ADW Draft 9/25/11 AP edits 2/19/12
Chapter 8. Actions Binding the Corporation
Sources Used in this Chapter
Restatement (Third) of Agency §§1.01, 2.01, 2.03, 2.06, 4.01, 4.02 Restatement (Second) of Agency §§ 8A, 161 MBCA §§8.01, 8.20-8.25 Lee v. Jenkins Brothers Menard, Inc. v. Dage-MTI, Inc.
Concepts for this Chapter
When is corporation bound? o Actual authority o Apparent authority o Inherent authority Ascertaining corporate authority o Board: meeting rule o Corporate resolution / certificate of corporate secretary o Opinion letters
1 Introduction
Question: Who acts for the corporation?
Answer: This is the fundamental question addressed by Chapter 8. MBCA § 8.01 Requirements for and Functions of Board of Directors (reprinted on p. 179) provides the standard answer: the board of directors has the central role.
Shareholders delegate power to the board of directors to act on behalf of the corporation. The board of directors becomes the situs of corporate power—including the authority to bind the corporation. This power is carried out by corporate agents, primarily its officers.
The corporation can become liable to outside parties in contract only through its agents; corporate actors without authority (actual, apparent, inherent) cannot bind the corporation. This triggers a fundamental question for corporate outsiders: to what degree must the outsider investigate and confirm that the corporation is bound by the actions of one of its officewrsofficers?
While there is a modern trend towards protecting the legitimate expectations of outsiders, responsibilities remain for those attempting to bind the corporation in valid transactions.
In Commentaries on the Laws of England, William Blackstone (1723-1780) called the corporation a “little republic,” with power and legitimacy flowing from the shareholders— including authority to bind the corporation. The shareholders elect and empower the board of directors, which in turn vests select corporate officers and employees with the authority to act and bind the corporation.
Shareholders (electorate) ↓ Board of Directors (legislative organ) ↓ ↓ ↓ Corporation (officers and employees)
Shareholders, directors, and officers are each allocated different sets of powers and responsibilities. This allows not only for specialization and separation of duties and powers, but also for clearer distinctions between who has power to bind the corporation and who does not. Undesignated corporate agents who act without proper authority cannot bind the corporation.
Allocation of Powers
Shareholders o Elect, remove directors o Approve fundamental transactions
2 o Amend bylaws, pass resolutions Board of directors o Exercise corporate powers o Manage business and affairs Officers o Described in bylaws / appointed by board o Authority in bylaws or prescribed by board
A. Board Delegation of Authority to Corporate Executives
Corporate law relies heavily on the law of agency to determine whether or not a corporation is bound by the actions of its officers in a particular transaction. In corporate law, as in agency law, there are three broad categories of action in which a corporation can become bound: where an agent acts with: actual authority, apparent authority, or inherent authority.
In the authority continuum, the certainty of authority grows less reliable as agents and actions become increasingly distanced from the board of directors—the source of all corporate authority.
1. Basic Agency Concepts
Question: What is agency?
Answer: Agency governs the situation in which one person (the agent) acts on behalf of another (the principal).
Restatement (Third) of Agency, §1.01 Agency Defined
Agency is the fiduciary relationship that arises when one person (a “principal”) manifests assent to another person (an “agent”) that the agent shall act on the principal's behalf and subject to the principal's control, and the agent manifests assent or otherwise consents so to act.
http://web2.westlaw.com/toc/default.wl?vr=2.0&utid=16&scdb=REST- AGEN&rs=WLW11.07&rp=%2ftoc %2fdefault.wl&sv=Split&fn=_top&mt=LawSchoolPractitioner&service=TOC& abbr=REST-AGEN
Agency relations are central to business associations. All employees, including managers, may be agents of their employers.
As a result, agency defines the boundaries of a business association. Companies are responsible for the actions of their agents. If an employee of a firm acting on behalf of
3 the firm makes a contract, the firm bound by that contract. If an employee doing her job injures someone, the firm is responsible for the damages. Deciding who is an agent is one way to determine the scope and size of the business, and who and what it is responsible for.
Actual Authority: Express, Implied and Ratification
Actual Authority There are two kinds of actual authority:
Express actual authority o a clear statement by principal to agent o grows out of explicit words or conduct granting the agent power to bind the principal
Implied actual authority o authority can be inferred from a grant of authority or circumstances, including past dealings o grows out of words or conduct taken in the context of the relations between the principal and the agent
In determining actual authority, the focus is on the perspective of the agent and the principal.
Restatement (Third) of Agency §2.01 Actual Authority
An agent acts with actual authority when, at the time of taking action that has legal consequences for the principal, the agent reasonably believes, in accordance with the principal's manifestations to the agent, that the principal wishes the agent so to act.
http://web2.westlaw.com/toc/default.wl?vr=2.0&utid=16&scdb=REST- AGEN&rs=WLW11.07&rp=%2ftoc %2fdefault.wl&sv=Split&fn=_top&mt=LawSchoolPractitioner&service=TOC& abbr=REST-AGEN
Example 8.1 on page 181 illustrates actual authority, both express and implied.
In the corporate context, actual authority can be understood as follows:
Express actual authority is the clearest form of corporate authority and occurs when the board expressly approves the actions of a corporate agent. This must be done at a properly held meeting (with notice and quorum) and with board approval (usually a majority vote of those present unless the articles or bylaws include a supermajority requirement).
As discussed later in the chapter, the “meeting rule” has powerful consequences—director approval outside of a meeting is not binding unless an exception applies.
4 Implied actual authority is more subtle. This type of actual authority arises when there has been no express authority to act for the corporation, but it can be reasonably inferred from the circumstances and/or prior like events that the board of directors implicitly approved the conduct of its officer(s).
Implied actual authority can be determined in two ways. First, by considering the scope of express actual authority delegated to an officer, it may be inferred that the board has impliedly granted an officer to perform a broad set of tasks and anything incidental to executing them successfully. Second, a board history of approving (or disapproving) past similar actions of corporate agents may serve as a strong suggestion that action was already impliedly approved (or disapproved).
