The following question was posted over at one of the LinkedIn groups I follow:
... does the Chairman in a shareholding company have the right to give power to someone else to sign in the contract and documents of the company, who is usually gives him this authority?
As I explain in Agency, Partnerships & LLCs
Corporate employees, especially officers, are agents of the corporation.[1] Curiously, however, neither an individual director nor even the board as a whole is regarded as agents of the corporation.[2] An individual director, as such, “has no power of his own to act on the corporation’s behalf, but only as one of the body of directors acting as a board.”[3] As for the board, when it acts collectively, the board functions as a principal rather than as agent. Unless shareholder approval is required, after all, the act of the board is the act of the corporation. Consequently, the board can be said to personify the corporate principal.
In my now out of print book Corporation Law and Economics
Suppose a newly appointed CEO wishes to hire an Administrative Assistant. If the CEO signs an employment contract with a prospective assistant, purporting to act on behalf of the corporation, will that contract be binding on the firm? The answer to that question depends on whether the CEO has authority as that term of art is used in agency law. Accordingly, we must (briefly) digress into agency law and the authority of agents.
1. The agency relationship defined
The agency relationship, in its broadest sense, includes any relationship in which one person (the agent) is authorized to act on behalf of another person (the principal). More specifically, an agency relationship arises when there is a manifestation of consent by the principal that the agent act on the principal’s behalf and subject to the principal’s control, and the agent consents to so act.[1] The requisite manifestation of consent can be implied from the circumstances, which makes it possible for the parties to have formed a legally effective agency relationship without realizing they had done so. Corporate employees, especially officers, are generally regarded as agents of the corporation.[2]
Curiously, neither an individual director nor even the board as a whole are regarded as agents of the corporation.[3] In a sense, when the board acts collectively, it functions as a principal in agency law terms. Unless shareholder approval is required, after all, the act of the board is the act of the corporation. As to the individual director, recall that he “has no power of his own to act on the corporation’s behalf, but only as one of the body of directors acting as a board.” [4]
2. Authority of agents
An agent may have either actual, apparent, or inherent authority to enter into contracts on behalf of the corporate principal. Likewise, in some settings, the corporation may be estopped from denying the authority of its employees. Determining whether an agent had the requisite authority in any given situation can be challenging. The differences between the various categories of authority are complex and subtle. In addition, many of the categories overlap—it is not at all uncommon for more than one type of authority to be present in a single transaction. Finally, the courts are not always precise when using labels. For example, estoppel and inherent authority are often called apparent authority. For our purposes, however, it is critical for you to understand that the legal consequences of an agent’s actions do not depend on the type of authority at hand. For purposes of determining whether or not the corporate principal is bound by the contract vis-à-vis the third party to the transaction, authority is authority and the different types of authority are essentially irrelevant.
Why then does the law distinguish between different categories of authority? A former student of your author claimed that it was a deliberate attempt to confuse people, which called to mind the old joke—”just because you’re paranoid doesn’t mean you aren’t being followed.” As Justice Holmes once observed, albeit in a different context, “common sense is opposed to the fundamental theory of agency.”[5]
It will be helpful to focus for a moment on the two basic types of authority: “actual authority” and “apparent authority.” Consider the following hypothetical: Pam owns Whiteacre. Alan is her real estate broker and, indisputably, her agent. Ted is an outsider who claims that Alan entered into a contract on Pam’s behalf to sell Whiteacre. Suppose Ted seeks to prove the existence of authority by evidence relating to communications between Pam and Alan, such as a letter from Pam to Allen in which Pam directed Alan to sell Whiteacre. In this instance, Ted is attempting to establish the existence of actual authority. In contrast, suppose Ted seeks to establish authority by evidence relating to communications from Pam to Ted. Suppose Pam sent Ted a letter in which she said that she had ordered Alan to sell Whiteacre. In this case, Ted is trying to establish apparent authority. Importantly, the contract will be no less binding if Ted proves apparent authority rather than actual. The difference between actual and apparent authority thus arises out of the way in which Ted seeks to prove that Alan was authorized to enter into the contract. In other words, the different categories of authority really are ways of classifying the proof the plaintiff must offer to bind the principal to the contract.
