Paul Klee, Monument (1929) (inverted)

Corporations:A Contemporary Approach

Chapter 8Actions Binding the Corporation

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Paul Klee, Monument (1929) (inverted)

http://pictify.com/user/tokhtaman/my-all-time-favorites



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• When is corporation bound– Actual authority– Apparent authority– Inherent authority

• Ascertaining corporate authority– Board: meeting rule– Corporate resolution / certificate of

corporate secretary– Opinion letters

Module III – Corporate Form

Citizen of world

Citizen of world

Law profession

Law profession

Corporate practice

Corporate practice

Bar examBar

exam



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“The Little Republic”William Blackstone English jurist (1723–80)

Shareholders[ principals / electorate]

Officers[executives / bureaucracy]

(more agents)

Board of Directors[legislative organ

/ agents]

“Theory of Firm”Michael Jensen

US economist (1939-)

Agency theory …



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Shareholders• Elect, remove directors

• Approve fundamental transactions • Amend bylaws, pass resolutions

Officers• Described in bylaws / appointed by board • Authority in bylaws or prescribed by board

Board of Directors• Exercise corporate powers• Manage business and affairs

Allocation of corporate power



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“Andrew, sell my horse Hopalong for $2000“

Agent authority ...

Inherent authority

Apparent Authority

Actual Authority(implied)

Actual Authority(express)

Ratification

“Nice sale, Andrew. Have you found other buyers?”

“Mr. Jones, this is my trusted agent,

Andrew, deal with him“

“Andrew, I’ve always trusted you. Run

the stables for me."

"I didn't expect him to sell Secretariat. But what the heck, it's OK."



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Authority of corporate officers …

Lee v. Jenkins Brothers (2d Cir. 1959)

Lee was promised a pension by Yardley, president of Jenkins Brothers, when he joined the company. Yardley said: "If you come with us, the company will pay you a pension when you reach age 60 of your salary, that is $1500/year."

– Actual authority?– Apparent authority?– Inherent authority?



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Ordinary vs. extraordinary …

Judge Lumbard (Second Circuit):

Apparent authority … depends not only on the nature of the contract involved, – but the officer negotiating it, – the corporation's usual manner of

conducting business, – the size of the corporation and the number

of its stockholders, – the circumstances that give rise to the

contract, – the reasonableness of the contract, – the amounts involved, and – who the contracting third party is …

In certain instances a given contract may be so important to the welfare of the corporation that outsiders would naturally suppose that only the board of directors … could properly handle it. … Beyond such “extraordinary” acts, whether or not apparent authority exists is simply a matter of fact.

J. Edward Lumbard


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1. True or false. Agency law generally can be ascertained by looking at Uniform Code of Agency.

2. The CEO of Products, Inc. is thinking that the company should acquire Widgets Corp. Is Products bound when –

a. CEO hires consulting firm to look at widgets market

b. CEO hires law firm to work on deal

c. CEO agrees with Widgets Corp. on buyout plan

3. Identify which agency “principle” applies when the Products CEO hired the law firm – though the board had told him not to.

a. Actual authority

b. Implied authority

c. Apparent authority

d. Ratification

4. True or false? Suppose the board later says, “OK, let’s pay the legal bill.” This is ratification, as though actual authority existed from the start.

Pop quiz

1-F / 2-AB / 3-C / 4-T



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5. Corporate offices and the duties entailed are most likely to be found in –a. The articles of incorporation, which

can be amended only with shareholder approval

b. The bylaws, which the board can amend

c. The officers’ employment agreements, which cannot be amended unilaterally

6. True or false? The person who sets the agenda for and conducts board meetings is known as the “board chair.” This person may not also be the CEO.

7. Which statement is false?a. An agent can create his own

authorityb. Third parties can rely on

reasonable appearances of corporate authority

c. Third parties sometimes must investigate whether the corporation’s board gave its approval

8. In a transaction that is extraordinary, the corporation … a. cannot be boundb. can be bound only if there is

actual authorityc. can be bound if the third

party relies on the agent’s apparent authority

5-B / 6-F / 7-A / 8-B




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Menard, Inc v. Dage-MTI, Inc. (Ind 2000)

Dage owned tract of land. Its president Sterling negotiated with sophisticated buyer Menard to sell the tract.

When Menard made an offer, Sterling forwarded it to the board - which said no.

When Menard made second offer, Sterling went ahead on his own. He told Menard he had authority.

– Actual authority?– Apparent authority?– Inherent authority?

Dage-MTI

Board

Shareholders

Menard Sales agreement

Sterling

President

Director



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Trial court:

“The record persuasively demonstrates that the land transaction in question was an extraordinary transaction" for Dage, which manufactures electronic video products. * * *

Thus, "Sterling was not performing an act that was appropriate in the ordinary course of Dage's business."