Thus, if in the past our horse owner had applauded sales of her horses and expressed interest in more of them, this would appear be a relatively clear case of implied actual authority (by way of past reaction to similar actions). The analogous situation in the corporate context would be knowledge and acquiescence by the board of an officer’s past similar conduct. Here, where the horse owner states “(n)ice sale. Have you found other buyers?” he is affirming the seller’s actions and encouraging him in the pursuit of future sales—impliedly authorizing him to make the sales.
Ratification
A principal becomes obligated to a third party by ratifying the act of another who, at the time of the act, lacked the power to bind the principal. When someone ratifies an unauthorized act done in her name, the ratification “relates back” so it is as if she conferred the authority before the act. Ratification can be inferred from acts, words or conduct of the principal showing an intention to ratify, and need not be made to the agent or even the other party. Ratification creates an agency relationship regardless of whether such a relationship existed at the time of the act.
Even in the event an officer’s actions do not bind the corporation when made, the board can create express actual authority through the ratification of a past act if the board has the power to authorize the act.
Example 8.4 on p. 182 illustrates ratification. “I didn’t expect him to sell Secretariat. But what the heck, it’s OK” is explicit and retroactive – as such, it operates as ratification.
Restatement (Third) of Agency § 4.01Ratification Defined
(1) Ratification is the affirmance of a prior act done by another, whereby the act is given effect as if done by an agent acting with actual authority. (2) A person ratifies an act by (a) manifesting assent that the act shall affect the person's legal relations, or (b) conduct that justifies a reasonable assumption that the person so consents.
5 http://web2.westlaw.com/toc/default.wl?vr=2.0&utid=16&scdb=REST- AGEN&rs=WLW11.07&rp=%2ftoc %2fdefault.wl&sv=Split&fn=_top&mt=LawSchoolPractitioner&service=TOC& abbr=REST-AGEN
Restatement (Third) of Agency, § 4.02 Effect Of Ratification
(1) Subject to the exceptions stated in subsection (2), ratification retroactively creates the effects of actual authority. Ratification is not effective: (a) in favor of a person who causes it by misrepresentation or other conduct that would make the contract voidable, (b) in favor of an agent against a principal when the principal ratifies to avoid a loss, or (c) to diminish the rights or other interests of persons, not parties to the transaction, that were acquired in the subject matter prior to the ratification
http://web2.westlaw.com/toc/default.wl?vr=2.0&utid=16&scdb=REST- AGEN&rs=WLW11.07&rp=%2ftoc %2fdefault.wl&sv=Split&fn=_top&mt=LawSchoolPractitioner&service=TOC& abbr=REST-AGEN
Note: Although ratification is included here under express actual authority, ratification can also be implied. If the board has knowledge of and acquiesces in an officer’s conduct, ratification may be inferred.
Apparent authority
Errata – p. 181: middle paragraph, last sentence should state: "Whereas actual authority focused on the agent and principal, in assessing apparent authority, the focus is on the perspective of the third party."
A principal may create apparent authority by written or spoken words or any other conduct that, reasonably interpreted, causes a third person to believe that the principal has consented to the agent acting for her.
With apparent authority, the focus is on the perspective of the third party, so apparent authority may be found – whether or not agent has actual authority – if the actions of the principal lead an outsider to rely on the agent.
That is, if the board creates the appearance that an officer was vested with the power to execute a transaction, courts may find the corporation is bound.
The appearance of authority can be created where officers’ duties and authority allow an outsider to assume authority exists for the transaction in question. Some officers are normally granted no power to bind the corporation, others are granted limited power to bind the
6 corporation within their area (for example, the vice president), and the President or CEO can generally bind the corporation in anything that is not an “extraordinary matter.”
Example 8.2 on p. 181 illustrates apparent authority. Because the theory of apparent authority has been developed to protect the reasonable expectations of outsiders, there cannot be apparent authority if the outsider actually knows the officer to the transaction has no authority. Here, our horse hypothetical creates apparent authority when the owner persuades an outsider to rely on her agent, even if the agent otherwise lacks authority (“Mr. Jones, this is my trusted agent, deal with her”).
Restatement (Third) of Agency §2.03 Apparent Authority
Apparent authority is the power held by an agent or other actor to affect a principal's legal relations with third parties when a third party reasonably believes the actor has authority to act on behalf of the principal and that belief is traceable to the principal's manifestations.
http://web2.westlaw.com/toc/default.wl?vr=2.0&utid=16&scdb=REST- AGEN&rs=WLW11.07&rp=%2ftoc %2fdefault.wl&sv=Split&fn=_top&mt=LawSchoolPractitioner&service=TOC& abbr=REST-AGEN
Inherent authority
Inherent authority is a third form of authority adopted by some courts. This authority is derived from the status of the corporate officer, most typically the CEO or president.
Inherent authority is based on the intuitive notion that even though an officer may not be authorized by the board to act for the corporation, nor appear to act for it under apparent authority, the officer’s very position creates the necessary authority. Under this theory, the corporation can become bound by its agent even if that agent possessed no actual or apparent authority.
Example 8.3 on p. 182 illustrates inherent authority. By her position, the owner in our horse hypothetical has acted with inherent authority in designating Bob to run her stables (“Bob, I’ve always trusted you. Run the stables for me”)
Restatement (Second) of Agency, §8A Inherent Agency Power
Inherent agency power is a term used in the restatement of this subject to indicate the power of an agent that is derived not from authority, apparent authority or estoppels, but solely from the agency relation and exists for the protection of persons harmed by or dealing with a servant or other agent.
7 Courts have struggled with inherent agency power. The Restatement (Third) of Agency (adopted in 2005 and published in 2006) replaced it with “liability of an undisclosed principal,” but the two concepts are not exactly the same.
Restatement (Third) of Agency §2.06: Liability of Undisclosed Principal
(1) An undisclosed principal is subject to liability to a third party who is justifiably induced to make a detrimental change in position by an agent acting on the principal's behalf and without actual authority if the principal, having notice of the agent's conduct and that it might induce others to change their positions, did not take reasonable steps to notify them of the facts. (2) An undisclosed principal may not rely on instructions given an agent that qualify or reduce the agent's authority to less than the authority a third party would reasonably believe the agent to have under the same circumstances if the principal had been disclosed.
