Over on Twitter my friend David Skeel posed an interesting question:
Helpful thread by @PrawfBainbridge on the NRA corporate authority issue. One question: I assume the Board that while the Board could auth the CEO to sign a merger agreement, it couldn't auth her to decide whether and when to propose a merger on behalf of the Bd? https://t.co/yBEccXGnrF
— David Skeel @ Penn (@daskeel) April 12, 2021
I discuss the general authority of corporate CEOs in my book Corporate Law (Concepts and Insights). In it, I observe that:
Corporate employees, especially officers, are agents of the corporation.[1] As such, they can have authority or apparent authority. Actual authority exists when the agent reasonably believes the principal has consented to a particular course of conduct.[2]
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.[3] Actual authority can also be implied, however, if the principal’s acts or conduct are such the agent can reasonably infer the requisite consent.
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.[4] Of particular importance with respect to the authority of corporate officers is the concept of apparent authority implied by custom. If it is customary for officers holding the position in question to have authority to make the contract in question, it would be reasonable for a third party to believe this officer has that authority.
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.[5]
An important line of cases limits the implied actual and the apparent authority of corporate officers—of whatever rank—to matters arising in the ordinary course of business.[6]
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.[7] The Model Business Corporation Act provides that the following decisions may not be delegated to a committee of the board, but rather must be made by the board as a whole: (1) Authorize dividends or other distributions, except according to a formula or method, or within limits, prescribed by the board of directors. (2) Approve or propose to shareholders action that the statute requires be approved by shareholders. (3) Fill vacancies on the board of directors or, in general, on any of its committees. (4) Adopt, amend, or repeal bylaws.[8] DGCL § 141(c) is similar. Certainly, if those decisions may not be delegated to a board committee they may not be delegated to officers.
This is critical for our purposes, because approval of a merger requires approval by both the board of directors and the shareholders. Hence, it seems clear a CEO would lack both implied actual and apparent authority to bind the corporation to a merger.
Obviously, however, the board of directors could delegate substantial authority with respect to a merger to a CEO and thereby vest the CEO with express actual authority. The board doubtless can (and usually does) authorize the CEO to hire legal and financial advisors, negotiate with potential merger partners, and negotiate the terms of the merger agreement.[9] The board also could authorize the CEO to explore alternative transactions.[10] Once the board of directors has approved the agreement and plan of merger, the board doubtless could (and usually does) delegate authority to the CEO to sign the merger agreement on the corporation’s behalf.[11]
Could the board thus authorize the CEO to decide whether and when to contact a potential target or buyer? I think this would be valid. It differs in degree but not in kind from the things we know a CEO can be given actual authority to do. While I haven’t found a case on point, I note that in the famous Trans Union case, CEO Van Gorkom initiated the sale of the company without first getting any authorization from the board to do so and, while that may have been unwise, the court did not use that fact to invalidate the deal.[12]
[1] Restatement (Second) of Agency § 14 C cmt. a.
[2] Restatement (Second) of Agency §§ 7 & 26; Restatement (Third) of Agency § 2.01.
[3] 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) with King World Prod., Inc. v. Financial 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).
[4] Restatement (Second) of Agency § 27; Restatement (Third) of Agency § 2.03.
[5] See, e.g., 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); 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).
[6] 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).
[7] See, e.g., Plant v. White River Lumber Co., 76 F.2d 155 (8th Cir.1935) (sale of all or substantially all corporate assets).
[8] Model Bus. Corp. Act Ann. § 8.25(e) (2001).
[9] See, e.g., Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 238 (Del. 2009) (noting without disapproval that the board authorized the CEO to conduct the negotiations with a prospective buyer).
[10] See, e.g., Buckhorn, Inc. v. Ropak Corp., 656 F. Supp. 209, 218 (S.D. Ohio 1987), aff'd, 815 F.2d 76 (6th Cir. 1987) (noting without disapproval that the board had authorized the CEO to explore six alternatives to a hostile takeover offer).
[11] See Steven A. Ramirez, The Chaos of Smith, 45 Washburn L.J. 343, 365 n. 48 (2006) (“Of course, a merger agreement signed by a CEO after board authorization, that is not subsequently repudiated by the board, would bind the corporation in important aspects.”)
[12] Smith v. Van Gorkom, 488 A.2d 858, 866 (Del. 1985).