Actual authority exists when the agent reasonably believes the principal has consented to a particular course of conduct.[6] Actual authority can be express, as where the principal instructs the agent to “sell Whiteacre on my behalf.” In the corporate context, express actual authority is usually vested in officers by a resolution of the board and/or a description of the officer’s duties set forth in the bylaws.[7] Actual authority can also be implied, however, if the principal’s acts or conduct are such the agent can reasonably infer the requisite consent. An agent has incidental actual authority, for example, to use all means reasonably necessary to carry out a particular result expressly mandated by the principal. A pattern of acquiescence by the board in a course of conduct may also give rise to implied actual authority to enter into similar contracts in the future.[8]
A contract entered into by an agent, purportedly on the principal’s behalf, can be binding even if the agent lacks actual authority. Apparent authority exists where words or conduct of the principal lead the third party to reasonably believe that the agent has authority to make the contract.[9] Of particular importance with respect to the authority of corporate officers is the concept of apparent authority implied by custom. Suppose the board of directors instructed the CEO not to hire an assistant. The CEO thus lacked actual authority. The CEO nonetheless signs a prospective assistant to an employment contract that purports to be binding on the corporation. Is it binding? If the assistant (the third party) knew that that the corporation had placed the CEO in that position and its was customary for CEOs to have authority to hire assistants, the CEO will have apparent authority by virtue of that custom and the contract will be binding.[10] The economic rationale for this rule should be self-evident—it is the basic concept of the cheaper cost avoider. Sound social policy dictates that the loss be put on the party who could have most cheaply avoided it. Here the corporation’s position, by definition, is idiosyncratic. Most firms let their CEOs hire assistants. Its cheaper for the few idiosyncratic principals to take precautions than for all job applicants to be obliged to take precautions.
3. Authority of corporate officers
Most of the case law on the apparent authority of corporate officers relates to the powers of presidents. Corporate presidents are regarded as general agents of the corporation vested with considerable managerial powers. Accordingly, contracts that are executed by the president on the corporation’s behalf and arise out of the ordinary course of business matters are binding on the corporation.[11]
Cases dealing with the authority of subordinate officers are much rarer. As to vice presidents, a number of (mostly older) cases hold they have little or no implied or apparent authority to bind the corporation. Accordingly, they have only such authority as is expressly conferred on them in the bylaws or by board resolution.[12] The corporate secretary is assumed to be the custodian of the corporation’s books and records. Accordingly, the secretary has actual authority to certify those records. Otherwise, however, the secretary has no authority other than that conferred on him by the bylaws or board resolutions.[13]
An important line of cases limits the implied and apparent authority of corporate officers to matters arising in the ordinary course of business. In the leading decision of Lee v. Jenkins Bros., the Second Circuit held:
The rule most widely cited is that the president only has authority to bind his company by acts arising in the usual and regular course of business but not for contracts of an “extraordinary” nature. . . .
Apparent authority is essentially a question of fact. It 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, to list a few but not all of the relevant factors. 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 (or even the shareholders) could properly handle it. It is in this light that the “ordinary course of business” rule should be given its content.[14]
As Lee suggests, there is no bright line between ordinary and extraordinary acts. It seems reasonable to assume, however, that acts consigned by statute to the board of directors will be deemed extraordinary.[15] Consequently, for example, the eight acts specified in MBCA § 8.25(e) that a board of directors may not delegate to a committee doubtless are extraordinary in nature. (Of course, once the board has made its decision with respect to an extraordinary matter, implementation of that decision can be delegated to officers.)
In general, when one must decide a particular action is ordinary or extraordinary, the following factors seem especially pertinent:[16] How much of the firm’s assets or earnings are involved? Suppose a corporation running a video tape rental store has $10,000 in cash available. A decision to spend $50 to buy a new tape would be ordinary, a decision to spend $5,000 to establish a line of compact discs for rent probably would be regarded as extraordinary. How much risk is involved? A decision to buy one tape is not very risky and would be an ordinary action, while a decision to open a new store might be very risky and therefore extraordinary. A decision to buy tapes on installment where the purchase price is paid off in three months probably would be seen as ordinary. A decision to take out a thirty year loan probably would be seen as extraordinary. How long will the action have an effect on the corporation? How much would it cost to reverse the decision? A decision to open a new store might be very expensive to reverse, as the corporation might not be able to get out of the lease if things went bad. Such a decision thus would be extraordinary.