Comment c. Rationale. The principle stated in this section will result in liability in a relatively small number of cases in which a third party deals with an agent but has no notice that the agent represents the interests of another. Under subsection (1), a principal is subject to liability to a third party who is justifiably induced to make a detrimental change in position by the conduct of an agent acting without actual authority when the principal has notice of the agent's conduct and its likely impact on third parties and fails to take reasonable steps to inform them of the facts.
http://web2.westlaw.com/toc/default.wl?vr=2.0&utid=16&scdb=REST- AGEN&rs=WLW11.07&rp=%2ftoc %2fdefault.wl&sv=Split&fn=_top&mt=LawSchoolPractitioner&service=TOC& abbr=REST-AGEN
The rationale for inherent agency power is tricky. In many cases, the court may reason that the principal (in Example 8.3, Priscilla) is in the best position to avoid the loss, so it is better to let the loss fall on her than on the innocent third party.
2. Authority of Corporate Officers
Question: When does an outside party have a duty to ascertain the authority of a corporate officer?
Answer: The answer to this question lies in the difference between the ordinary and the extraordinary.
Whether or not apparent authority exists hinges on whether the transaction is ordinary or extraordinary. Courts have held that there exists a duty for outside parties to ascertain the authority of the corporate agent in an extraordinary transaction—transactions which appear to lack business justification or are of such magnitude that board approval would
8 seem required. The facts and circumstances of each case must be closely analyzed to determine whether or not a transaction is extraordinary.
Lee v. Jenkins Brothers and Menard, Inc. v. Dage-MTI, Inc. take up the issue of the extraordinary transaction. In Lee v. Jenkins Bros., the court held that no extraordinary transaction existed. But the case is useful for both its discussion of what an extraordinary transaction is not as well as for its listing of the factors courts weighs in determining whether a transaction is extraordinary. In Menard, Inc. v. Dage-MTI, Inc., the court reversed the trial court’s finding of an extraordinary transaction. The case is helpful for its close parsing of ordinary and extraordinary transactions.
L ee v. Jenkins Bros ., 268 F.2d 357 (2d Cir. 1959)
Facts: The president of Jenkins Brothers, Franham Yardley, promised a new executive (Lee) that the corporation would provide him a pension of $1500 a year at age 60 but Yardley did not have board approval to make such a promise.
Issue: Did President Yardley have authority to make such a promise to Lee?
Holding: Yes, a life pension offered by the company’s president to attract a new executive could be within the president’s apparent authority (no extraordinary transaction).
Reasoning: President Franham Yardley did not have actual authority to make the promise; he had neither board approval for express actual authority nor the circumstances necessary to infer implied actual authority.
However, there might have been apparent authority: “the combination of circumstances here present would . . . make the question of apparent authority an issue for the jury.”
The court ultimately held that the president’s promise was not “extraordinary” because the contract did not leave the corporation vulnerable to significant liabilities nor did it affect future managerial policy at the company.
The court reasoned that apparent authority … depends not only on the nature of the contract involved, but also on factors such as: 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.
The court held that, 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
9 directors (or even the shareholders) could properly handle it. Beyond such 'extraordinary' acts, whether or not apparent authority exists is simply a matter of fact.
The modern approach to extraordinary transactions is illustrated by Menard, Inc. v. Dage-MTI, Inc.
Menard, Inc. v. Dage-MTI, Inc., 726 N.E.2d 1206 (Ind. 2000)
Facts: Arthur Sterling was president and member of the board of directors of Dage- MTI, Inc., a close corporation. Sterling negotiated and signed a sales agreement to sell a 30-acre parcel of land owned by Dage-MTI to Menard, a home improvement chain and a sophisticated buyer.
Sterling had operated without board oversight or approval for many years. In 1993a new investor, Kerrigan, placed himself on the board and sought to rein in Sterling and subject Dage management to board control. In October 1993, Menard, Inc. showed interest in purchasing the parcel of land and made a formal offer to Sterling to purchase 10.5 acres of the 30-acre tract. Sterling presented the offer to the Dage board, which rejected it. Sterling informed Menard’s representative that the board had objected to several provisions of the offer.
After the rejected offer, Sterling called Kerrigan and told him Menard would make a second offer, this time for the entire 30-acre parcel. Sterling offered to the board a proposed consent resolution authorizing him to offer and sell the parcel. Sterling, Kerrigan, and Kerrigan’s lawyer and financial advisor discussed the Menard offer and Sterling was told that he was not to negotiate the specific terms of a sale in soliciting offers from Menard for the 30-acre parcel. Gorkinsky, Kerrigan’s lawyer, emphasized to Sterling that any offer from Menard would require board review and acceptance.
Question: Did Sterling have any actual authority?
Answer: No.
Question: Did Sterling have any apparent authority?
Answer: No, according to the trial court. Menard understood that Sterling could not offer or sell without further board approval.
Facts continued: In early December 1993, Menard made a second offer to Sterling. This agreement contained provisions identical to those found objectionable in the first agreement. Unlike the first agreement, however, the second offer was made for the entire 30-acre parcel for a price of $1,450,000. Sterling spent a week discussing the offer with Menard, unbeknownst to any other Dage board members. Sterling negotiated several minor revisions to the Menard offer before signing it acting on behalf of Dage. Menard then accepted. The transaction closed, and over four months later the Dage
10 board sought to rescind the contract based on lack of authority for Sterling to bind the corporation. Menard sought specific performance and the sale of the land.
The lower court ruled that Sterling lacked both actual and apparent authority because this was an “extraordinary transaction” by Sterling as president (and therefore that the transaction should be rescinded). The court of appeals affirmed.
Issue: Did Sterling have authority to bind the company to sell the parcel?
Holding: Yes. Sterling, as president, had inherent authority to negotiate the land purchase.
Reasoning: First, the court accepted the trial court’s factual finding of no apparent authority. Instead, the court concluded that it was a question of inherent authority.
