Corporations February 2005 Flashcards
(4 cards)
Summary
According to the bylaws of Corp, Presley, as president, is the CEO and has authority to manage the business of the corporation. Therefore, Presley had authority to retain an attorney to file suit against FS to collect the $11,000 FS owed Corp so long as collecting on this type of obligation (an account receivable) was in the ordinary course of business and the lawsuit was filed to preserve corporate assets. Presley did not have authority to declare a dividend to Corp’s shareholders. Dividends can be authorized only by the board of directors. Finally, Presley did not have authority to enter into a purchase agreement with Large to acquire its local manufacturing plant for Corp. The purchase of an additional manufacturing plant would be outside the ordinary course of business.
As president of Corp, Presley had authority to retain an attorney to file suit against FS to collect the $11,000 FS owed Corp because retaining an attorney to collect an account receivable was in the ordinary course of Corp’s business. Further, as FS was on the verge of bankruptcy, Presley was attempting to preserve one of Corp’s assets.
Corporations are managed by or under the direction of their boards of directors. See Revised Model Business Corporation Act (RMBCA) §8.01. The board of directors generally delegates day-to-day management of the corporation’s business to officers. See RMBCA§§ 8.40, 8.41. Traditionally, officers had only those powers conferred on them by the bylaws or resolutions of the board of directors. See Black v. Harrison Home Co., 99 P. 494 (Cal. 1909); Daniel Webster Council, Inc. v. St. James Assoc., Inc., 533 A.2d 329 (N.H. 1987). Today, most states presume that the president has the inherent power to act for the corporation so long as the matter is within the scope of its ordinary business. See, e.g., Lee v. Jenkins Bros.,268 F.2d 357, 365-66 (2d Cir. 1959); Belcherv. Birmingham Trust National Bank, 348 F. Supp. 61 (N.D. Ala. 1968); Gunter v. Novopharm USA, Inc., 2001 U.S. Dist. LEXIS 2117 (N.D. Ill. 2001).
Presley was appointed president of Corp by its board of directors. The bylaws provide that “the president, as the chief executive officer of the corporation, shall manage the business of the corporation and perform such other duties as the board of directors may from time to time direct.”Pursuant to the bylaws, Presley, as chief executive officer responsible for managing the business, had the authority to retain an attorney to file suit against FS for the following reasons: Corp manufactures computer desks and sells them to furniture stores like FS. FS purchased computer desks but has not paid for them. Presley was attempting to collect on an account receivable. Hiring an attorney to bring suit against a retailer for payment is part of Corp’s ordinary course of business.
Absent a prohibition contained in bylaws or imposed by the board of directors, Presley had authority to bring suit on behalf of Corp, so long as it was in the ordinary course of business. See Custer Channel Wing Corp v. Frazer, 181 F. Supp. 197, 200 (S.D.N.Y. 1959); West View Hills, Inc. v. Lizau Realty Corp, 160 N.E.2d 622, 624 (N.Y. 1959) (absent direct prohibition, a president has presumptive authority to prosecute suits in the name of the corporation). See generally 2A FLETCHER’S CYCLOPEDIAOF PRIVATE CORPORATIONS §618 (discussing presidents’ authority to bring legal proceedings). There are no facts indicating that the board of directors has withheld authority from Presley to commence litigation on behalf of Corp.
Some case law indicates that the president may only commence litigation to preserve corporate assets or prevent dissipation. See Lloydona Peters Enterprises v. Dorius, 658 P.2d 1209, 1211 (Utah 1983). Even under this test, Presley had authority to sue FS. As FS was on the verge of bankruptcy, by retaining an attorney to file suit, Presley was attempting to preserve a corporate asset.
Presley did not have authority to declare a dividend payable to Corp’s shareholders. Corporate law reserves the authority to declare dividends to the board of directors.
Although the president of a corporation has the authority to bind the corporation by acts that are in the ordinary course of business (see Point One above), the president does not have the authority to declare or pay dividends to shareholders. Corporate law confers this authority only on the directors of the corporation. See RMBCA§6.40(a); Del. Gen. Corp. Law. §170(a). Consequently, only the board of directors has the power to declare a dividend. See 1 PRINCIPLES OFCORP.GOVERNANCE §3.01 Reporter’s Note (“some matters, such as the declaration of dividends, are required by statute to be decided by the board”). Therefore, Presley, as an officer, did not have the authority to declare a dividend payable to Corp’s shareholders.
Presley has no power, as president, to enter into a purchase agreement to acquire Large’s local manufacturing plant on behalf of Corp because the transaction is extraordinary in nature.
The president of a corporation has the authority to bind the corporation by acts that are in the ordinary course of business, but does not have the authority to bind the corporation by extraordinary acts. See Point One above. While some acts are clearly ordinary or extraordinary, in many cases there is no bright line demarcation. “Any attempt at precision in drawing this line would almost certainly be futile, because the issue is highly dependent on the context in which it arises, and the types of business transactions that may arise are endlessly variable.” See 1 PRINCIPLESOF CORP. GOVERNANCE §3.01 Reporter’s Note. Factors that a court might consider in determining whether a transaction is extraordinary include “the economic magnitude of the action in relation to corporate earnings and assets, the extent of the risk involved, the time span of the action’s effect, and the cost of reversing the action.” Id. See also Joseph Greenspon’s Sons Iron & Steel Co. v. Pecos Valley Gas Co., 156 A. 350, 352-53 (Del. Super. 1931) (factors include “the character of the goods ordered, the amount thereof in relation to the size and condition of the company, the nature of the company, its purposes and aims”).
The facts surrounding Presley’s planned purchase of Large’s local manufacturing plant do not provide numbers to calculate the economic impact of the purchase on the corporation, but they do suggest that the impact would be significant. Additionally, while Presley believes the price is “very reasonable, ”the payment process could span 10 years. Finally, it seems likely that it would be costly to reverse the transaction if it turned out not to be beneficial to Corp.
Consequently, it is very likely that entering into a purchase agreement to acquire Large’s local manufacturing plant would be viewed as an extraordinary act. As such, Presley, as president, would not have actual authority to sign the purchase agreement without the approval of the board of directors.
Further, there are no facts that gave Large a reasonable basis to believe that Presley was authorized to enter into this purchase agreement. Therefore, Presley also lacked apparent authority to enter into the purchase agreement.
