required to pass a resolution. MBCA SS 8.24(c).
? BUT the articles or the by-laws can provide that a greater number of directors is required to pass a resolution. MBCA SS
? STATUTORY EXCEPTIONS to the meeting rule
? MBCA SS 8.20(b) permits the board to conduct a meeting by "any means of communication by which all directors participating may simultaneously hear each other during the meeting."
? MBCA SS 8.21 allows board action to be taken without a meeting upon unanimous written consent of the directors
?????COMMON LAW EXCEPTIONS (possibly preempted by statutes)
?????Unanimous Director Approval: When all the directors separately approve a transaction
?????Emergency: When the board must very quick decisions to prevent great harm or take advantage of a great opportunity
? Unanimous Shareholder Approval: If all the shareholders meet, the conclusion will likely bind the corporation
? Majority Shareholder-Director Approval: If the directors who participate in the informal action constitute a majority of the board and own a majority of the corporation's issued and outstanding shares, the corporation will be bound
?????JURIS SPLIT re COMMON LAW EXCEPTIONS
?????Some Courts: the liberalized statutory approaches preempts the common law exceptions
? Other Courts: Upheld informal board action with respect to close corporations even when they did not comply with statutes
? See, e.g., White v. Thatcher Fin. Group, Inc. - pg. 317 (noting that it was the "custom and practice of the corporation" to operate with fewer than the required number of directors and that the "custom and practice" doctrine protected innocent third parties in dealing with a close corporation). b) QUORUM: The default rule is that a majority of the total number of directors must be present to take action BUT the articles may increase that number or reduce it to no less than one-third of the directors. MBCA SS 8.24. c) NOTICE
? Regular Meetings: There is no notice requirement with respect to regular meetings as directors are presumed to know the schedule.
? Special Meetings: Unless the articles or by-laws provide
otherwise, two days notice must be given of the date, time, and place of any special meeting. MBCA SS 8.22(b).
? BUT any director who does not receive proper notice may waive notice by signing a waiver before or after the meeting, MBCA SS 8.23(a), or by attending or participating in the meeting and not protesting the absence of notice, MBCA SS 8.23(b). d) COMMITTEES
?????The Executive Committee is a common board committee and can have the full authority of the board in all but a few essential transactions (e.g. declaration of a dividend or approval of merger). MBCA SS 8.25(e).
? The Audit Committee is another common committee and its functions usually include selection of the company's auditors, specification of the scope of the audit, review of audit results, and oversight of internal accounting procedures.
? Both the NYSE and the National Association of Securities Dealers now require publicly-held companies to have audit committees.
?????Other common committees
?????Finance Committee: usually responsible for giving advice on financial structure, the issuance of new securities, and the management of the corporation's investments
?????Nomination Committee: responsible for nominating new directors and officers
? Compensation Committee: responsible for fixing the salaries and other compensation of executives
? MBCA SS 8.30(b) permits a director to rely on the reports or actions of a committee on which he does not serve, so long as the committee reasonably merits his confidence. C. Lawyer Opinions i. Purposes a) Make sure valid transaction b) Lawyer opinion holds weight c) Access to documents d) Know the law e) Someone to blame if something goes wrong ii. Authorized, validly issued, fully paid and nonassessable (DGCL) a) Authorized: certificate states amount of stock authorized. DGCL SS
102(a)(4) b) Validly issued: issuance must have been approved by the board. DGCL SS 152 c) Fully paid and nonassessable: whether lawful consideration received.
? "The board of directors may authorize capital stock to be issued for consideration consisting of cash, any tangible or intangible property, or any benefit to the corporation, or any combination thereof. In the absence of actual fraud in the transaction, the judgment of the board of directors as to the value of the
consideration shall be conclusive." DGCL SS 152 iii. Validly issued, fully paid and nonassessable (MBCA) a) Validly issued: articles must state the number of shares authorized. MBCA SS 2.02(a)(2) b) Fully paid and nonassessable: whether lawful consideration received. See MBCA SS 6.21(d) ("when the corporation receives the consideration for which the board of directors authorized the issuance of shares, the shares issued therefore are fully paid and nonassessable."); see also MBCA SS 6.21(c) ("Before the corporation issues shares, the board of directors must determine that the consideration received or to be received for shares to be issued is adequate. That determination by the board of directors is conclusive insofar as the adequacy of consideration for the issuance of shares relates to whether the shares are validly issued, fully paid, and nonassessable.") D. Introduction i. Close Corporation (definition) a) Although there is no single general accepted definition of close corporation, a close corporation is "typified by: (1) a small number of stockholders; (2) no ready market for the corporate stock; and (3) substantial majority stockholder participation in the management, direction and operations of the corporation." Donahue v. Rodd Electrotype Co. of New England - pg. 335 ii. Statutory Approaches to Close Corporations - JURIS SPLIT a) MBCA: The most common statutory approach to close corporations is to presume that all corporations are alike but to expressly authorize the close corporation to adopt governance structures that vary from the traditional model. See,e.g. MBCA SSSS
? MBCA SS 7.32 allows for shareholder agreements that may
? eliminate the board of directors or restrict the discretion or powers of the board, MBCA SS 7.32(a)(1);
? govern the authorization or making of distributions whether or not in proportion to ownership of shares, MBCA SS
? establish who shall be directors or officers of the corporation, or their terms of office or manner of selection or removal, MBCA SS 7.32(a)(3);
? govern the exercise of division of voting power by or between the shareholders and directors, MBCA SS 7.32(a) (4);
? establish the terms and conditions of any agreement for the transfer or use of property, MBCA SS 7.32(a)(5);
? transfer to one or more shareholders or other persons all or part of the authority to exercise the corporate powers or to manage the business and affairs of the corporation, MBCA
? require dissolution of the corporation at the request of one or more shareholders or upon the occurrence of a specified
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