As to most matters falling in the gray area between ordinary and extraordinary, a small host of decisions could be cited on either side.[17] There is relatively little consistency of outcome in this area. Courts are divided, for example, as to whether such basic matters as filing a lawsuit[18] or executing a guarantee of another corporation’s debts are ordinary or extraordinary.[19] One is tempted to remind them that Emerson’s famous dictum against a fetish for consistency holds only that a “foolish consistency is the hobgoblin of little minds.”
How should cases falling between the extremes be resolved? Put bluntly, the authority of corporate officers should be regarded as virtually plenary. Only matters expressly reserved to the board by statute, the articles of incorporation, or the bylaws should be deemed “extraordinary” and, consequently, beyond the scope of senior officers’ authority.
One rationale for this position is suggested by simple statutory interpretation. recall that both the MBCA and Delaware law provide that the business of the corporation “shall be managed by or under the direction of a board of directors.”[20] The use of the disjunctive prior to the phrase “under the direction of” suggests that the statute’s drafters anticipated that the corporation would be managed by its officers with the board mainly exercising oversight authority. Unless a decision is expressly reserved to the board, the statutory language thus contemplates that a corporation may act through its officers subject to review by the board.
This reading of the statute comports with modern board practice. The de facto role of the board in most large public corporations consists of providing informal advice to senior management (especially the CEO) and episodic oversight. An extensive definition of extraordinary acts thus seems a needless formality.
An alternative justification for the proposed rule rests on the costs the existing rule imposes on third parties. Persons who do business with a corporation do so at some peril of discovering that their transaction will be deemed to implicate an extraordinary act and, accordingly, required express board action. An expansive definition of extraordinary matters increases this risk. Transaction costs thus increase in several respects. An expansive variant of the rule creates uncertainty, obliging third parties to take costly precautions. They may insist, for example, on seeing an express authorization from the board. Uncertainty about the outer perimeters of the rule also encourages opportunism by the corporation. If contracts dealing with extraordinary matters are voidable, the corporation effectively has a put with respect to the transaction. Uncertainty as to the enforceability of a contract gives the board leverage to extract a favorable settlement of the third party’s claims.
[1] Restatement (Second) § 14 C cmt. a. A subsidiary of a corporation will not be deemed the agent of the parent corporation even though the latter has the power to control the former. A parent corporation thus cannot be held liable for the acts of its subsidiary on a principal-agent basis; instead, a plaintiff seeking to hold the parent liable must pierce the corporate veil of the subsidiary. Bunch v. Centeon, L.L.C., 2000 WL 1741905 (N.D. Ill. 2000).
[2] Restatement (Second) § 14 C.
[3] Restatement (Second) § 14 C cmt. b. Directors thus are a type of non-agent fiduciary, as are “trustees, ... executors, guardians, ..., partners and joint adventurers, and attorneys ....” Chisholm v. Western Reserves Oil Co., 655 F.2d 94, 97 (6th Cir. 1981). See Young v. Colgate-Palmolive Co., 790 F.2d 567 (7th Cir. 1986) (holding that “the directors are not acting as agents in their management of the corporation, but as fiduciaries”); U.S. v. Griswold, 124 F.2d 599 (1st Cir. 1941) (“The directors of a corporation for profit are ‘fiduciaries’ having power to affect its relations, but they are not agents of the shareholders since they have no duty to respond to the will of the shareholders as to the details of management.”); Arnold v. Soc'y for Sav. Bancorp, 678 A.2d 533, 539-40 (Del.1996) (“Directors, in the ordinary course of their service as directors, do not act asagents of the corporation .... A board of directors, in fulfilling its fiduciary duty, controls the corporation, not vice versa.”).
[1] Agency Restatement §1.
[2] Agency Restatement § 14 C cmt. a.
[3] Agency Restatement § 14 C.
[4] Agency Restatement § 14 C cmt. b.
[5] Oliver Wendell Holmes, Jr., Agency II, 5 Harv. L. Rev. 1, 14 (1891).