Indiana Sup Ct:

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.

Dissent:

It is difficult to know how lawyers will advise their [corporate clients] after this decision. Where all parties to a corporate transaction understand that board approval is required, the black letter law [says] the buyer’s offer was not accepted by the seller [in this case].



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Inherent authority

Apparent Authority

Actual AuthorityImplied

Actual AuthorityExpress

Ratification


Restatement (2d) Agency S 161

A general agent for a disclosed principal subjects the 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.



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Hypothetical

Would the analysis be different if Sterling’s spouse was the commercial real estate broker putting together the deal – for a hefty commission?

Dage-MTI

Board

Shareholders

Menard Sales agreement

Sterling

President

Director

spouse



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MBCA § 8.20. MEETINGS

(a) Unless the articles of incorporation or bylaws provide otherwise, the board of directors may permit any or all directors to participate … by any means of communication by which all directors participating may simultaneously hear each other during the meeting.

MBCA § 8.21. ACTION WITHOUT MEETING

(a) Except to the extent that the articles of incorporation or bylaws require that action by the board of directors be taken at a meeting, action … by the board of directors may be taken without a meeting if each director signs a consent describing the action to be taken and delivers it to the corporation.

MBCA § 8.22. NOTICE OF MEETING

(b) Unless the articles of incorporation or bylaws provide for a longer or shorter period, special meetings of the board of directors must be preceded by at least two days' notice of the date, time, and place of the meeting. The notice need not describe the purpose of the special meeting unless required by the articles of incorporation or bylaws.

MBCA § 8.23. WAIVER OF NOTICE

(a) A director may waive any notice … in writing, signed by the director entitled to the notice, and filed with the minutes or corporate records.

(b) A director's attendance at … a meeting waives any required notice to the director of the meeting unless the director at the beginning of the meeting (or promptly upon arrival) objects to holding the meeting … and does not thereafter vote … at the meeting.

MBCA § 8.24. QUORUM AND VOTING

• Unless the articles of incorporation or bylaws require a greater number [but no less than one-third], a quorum of a board of directors consists of … a majority of the … directors.

(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 [articles or bylaws require greater number, BOARD ACTIO

N


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1. True or false. Shareholders have the authority to act for the corporation.

2. The 7 directors of X Corp learn of a great business deal, but aren’t all available. Is the deal approved when –

a. Five directors sign the deal/contract

b. Seven directors sign a “consent” to the contract

c. Seven directors sign a “consent” authorizing President to sign contract, and he does

3. The X Corp board chair emails the directors notifying them of a meeting about the possible contract. The notice is ...

a. Valid if sent 48 hours before the meeting

b. Valid if sent 24 hours before the meeting

c. Not valid because it does not describe reason for meeting

4. True or false? Under MBCA, a director can be present by Skype only if authorized in the bylaws.

Pop quiz

1-F / 2-C / 3-A / 4-F



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5. There is a quorum on the 7-person board if three directors are present in person and another is present –a. By regular phoneb. By Skype (though director’s

laptop speaker doesn’t work)c. By cell phone with “speaker”

feature

6. True or false? At the meeting, one of the directors says, “Thank goodness that Mary called me. I never got the notice of the meeting.” Turns out the notice was never sent to the director. Meeting is no good.

7. At the meeting, with three directors present in person and one by “speaker” phone, one of the directors leaves.a. The quorum is broken and

no business can take placeb. The quorum is not broken

since ¾ are still therec. The meeting can proceed --

there was initially a quorum

8. The board can delegate its authority to … a. The executive committee to

decide all mattersb. The financial committee to

declare dividendsc. The nomination committee to

nominate directors

5-C / 6-F / 7-A / 8-C




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Law Firm, LLP

You asked for our firm’s opinion on the Transaction described below.

After due investigation of the documents presented to us, we are able to give the following opinion:

“The Company [Big Machines, Inc] has authorized the execution, delivery and performance of the Transaction Documents by all necessary corporate action and has duly executed and delivered the Transaction Documents.”

Your signaturePartner

• What is a legal opinion? See NC Legal Opinion Report.

• Significance of “unqualified” opinion?

• Do assumptions and exceptions undermine opinion?

• Malpractice liability, if wrong?