The court analyzed inherent authority using the Restatement (Second) of Agency §8A (discussed above) and §161 as follows:
An agent’s inherent agency authority subjects his principal to liability for acts done on his account which:
1. usually accompany or are incidental to the 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.
The court reasoned:
1. (usual or incidental acts by agent): Given that Sterling had purchased real estate for Dage without board approval in the past, Sterling’s actions at issue in the case were acts that “usually accompany or are incidental to transactions which he was authorized to conduct” as president of Dage.
2. (reasonable belief by a third party): Because Sterling was a “general officer” of the corporation, Menard (a third party) is not required to scrutinize too carefully the mandates of this permanent agent who did no more than what is usually done by a corporate president. Therefore, Menard “reasonably believed,” based upon previous actions of Sterling and his statement that he was “duly authorized,” that Sterling was authorized to enter the transaction on behalf of the company. The court
11 said this was especially true because Sterling was himself a member of the board, because the agreement specified that the signer had authority to sign it (though an agent cannot create his own authority), and because Menard was aware that Dage’s corporate counsel was involved in the review of the terms of the agreement. (The failure of Dage's lawyer to protect the corporation from a wayward agent may have been critical in the case.)
3. (third party has no notice): Menard had no notice of the “consent resolution proposal” or that Sterling’s authority was only limited to soliciting offers. “The record fails to reveal a single affirmative act that Dage took to inform Menard of Sterling’s limited authority with respect to the 30-acre parcel.” .
Restatement (Second) of Agency §161 Unauthorized Acts of General Agent
A general agent for a disclosed or partially disclosed principal subjects his principal to liability for acts done on his account which usually accompany or are incidental to transactions which the agent is authorized to conduct if, although they are forbidden by the principal, the other party reasonably believes that the agent is authorized to do them and has no notice that he is not so authorized.
http://web2.westlaw.com/toc/default.wl?vr=2.0&utid=16&scdb=REST- AGEN&rs=WLW11.07&rp=%2ftoc %2fdefault.wl&sv=Split&fn=_top&mt=LawSchoolPractitioner&service=TOC& abbr=REST-AGEN
Remember that the Restatement (Second) was superseded by the Restatement (Third) in 2005.
Question: Was this an ordinary or an extraordinary transaction?
Answer: According to the trial court, it was an extraordinary transaction. This finding of fact created the problem for a finding of apparent authority, and pushed the court to use the inherent agency power analysis.
Reasoning continued: Finally, Dage took three and a half months to disavow the deal, suggesting that there had been acquiescence to Sterling’s actions before the company decided (maybe because of a higher offer) to try to back out.
Dissent: In a dissent that took issue with the disposition of the case but not its legal reasoning, Chief Justice Shephard pointed out that Sterling knew that the transaction had to be submitted to the Board, Menard knew that the transaction had to be submitted to
12 the board, and both ignored that and signed the document anyway. Justice Shephard felt that the document should not be binding.
Justice Shephard pointed out that corporate lawyers would be left unsure of how to proceed because of the majority opinion. “It is difficult to know,” Justice Shephard wrote, “how lawyers will advise their clients after today’s decision . . . the black letter law cited in today’s opinion points toward a conclusion that the buyer’s offer was not accepted by the seller.” Justice Shephard’s concern was that the opinion created a carte blanche for third parties to trust the representations of presidents.
Trial court: Indiana Supreme Court Dissent “The record persuasively “[w]hile representations of the “It is difficult to know how demonstrates that the land principal to the third party are lawyers will advise their transaction in question was an central for defining apparent [corporate clients] after ‘Extraordinary transaction’ for authority, the concept of today’s decision. Where all Dage, which manufactures inherent authority differs and parties to a corporate electronic video products. *** originates from the customary transaction understand that Thus, the [trial] court authority of a person in the board approval is required, concluded that "Sterling was particular type of agency *** the black letter law points not performing an act that was relationship so that no towards a conclusion that the appropriate in the ordinary representations beyond the buyer’s offer was not accepted course of Dage's business." fact of the existence of the by the seller.” agency need be shown.”
The Menard case shows a wide range of interpretations. The trial court thought it an issue of apparent authority, the Indiana Supreme Court found it a matter of inherent authority while accepting that the transaction was extraordinary, and the dissenting opinion considered it an extraordinary transaction and an incorrect application of legal principles.
Question: What should Dage have done?
Answer: It is unclear what Dage should have done. Notified Menard that Sterling did not have authority? Controlled Sterling better? Controlled its corporate counsel better? Objected sooner?
Points for Discussion (pp. 191-192)
1. Analysis of decision. It seems the appeals court wanted to uphold the transaction. The facts indicated that Menard relied on Sterling. Even though the reliance might not have been reasonable under regular “apparent authority” analysis, there was enough in terms of corporate counsel’s presence and acquiescence to push the envelope. Good facts may have made bad law.
2. Third-party expectations. It seems unlikely that, going forward, third parties would decide to count on a questionable transaction being upheld. Notice that in this case it
13 took two appeals and a divided supreme court to uphold the deal. (The land must have been quite valuable.)
3. Investigation of authority. An important circumstance in investigating authority is whether the corporate agent has a conflict of interest. If the agent does, then the third party must treat the transaction as extraordinary and there is much more reason to question the agent’s authority.
4. Corporate acquiescence. Failure to repudiate – remember the 3 ½ -month delay before Dage repudiated the deal – is relevant in gauging implicit ratification.
Bonus Question: Would the analysis be different if Sterling’s spouse was the commercial realtor putting together the deal – for a hefty commission?
Answer: This slight variation in the facts is very important because the ordinary and extraordinary distinction is based on the facts and circumstances of each individual case. That Sterling’s spouse is the commercial realtor in the deal should put the third party, Menard, on notice that (1) the transaction is extraordinary given the conflict of interest and (2) it has a duty to ascertain authority.
Investigating and ascertaining corporate authority is the topic of the next section of the chapter.
3. Ascertaining Corporate Authority .
Question: What lengths must corporate lawyers for outside party go in order to investigate corporate authority? What evidence is sufficient? Who is the outside party really protecting?
Answer: Generally, counsel representing a party to an important transaction will demand persuasive evidence that the agents claiming to act with authority for the corporation have such authority.