[6] Agency Restatement §§ 7 & 26.
[7] Compare Musulin v. Woodtek Inc., 491 P.2d 1173 (Or. 1971) (unless authorized by the bylaws or board resolution, corporate officers lacked authority to execute a promissory note on the corporation’s behalf); Daniel Webster Council, Inc. v. St. James Ass’n, Inc., 533 A.2d 329 (N.H. 1987) (officers have only such actual authority as provided in the bylaws or board resolutions) with King World Prod., Inc. v. Fin. News Network, Inc., 660 F. Supp. 1381 (S.D.N.Y. 1987) (corporate officer had actual authority to execute a lease based, inter alia, on the job description in his employee contract).
[8] Agency Restatement § 7 cmt. c & § 26 cmt. d.
[9] Agency Restatement § 27.
[10] Agency Restatement § 27 cmt. d. Because apparent authority requires a manifestation by the principal, some connection between the third party and the principal is necessary. You must always look at how the third party learned of the agent’s alleged authority and ask whether the principal reasonably can be said to have been the source of that knowledge. The act of placing the agent in a position customarily carrying certain powers, however, is deemed an adequate manifestation of consent by the principal. Id. Apparent authority by virtue of custom and inherent authority are most clearly different in cases where there is an undisclosed principal (i.e., the situation in which the third party is unaware that a principal exists). Where the third party knows that the principal exists and has placed the agent in a position carrying certain customary powers, there has been the requisite manifestation by the principal. Inherent authority does not require such a holding out and, hence, can exist even as to an undisclosed principal. Id., § 195.
[11] See, e.g., Buxton v. Diversified Res. Corp., 634 F.2d 1313 (10th Cir. 1980) (president had authority to sign audit statements in the ordinary course of his job); Evanston Bank v. Conticommodity Servs., Inc., 623 F. Supp. 1014 (N.D. Ill. 1985) (president’s inherent authority extended only to ordinary matters); Belcher v. Birmingham Trust Nat’l Bank, 348 F. Supp. 61 (N.D. Ala. 1968) (president has power to bind corporation in ordinary course of business); Custer Channel Wing Corp. v. Frazer, 181 F. Supp. 197 (S.D.N.Y. 1959) (president had authority to bring suit on the corporation’s behalf because doing so was incidental to the ordinary business of the firm); W. Am. Life Ins. Co. v. Hicks, 217 S.E.2d 323 (Ga. 1975) (president has power to act in ordinary course of business); Quigley v. W. N. MacQueen & Co., 151 N.E. 487 (Ill. 1926) (by virtue of his office, president has power to bind the corporation to contracts made in the ordinary course of business).
[12] See, e.g., Interstate Nat’l Bank v. Koster, 292 P. 805 (Kan. 1930); James F. Monaghan, Inc. v. M. Lowenstein & Sons, 195 N.E. 101 (Mass. 1935); Musulin v. Woodtek, 491 P.2d 1173 (Or. 1971).
[13] See, e.g., In re Drive-In Development Corp., 371 F.2d 215 (7th Cir. 1967) (corporation estopped to deny validity of board resolutions certified by corporate secretary); Meyer v. Glenmoor Homes, Inc., 54 Cal. Rptr. 786 (Cal. App. 1966) (secretary had power to affix corporate seal to documents but no authority re contracts of indebtedness); Blair v. Brownstone Oil & Refining Co., 120 P. 41 (Cal. App. 1911) (no authority to execute release); Ideal Foods, Inc. v. Action Leasing Corp., 413 So.2d 416 (Fla. App. 1982) (secretary is a ministerial position with no authority to conduct business); Shunga Plaza, Inc. v. American Employer’s Ins. Co., 465 P.2d 987 (Kan 1970) (corporate secretary has no power to bind the corporation unless the board has entrusted him with management of the business); Easter Oil Corp. v. Strauss, 52 S.W.2d 336 (Tex. Civ. App. 1932) (secretary had no authority to execute promissory note)
[14] Lee v. Jenkins Bros., 268 F.2d 357, 365-70 (2d Cir.), cert. denied, 361 U.S. 913 (1959). See also In re Mulco Products, Inc., 123 A.2d 95 (Del. Super. Ct. 1956); Lucey v. Hero Int’l Corp., 281 N.E.2d 266 (Mass. 1972).