Legal opinions …

http://www.ncbar.org/media/1110909/reportofthirdpartylegalopinions.pdf

http://www.ncbar.org/media/1110909/reportofthirdpartylegalopinions.pdf



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THIRD-PARTY OPINION[Date] Ladies and Gentlemen: We have acted as counsel to ABC Corporation (the “Company”) in connection with the transaction (the “Transaction”) contemplated by the Sales Agreement dated December 31, 2008 (the

“Agreement”) between the Company and XYZ Ltd. (the “Other Party”). We have reviewed such documents and considered such matters of law and fact as we, in our professional judgment, have deemed appropriate to render the opinions contained herein. With

respect to certain facts, we have considered it appropriate to rely upon certificates or other comparable documents of public officials and officers or other appropriate representatives of the Company, without investigation or analysis of any underlying data contained therein.

The opinions set forth herein are limited to matters governed by the laws of the State of New Columbia, and no opinion is expressed herein as to the laws of any other jurisdiction. Based upon and subject to the foregoing and the further assumptions, limitations and qualifications hereinafter expressed, it is our opinion that:1. The Company is duly incorporated, validly existing and in good standing under the laws of the State of New Columbia . 2. Company is authorized to transact business in the State of New Columbia.3. The authorized capital stock of the Company consists of 1,000,000 common shares, of which 750,000 shares are outstanding. The Shares have been duly authorized and validly issued,

and are fully paid and nonassessable.4. The Company has the corporate power to execute, deliver and perform its obligations under the Transaction Documents. 5. The Company has authorized the execution, delivery and performance of the Transaction Documents by all necessary corporate action and has duly executed and delivered

the Transaction Documents.6. The Agreement constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. 7. The execution and delivery by the Company of the Agreement and the performance by the Company of its obligations therein (a) do not violate the articles of incorporation or bylaws of the

Company, (b) do not breach or result in a default under any Other Agreement, and (c) do not violate the terms of any Court Order. For purposes hereof, (I) the term “Other Agreement” means any of those agreements listed on the officer’s certificate rendered to us in connection with this opinion and (II) the term “Court Order” means any judicial or administrative judgment, order, decree or arbitral decision that names the Company and is specifically directed to it or its properties and that is listed on the officer’s certificate rendered to us in connection with this opinion or that is known to us.

8. The execution and delivery by the Company of the Agreement, and performance by the Company of its obligations therein, do not violate applicable provisions of statutory laws or regulations.

9. No consent, approval, authorization or other action by, or filing with, any governmental authority of the United States or the State of New Columbia is required for the Company’s execution and delivery of the Transaction Documents and consummation of the Transaction.

The opinions expressed above are subject to the following assumptions, qualifications and limitations: (a) This opinion is subject to the effect of applicable bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium and similar laws affecting the enforcement of creditors’ rights

generally. (b) This opinion is subject to the effect of general principles of equity (regardless of whether considered in a proceeding in equity or at law), which may, among other things, deny rights of

specific performance. (c) We do not express any opinion as to the enforceability of provisions of the Agreement purporting to require a party thereto to pay or reimburse attorneys’ fees incurred by another party, or

to indemnify another party therefore, which provisions may be limited by applicable statutes and decisions relating to the collection and award of attorneys’ fees. (d) We do not express any opinion as to the enforceability of provisions of the Agreement providing for arbitration.In addition, we advise you that to our knowledge, there is no action, suit or proceeding at law or in equity, or by or before any governmental instrumentality or agency or arbitral body, now

pending or overtly threatened against the Company, except as listed on the officer’s certificate rendered to us in connection with this opinion.This opinion letter is delivered solely for your benefit in connection with the Transaction and may not be used or relied upon by any other person or for any other purpose without our prior

written consent in each instance. Our opinions expressed herein are as of the date hereof, and we undertake no obligation to advise you of any changes in applicable law or any other matters that may come to our attention after the date hereof that may affect our opinions expressed herein.

Very truly yours, Signature of Opining Lawyer or Firm

1. The Company is duly incorporated, validly existing and in good standing under the laws of the State of New Columbia.

5. The Company has authorized the execution, delivery and performance of the Transaction Documents by all necessary corporate action and has duly executed and delivered the Transaction Documents.



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Group hypo (investigating authority)

You represent Home Supplies, Inc.

HSI is negotiating a contract with Construx, Inc (a large construction company) to build a new warehouse for HSI.

HSI, worried about Construx’s finances, asks for a guarantee. Construx says its equipment supplier - Big Machines, Inc. will provide one.

Your client asks for your opinion on the sufficiency of the following documents.

Big Machines

guarantee

Supplier

K

HS Inc

Construx

Document #4Document #3




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Board Consent

After due notice of the matter, the undersigned directors of Big Machines, Inc., constituting a majority of the board, state:

RESOLVED, that the board of directors authorizes George Kraft, Vice President & Treasurer of the Company, to sign on behalf of the Company a guarantee of the construction contract of Construx with Home Supplies -- up to $10 million.