Question: How does counsel investigate an agent’s corporate authority?
Answer: Often, by requesting to see the minutes of the meeting at which a resolution formalizing the board’s grant of authority was adopted.
Such evidence may be buttressed by (1) a provision of statutory law, (2) the articles, (3) the bylaws, or (4) evidence that the corporation has permitted the officer to represent it in similar situations and since recognized, approved or ratified those actions.
Question: How can third parties know the evidence they have obtained is authentic?
14 Answer: Generally, third parties seeking to ascertain authority can have the secretary of the corporation (or other bookkeeper) certify the documentation. This saves third parties the hassle of conferring personally with directors to confirm that they have authorized the officer to act.
Question: Who benefits from this process?
Answer: The shareholders and other constituents of the corporation for which authority is in question. The investigation is to ensure that the corporation will not be bound by a renegade agent.
Hypothetical 8.1 (p. 192) – Part One
You represent Home Supplies, Inc. Home Supplies is negotiating a contract with Construx, Inc (a large construction company) to build a new warehouse for Home Supplies. Home Supplies is worried about Construx’s finances and asks for a guarantee. Construx says its equipment supplier - Big Machines, Inc. - will provide one
Question: Why is an equipment supplier giving a large financial guarantee?
Answer: There seems to be no reason. You should get the guarantee in writing, and investigate authority.
Hypothetical 8.1 – Part Two
You receive the following document:
Guarantee
Big Machines, Inc., duly incorporated under the laws of the State of Delaware, 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
Question: Is this enough? What questions should you ask?
Answer:
15 Is Big Machines for real? How can you find out? If it is a public company, it is easy enough to look at its SEC filings. If it is not, you may be able to check its incorporation status, Dunn & Bradstreet, phone book, etc.
Is the guarantee for real? Is it an extraordinary transaction? If it is extraordinary, you must investigate further to determine whether the agent for Big Machines, George Kraft, has authority.
What is the business purpose of guarantee for Big Machines? It is hard to understand why an equipment supplier would guarantee a construction contract. Why is Big Machines guaranteeing the obligations of another company, one that might be financially risky?
Why is this guarantee coming from the vice president/treasurer? Is Kraft actually the vice president or the treasurer? Perhaps the treasurer gives the company’s financial guarantees? What if the corporate bylaws do not specifically mention guarantees?
Hypothetical 8.1 – Part Three
In order to determine whether Big Machine’s treasurer can give a financial guarantee, you look to the bylaws:
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
Question: Is this enough to show authority? Are guarantees a type of “evidence of indebtedness”? Is this something usual for a company’s finance department?
Answer: This is not enough. You need the minutes where the board gives specific approval, especially since this transaction is hard to explain coming from Finance Department and hard to explain on business grounds.
Question: Is Kraft really the treasurer? Is he really the vice-president?
Answer: If Big Machines is a public company, this would be easy enough to find in SEC filings. If it is not a public company, state filings (annual reports) often include this information. Or you might go back to Dunn & Bradstreet and making a phone call to company.
16 Hypothetical 8.1 – Part Four
Now you look to the board’s action:
Board Consent
After due notice of the matter, the undersigned directors of Big Machines, Inc., constituting a majority of the board, considered and approved in writing the following:
RESOLVED, that the board of directors authorizes George Kraft, Vice President & Treasurer of the Company, to guarantee construction contract of Construx Corp. up to $10 million.
Robert Able Ramona Best Richard Cornacchione Royce Demphrey Date: September 22, 2009
Question: Is this enough?
Answer: Now we are looking at action by the board – the situs of corporate power. The document mentions Kraft, but it still may not be enough.
Question: Does this signing constitute valid board action?
Answer: There is no indication that the board met on this matter. Remember that board action must happen at a meeting, after due notice and proper quorum and majority vote of directors present. According to the meeting rule the board of directors must have met.
Question: What purpose is the meeting rule serving here?
Answer: The power of the board is collective. It is important for group discussion and dynamics. Shareholders delegate power to board, not to directors.
Question: Would this have worked if it were all directors giving written consent?
Answer: Yes, under most modern statutes. Sometimes convenience and urgency trump rationale for meeting rule.
Hypothetical 8.1 – Part Five
17 Now you investigate how the board authorized Kraft:
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 September 28, 2009 of the Corporation's board of directors.
Sincerely yours, U. R. Minion U.R. Minion, Secretary
Minutes
At a special meeting for which notice was waived and at which a quorum of directors was present (three by Skype connection), the board unanimously resolved:
RESOLVED, that the board authorizes Charles Kraft, Vice President & Treasurer of the Company, to guarantee the construction contract between Construx Inc and Home Supplies, Inc. (dated September 28, 2009) up to $10 million.
Respectfully submitted, U.R. Minion U R Minion, Secretary Big Machines, Inc
Question: Is this enough?
Answer: These documents seem to be enough:
It is okay that notice of meeting was waived. It is sufficient that quorum of directors was present. The Board vote is enough. Skype (electronic hear and be heard) is an acceptable means of attending the directors meeting. See MBCA §8.20(b) (if the board permits this and the articles and bylaws do not provide otherwise). The mention of the contract is good (though the fact that it was dated the same date as the meeting is strange).
But some elements raise concerns:
18 There is a discrepancy between first name of Kraft in the guarantee itself (George) and in the minutes (Charles). The resolution authorizes Kraft to guarantee the contract, not for Kraft to guarantee “on behalf of corporation.”
Still, if these concerns are answered (or corrected), this is enough apparent authority to give the third party confidence that the transaction is actually authorized. Even if it later turns out to be a sham, the third party can proceed on a theory of apparent authority. The corporation can be bound by a falsifying secretary and its treasurer/vice-president- finance.
Wrap-Up Question: Why do you ascertain corporate authority?
Answer: You need to be sure that the corporation will be bound by the transaction in question. As an outside third party you are making sure that the corporate agents really have authority, thus protecting the corporation and its constituents from renegade agents.
Wrap-Up Question: How do you ascertain corporate authority?