[15] See, e.g., Plant v. White River Lumber Co., 76 F.2d 155 (8th Cir. 1935) (sale of all or substantially all corporate assets).
[16] ALI Principles § 3.01 rptr. note.
[17] For cases holding particular acts to be “ordinary,” see, e.g., Lee v. Jenkins Bros., 268 F.2d 357 (2d Cir.), cert. denied, 361 U.S. 913 (1959) (hiring or firing employees and fixing their compensation and benefits); United Producers and Consumers Coop. v. Held, 225 F.2d 615 (9th Cir. 1955) (same); Custer Channel Wing Corp. v. Frazer, 181 F. Supp. 197 (S.D.N.Y. 1959) (initiating lawsuit); Mem’l Hosp. Ass’n of Stanislaus County v. Pacific Grape Products Co., 290 P.2d 481 (Cal. 1955) (making charitable pledge); In re Mulco Products, Inc., 123 A.2d 95 (Del. Super. Ct. 1956) (executing promissory note); Quigley v. W. N. MacQueen & Co., 151 N.E. 487 (Ill. 1926) (corporation would repurchase stock from shareholder at latter’s option); Sperti Products, Inc. v. Container Corp., 481 S.W.2d 43 (Ky. App. 1972) (executing guarantee of another firm’s debts); Emperee v. Meyers, 269 A.2d 731 (Pa. 1970) (executing note for benefit of prospective employee).
For cases holding particular acts to be extraordinary, see, e.g., In re Lee Ready Mix & Supply Co., 437 F.2d 497 (6th Cir. 1971) (mortgaging assets); Maple Island Farm, Inc. v. Bitterling, 209 F.2d 867 (8th Cir. 1954) (lifetime employment contract); Abraham Lincoln Life Ins. Co. v. Hopwood, 81 F.2d 284 (6th Cir. 1936); (contract to effectuate a merger); Computer Maint. Corp. v. Tilley, 322 S.E.2d 533 (Ga. 1984) (shareholder buy-sell agreement); First Nat’l Bank v. Cement Products Co., 227 N.W. 908 (Iowa 1929) (guaranteeing debt of another firm); Ney v. Eastern Iowa Tel. Co., 144 N.W. 383 (Iowa 1913) (initiating a lawsuit against the corporation’s largest shareholder); Chesapeake & Potomac Tel. Co. v. Murray, 84 A.2d 870 (Md. 1951) (lifetime employment contract); Daniel Webster Council, Inc. v. St. James Ass’n, Inc., 533 A.2d 329 (N.H. 1987) (land sales contract); Myrtle Ave. Corp. v. Mt. Prospect Bldg. & Loan Ass’n, 169 A. 707 (N.J. 1934) (postponing mortgage foreclosure); Burlington Indus., Inc. v. Foil, 202 S.E.2d 591 (N.C. 1974) (guaranteeing another firm’s debts); Brown v. Grayson Enter., Inc., 401 S.W.2d 653 (Tex. Civ. App. 1966) (making lifetime employment contract); Lloydona Peters Enterprises, Inc. v. Dorius, 658 P.2d 1209 (Utah 1983) (initiating litigation).
[18] Compare Custer Channel Wing Corp. v. Frazer, 181 F. Supp. 197 (S.D.N.Y. 1959) (president had authority to do so) with Lloydona Peters Enter., Inc. v. Dorius, 658 P.2d 1209 (Utah 1983) (no authority to do so); Ney v. Eastern Iowa Tel. Co., 144 N.W. 383 (Iowa 1913) (no authority to do so with respect to the corporation’s largest shareholder).
[19] Compare Sperti Products, Inc. v. Container Corp. of Am., 481 S.W.2d 43 (Ken. App. 1972) (president had authority) with First Nat’l Bank v. Cement Products Co., 227 N.W. 908 (Iowa 1929) (no authority to do so); Burlington Indus., Inc. v. Foil, 202 S.E.2d 591 (N.C. 1974) (president lacked authority, inter alia, because making such guarantees was not part of the corporations’ ordinary business).
[20] DGCL § 141(a); see also MBCA § 8.01.