Robert AbleRamona BestRichard CornacchioneRoyce Demphrey

Date: September 14, 2014

Guarantee

Big Machines, Inc., duly incorporated under the laws of the State of Delaware, hereby guarantees the obligations of Construx Inc in the construction contract to be entered into with Home Supplies, Inc. - up to $10 million.

Big Machines, Inc.

George Kraft By: George Kraft, Vice President / Treasurer




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BOARD MINUTES15 Sep 2014

At a special meeting of the Board of Directors, for which notice was waived by all directors, and at which all directors were present (three by Skype connection), the Board unanimously resolved:

RESOLVED, that the Board authorizes Charles Kraft, Vice President & Treasurer of the Company, to sign on behalf of the Company a guarantee of the construction contract between Construx Inc and Home Supplies, Inc up to $10 million.

Respectfully submitted, U.R. Minion U R Minion, SecretaryBig Machines, Inc

Big Machines, Inc. [Letterhead]

I am secretary of Big Machines Inc, and the attached minutes are a true and complete copy of the minutes of the meeting of the Corporation's board of directors on September 15, 2014.

Sincerely yours, U. R. Minion U.R. Minion, Secretary



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Group hypo (investigating authority)

You represent Home Supplies, Inc.

HSI is negotiating a contract with Construx, Inc (a large construction company) to build a new warehouse for HSI.

HSI, worried about Construx’s finances, asks for a guarantee. Construx says its equipment supplier - Big Machines, Inc. will provide one.

Your client asks for your opinion on the sufficiency of the following documents.

Big Machines

guarantee

Supplier

K

HS Inc

Construx





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Board Consent

After due notice of the matter, the undersigned directors of Big Machines, Inc., constituting a majority of the board, state:

RESOLVED, that the board of directors authorizes George Kraft, Vice President & Treasurer of the Company, to sign on behalf of the Company a guarantee of the construction contract of Construx with Home Supplies -- up to $10 million.

Robert AbleRamona BestRichard CornacchioneRoyce Demphrey


Guarantee

Big Machines, Inc., duly incorporated under the laws of the State of Delaware, hereby guarantees the obligations of Construx Inc in the construction contract to be entered into with Home Supplies, Inc. - up to $10 million.

Big Machines, Inc.

George Kraft By: George Kraft, Vice President / Treasurer




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BOARD MINUTES15 Sep 2014

At a special meeting of the Board of Directors, for which notice was waived by all directors, and at which all directors were present (three by Skype connection), the Board unanimously resolved:

RESOLVED, that the Board authorizes Charles Kraft, Vice President & Treasurer of the Company, to sign on behalf of the Company a guarantee of the construction contract between Construx Inc and Home Supplies, Inc up to $10 million.

Respectfully submitted, U.R. Minion U R Minion, SecretaryBig Machines, Inc

Big Machines, Inc. [Letterhead]

I am secretary of Big Machines Inc, and the attached minutes are a true and complete copy of the minutes of the meeting of the Corporation's board of directors on September 15, 2014.

Sincerely yours, U. R. Minion U.R. Minion, Secretary



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Our Firm LLP

As requested, we offer you our opinion on the authority of Big Machines, Inc. to enter into the Guarantee that you provided to us (attached).

As explained below, there are a number of irregularities with the documents that purport to authorize this transaction, leading us to question whether the Guarantee is a binding obligation of BMI.

First, the purported written consent signed only by a majority of the MBI directors is invalid under the corporation law of Delaware, the state of BMI’s incorporation. See DGCL S 141(f) (all directors).

Second, the purported minutes of the MBI board of directors are highly irregular. They do not specify which directors attended the meeting (in person or otherwise). They do not specify, as is usual, the time or location of the meeting. They purport to authorize “Charles Kraft” to sign the guarantee, when it was “George Kraft” whose signature appears on the Guarantee document you provided us. Moreover, the resolution does not specify which “guarantee” document the board was authorizing.

Third, from our experience, the supposed “guarantee” is highly unusual. It is unclear why BMI, an equipment manufacturer, would guarantee the financial obligations of a customer. In addition, a guarantee would typically make specific reference to the contract it purported to guarantee – but not here. Moreover, it is usual that an opinion on the authority of a corporation to enter into a business transaction would be given by that corporation’s law firm – something that has not happened here.

In conclusion, we advise Home Supplies not to assume that BMI has authorized any guarantee of the construction contract proposed to be entered into with Construx.

Very truly yours,

Rex T. Ranasorus

http://delcode.delaware.gov/title8/c001/sc04/index.shtml



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“Is our malpracticeinsurance policy

up to date?”



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The end



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Bylaws Big Machines 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 …

Any other questions?

Paul Klee, Monument (1929) (inverted)

Documents

Transcript of Paul Klee, Monument (1929) (inverted)