Answer: you need evidence that the individuals who purport to act for the corporation have authority. That evidence may come from, for example: Provisions of the statutory law Articles of incorporation Bylaws Board of directors resolutions (including the minutes and a secretary’s certificate) Evidence that the officer has done the same thing before and the corporation approved or ratified those actions
B. Formalities of Board Action
1. Board Action at a Meeting
Question: How does the board of directors act?
Answer: The directors have authority as a board, not individually. They act as a body. They have no authority to act except when assembled in a board meeting. The 1879 Baldwin v. Canfield case (discussed on p. 195) illustrates this.
Question: What does the “meeting rule” require?
Answer: It requires that the board acts as a body and takes formal action by vote at a meeting. Each director gets one vote. No proxies.
Question: What are the exceptions to the meeting rule?
19 Answer: Common law exceptions include:
Close corporations When necessary to protect innocent third parties When the court finds it justified o Unanimous director approval o Emergency o Unanimous shareholder approval o Majority shareholder – director approval
These are expressed in MBCA §8.21, which allows board action without a meeting under some conditions (e.g., on the unanimous written consent of the directors)
MBCA § 8.21. Action Without Meeting.
(a) Unless the articles of incorporation or bylaws provide otherwise, action required or permitted by this Act to be taken at a board of directors' meeting may be taken without a meeting if the action is taken by all members of the board. The action must be evidenced by one or more written consents describing the action taken, signed by each director, and included in the minutes or filed with the corporate records reflecting the action taken. (b) Action taken under this section is effective when the last director signs the consent, unless the consent specifies a different effective date. (c) A consent signed under this section has the effect of a meeting vote and may be described as such in any document.
In addition, board meetings do not need to be conducted in person.
MBCA § 8.20. Meetings.
(a) The board of directors may hold regular or special meetings in or out of this state. (b) Unless the articles of incorporation or bylaws provide otherwise, the board of directors may permit any or all directors to participate in a regular or special meeting by, or conduct the meeting through the use of, any means of communication by which all directors participating may simultaneously hear each other during the meeting. A director participating in a meeting by this means is deemed to be present in person at the meeting.
2. Notice and Quorum
Regular meetings do not necessarily require notice.
MBCA § 8.22. Notice of Meeting.
20 (a) Unless the articles of incorporation or bylaws provide otherwise, regular meetings of the board of directors may be held without notice of the date, time, place, or purpose of the meeting.
However, special meetings do require notice
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.
Question: What happens if the company fails to give the required notice?
Answer: Action taken at a board meeting held without the required notice is invalid.
Question: Can notice be waived?
Answer: Yes. A director can sign a waiver before the meeting. In addition, if the director attends and participates in the meeting (beyond simply coming to complain about the lack of notice) it may constitute waiver.
MBCA § 8.23. Waiver of Notice.
(a) A director may waive any notice required by this Act, the articles of incorporation, or bylaws before or after the date and time stated in the notice. Except as provided by subsection (b), the waiver must be in writing, signed by the director entitled to the notice, and filed with the minutes or corporate records. (b) A director's attendance at or participation in a meeting waives any required notice to him of the meeting unless the director at the beginning of the meeting (or promptly upon his arrival) objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to action taken at the meeting.
Question: What constitutes a quorum at a board of directors meeting?
Answer: The statutory norm for a quorum is a majority of the directors, although a company’s bylaws or articles of incorporate may increase it above a majority, or decrease it to no fewer than a third of the directors.
MBCA § 8.24. Quorum and Voting.
21 (a) Unless the articles of incorporation or bylaws require a greater number or unless otherwise specifically provided in this Act, a quorum of a board of directors consists of (1) a majority of the fixed number of directors if the corporation has a fixed board size; or (2) a majority of the number of directors prescribed, or if no number is prescribed the number in office immediately before the meeting begins, if the corporation has a variable-range size board. (b) The articles of incorporation or bylaws may authorize a quorum of a board of directors to consist of no fewer than one-third of the fixed or prescribed number of directors determined under subsection (a).
Question: Once a quorum is established, how many of the directors must vote for a measure for it to constitute board action?
Answer: generally, a majority of the directors present.
MBCA § 8.24. Quorum and Voting.
(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 the articles of incorporation or bylaws require the vote of a greater number of directors.
Question: What happens if the board acts at a meeting without the required quorum?
Answer: Action taken in the absence of a quorum is invalid.
Question: What happens if there is a quorum at the start of a board meeting, but then directors walk out and the meeting no longer has a quorum?
Answer: Action taken by the directors after a quorum is lost or broken is not valid. (This rule is different from the one for shareholders' meetings, where once there is a quorum at the beginning of the meeting, it's good for all actions at the meeting. See MBCA §7.25 ("share ... represented at a meeting ... is deemed present for quorum purposes for the remainder of the meeting").
Hypothetical 8.2 (p. 197) walks through the mechanics of notice and quorum.
3. Committees of the Board
Question: Can the board delegate its functions to committees?
Answer: Yes. Corporate statutes allow boards to delegate responsibility for many functions to committees authorized to exercise the authority of the board.
22 MBCA § 8.25. Committees.
(a) Unless this Act, the articles of incorporation or the bylaws provide otherwise, a board of directors may create one or more committees and appoint one or more members of the board of directors to serve on any such committee. (b) Unless this Act otherwise provides, the creation of a committee and appointment of members to it must be approved by the greater of (1) a majority of all the directors in office when the action is taken or (2) the number of directors required by the articles of incorporation or bylaws to take action under section 8.24. (c) Sections 8.20 through 8.24 apply both to committees of the board and to their members. (d) To the extent specified by the board of directors or in the articles of incorporation or bylaws, each committee may exercise the powers of the board of directors under section 8.01. (e) A committee may not, however: (1) authorize or approve 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 this Act requires be approved by shareholders; (3) fill vacancies on the board of directors or, subject to subsection (g), on any of its committees; or (4) adopt, amend, or repeal bylaws. (f) The creation of, delegation of authority to, or action by a committee does not alone constitute compliance by a director with the standards of conduct described in section 8.30. (g) The board of directors may appoint one or more directors as alternate members of any committee to replace any absent or disqualified member during the member's absence or disqualification. Unless the articles of incorporation or the bylaws or the resolution creating the committee provide otherwise, in the event of the absence or disqualification of a member of a committee, the member or members present at any meeting and not disqualified from voting, unanimously, may appoint another director to act in place of the absent or disqualified member.
Question: What are some examples of common board committees?
Answer: Some examples include: Executive Audit Finance Nomination Compensation
23 C. Legal Opinions
Question: What are legal opinions?
Answer: Legal opinions in the corporate context are memoranda or letters that express a lawyer’s conclusion as to how the relevant law applies to a fact pattern. Such opinions are often requested by parties to a transaction who want assurances that the transaction is legally binding and does not violate any legal standards.
Question: What function does the legal opinion serve?
Answer: Opinions may address everything from corporate housekeeping, such as the company’s standing under state corporate law, to whether a transaction is valid and binding, to whether the transaction is legal under substantive law (such as securities law).
Question: Who decides what goes into a legal opinion?
Answer: Bar associations (most notably the ABA’s Tri-bar Opinion Committee) write manuals that describe the style, wording and content of legal opinions. They mandate how an opinion is to be dated, to whom it should be addressed, and limitations on scope and reliance on facts provided by third parties. They are formalized documents, often based on a model published by the committee.
Question: How much legal analysis does an opinion include?
Answer: It depends. An unqualified legal opinion expresses the highest degree of confidence by the counsel drafting the opinion—there are no qualifications to the opinion being rendered. The corporation can bank on this additional level of assurance.
Assumptions do not necessarily undermine the opinion; normal and reasonable assumptions are permitted. Exceptions, however, would make the opinion qualified. That is not problematic, but it does indicate the lawyer is less confident in the opinion.
If there is a great deal of uncertainty in the qualified opinion, it may be termed a “reasoned” opinion, in which the attorney giving the opinion must engage in a great deal of (expensive and time-consuming) legal research and analysis. A reasoned opinion may delay or derail the transaction for which it is given.
Example 8.7 (p. 200) The Third Party Legal Opinion (the “Remedies Opinion”)
Question: What is a third party legal opinion?
Answer: Also called a “remedies opinion,” it is a legal opinion given by lawyer for one party to a transaction to another (“third”) party that assures the third party that the
24 transaction documents will constitute a legal, binding, obligation of the lawyer’s client, enforceable in accordance with their terms. In other words, if the third party needs it, it can seek a remedy against the lawyer’s client based on the transaction documents.
This structure is a little unusual, since the lawyer works for one party, but delivers the opinion to another party to the transaction.
[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”).
Question: What is the date of the opinion?
Answer: The opinion must be dated on the closing date. The legal situation it describes must be in force at the moment the transaction is consummated.
Question: To whom is the opinion addressed?
Answer: A lawyer delivering a third party legal opinion may prefer to limit the addressees (and, in that way, the parties who may rely on the opinion) to as few parties as possible. Normally the other party to the transaction, the one seeking comfort regarding the lawyer’s client, is the natural addressee.
Question: How should the lawyer describe his role?
Answer: The lawyer delivering the opinion will identify itself as “counsel” to its client in connection with the transaction in question. Sometimes, if the lawyer has been engaged for this transaction, and has not represented that client for long, the lawyer may describe himself as “special counsel” or “special FILL IN STATE counsel” in order to signal that he did not, for example, incorporate the client and is therefore relying on other sources for information regarding that process.
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.
25 Question: What does the lawyer giving the opinion have to do/investigate?
Answer: The opining lawyer may simply state that he has reviewed the documents necessary to give the opinion. In some cases, the lawyer may provide a list of the documents he has reviewed, perhaps in an effort to limit the documents for which he is responsible.
It is normal for the opinion giver to rely on certificates or other materials from public officials regarding issues such as good standing and filing. Otherwise the diligence necessary to give a basic opinion would be burdensome (and expensive).
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.
Question: What law is an opinion given under?
Answer: The opining attorney is discussing the binding nature of the transaction documents on his client, therefore the opinion should consider the state law governing the transaction documents, as well as the law of the state in which the client is organized (e.g. Delaware). In addition, some attorneys also specify that the opinions are limited to the federal law of the United States.
If the contract is governed by, or the client is incorporated in, a state where the opining lawyer is not licensed to practice, it may be necessary to have a second [that state] law opinion to rely upon.
Based upon and subject to the foregoing and the further assumptions, limitations and qualifications hereinafter expressed, it is our opinion that:
Question: Why does the opinion mention “opinions” here, halfway through?
Answer: It is confusing because the word “opinion” is being used two ways. First, it refers to the entire letter/document. The whole thing is a legal “opinion.” However, within the document, normally in numbered paragraphs, there are a series of specific “opinions”: particular legal conclusions based on the lawyer’s knowledge and investigation. The “opinion” thus includes a series of “opinions.”
1. The Company is duly incorporated, validly existing and in good standing under the laws of the State of New Columbia.
Question: What does the corporate status opinion (para. 1) mean?
Answer: The corporate status opinion means that the company has taken the proper
26 steps to be incorporated in its jurisdiction, and after that. It also indicates that the opinion giver has obtained assurances (probably in the form of a certificate) from that secretary of state indicating that the corporation has satisfied all the ongoing requirements for good standing (paying texes etc.)
2. Company is authorized to transact business in the State of New Columbia
Question: What does it mean for a company to be authorized to transact business in a state?
Answer: A company may need to register in states, in addition to the state in which it incorporated, in which it does business.
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.
Question: What does the shares opinion mean?
Answer: The shares opinion assures the addressee that the shares it is purchasing are the company’s to sell. The opinion giver is saying that the shares were properly issued and sold, and that no additional money is owing on them.
4. The Company has the corporate power to execute, deliver and perform its obligations under the Transaction Documents.
Question: What does the corporate power and authority opinion mean?
Answer: the corporate power and authority opinion assures the addressee that the company has the power under corporate law to enter to execute the documents, and to do what it is obligated to do under those documents. It is saying, for example, that the obligations will not be outside the scope of what the company can do.
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.
Question: What does the corporate actions opinion mean?
Answer: The corporate actions opinion means that the company has taken all the steps it needs to authorize the signing of the documents, and to perform the obligations in the documents. The authority of the company officers or representatives who are signing the documents is actual authority.
27 Question: What documents does the lawyer have to look at to give opinions #1 and #5?
Answer: Just as when investigating authority, the lawyer may want to look at filed articles of incorporation, secretary of state records, corporate articles and bylaws, board resolutions, secretary certificates, and transaction documents, among other things.
6. The Agreement constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms.
Question: What does the remedies opinion mean?
Answer: The remedies opinion means that the document in question is legal: that the legal requirements for formation of a contract have been satisfied; valid: that the agreement is not incomplete, vague or confusing (so that a court would refuse to give it effect;) binding: that there is no applicable law or public policy that makes it void; and enforceable: that a court would provide a remedy should the party fail to perform its obligation under the agreement.
This paragraph provides the “remedies opinion” – the heart of the third party legal opinion, which is sometimes known as a whole as the “remedies opinion.”
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.
Question: What does the no violation opinion mean?
Answer: This opinion means that the opinion giver has examined the document in question and compared it to the company’s articles of incorporation as well as other agreements and court orders listed in the officer’s certificate for the transaction, and there is no conflict.
28 Question: Why does the opinion use the phrase “known to us” in defining “Court Orders”?
Answer: The knowledge qualifier limits the orders for which the opinion giver is responsible.
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.
Question: What does the no violation of law opinion mean?
Answer: The no violation of law opinion complements the remedies opinion. It provides comfort regarding the legal consequences of the transaction (under the law specified).
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.
Question: What does the no approvals or consents opinion mean?
Answer: The no approvals or consents opinion means that the due execution and consummation of the transaction documents and the transaction do not require any consents or other approvals (which is true for most transactions). If such consents or approvals are required, then they may be mentioned in the opinion, which can then be revised with language like “that have not already been obtained.”
The opinions expressed above are subject to the following assumptions, qualifications and limitations
Question: Why does the opinion then have assumptions and qualifications?
Answer: There are some situations (e.g. bankruptcy) in which the legal outcome may be difficult to predict exactly. In addition, the opinion giver’s knowledge of the company may be incomplete, and he may need to assume certain facts, or rely on assurances from third parties. These are usually laid out in lettered paragraphs which follow the numbered opinion paragraphs.
(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.
29 (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.
Question: What are the purposes of the bankruptcy and equitable principles exceptions?
Answer: The bankruptcy and equitable principles exceptions identify situations in which the legal conclusions of the opinion giver may not hold. In these situations, the enforceability at the heart of the third party legal opinion may be in question.
There is some difference in practice regarding the placement of the bankruptcy and equitable principles exceptions. Some lawyers place them at the end of the opinion, as in this example, reasoning that the very unpredictability that they recognize means that they may impact any or all of the opinions given. Others place these two exceptions directly after the “remedies opinion” (para. 6 here), reasoning that bankruptcy and equitable principles have no effect on things such as the due incorporation of the company, or whether shares were validly issued, and therefore placement at the end of the opinion is over-inclusive.
(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.
Question: What do these exceptions mean?
Answer: These exceptions, relating to attorneys fees and arbitration, are two common areas in which an opinion giver may not want to express an opinion. They illustrate the need for careful drafting and review of opinions, which may seem to apply to the whole transaction, and yet employ the exceptions and qualifications to remove certain areas from the scope of the opinion.
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
Question: What does the no litigation paragraph mean?
30 Answer: This paragraph, which is sometimes given as an “opinion” in a numbered paragraph, again illustrates opinion giver limiting the scope of his opinion with a knowledge qualifier. It is probably unreasonable for the opinion giver to be responsible for any pending or overtly threatened suit against the company, and so he limits it to suits “to his knowledge.”
This paragraph also illustrates the “fact” – “law” tension in legal opinions. Ideally, the legal opinion represents the opinion giver’s legal conclusions, and should not be used to provide comfort for factual statements. Factual information may be better suited to the company’s own representations and warranties in the transaction documents themselves. Nevertheless, there is sometimes some pressure for the opinion giver to include more in the legal opinion.
Is the existence of pending or threatened litigation a factual statement or a legal 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.
Question: Who can rely on the opinion?
Answer: This paragraph specifies that only the addressees of the opinion may rely on it. It also frees the opinion giver from responsibility for updating the opinions when circumstances change. It analyzes the legal state of affairs on the date of the opinion (at closing).
Question: What happens if there is an error in the legal opinion?
Answer: Errors in legal opinions to not necessarily lead to liability for the erring lawyer and his law form. A mistaken or legally mistaken opinion may not necessarily lead to malpractice liability. To collect damages, a disappointed party must demonstrate that the opinion was 1) negligently rendered and 2) that any losses were proximately caused by the lawyer’s negligence.
Very truly yours,
Signature of Opining Lawyer or Firm
Question: Who signs the opinion? Whose opinion is it?
31 Answer: Often only partners or similar principals in a firm may sign an opinion, which is seen as representing the opinion of the firm.
32 Summary
The main points of this chapter are:
The authority to bind the corporation tracks agency authority o “Actual authority” arises when the corporation (through its board) manifests to the agent express or implied consent to the agent binding the corporation o “Apparent authority” arises when the corporation (through its board) acts so as to create a reasonable belief in the third party that the agent is authorized o “Inherent authority” arises when social or commercial policies place on the principal (the corporation) the burden to be watchful of its agents
The board acts only at meetings (the meeting rule) and all authority must come from action of the board o Board meetings must be properly noticed; a quorum (typically board majority) must exist; the action must be approved by a majority of directors present o Board resolutions, certified by the corporation’s secretary, constitute prima facie proof of board action – thus creating apparent authority o Many board functions can be delegated to board committees, but some not (declare dividends, approve mergers)
Legal opinions can be used to assure parties of corporate authority o Outside counsel to corporation reviews documents and opines on authority of corporation and its agents o Opinions can be “qualified” or “unqualified.” Legal analysis happens in “reasoned” opinions.
33