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Chapter Five Directors

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Chapter Five Directors CHAPTER FIVE DIRECTORS Section 5.01 Generally Every Oregon business corporation must have a board of directors. ORS 60.301(1); Necanicum Inv. Co. v. Employment Dept., 345 Or 138, 190 P3d 368 (2008). A corporation's board of directors has full power and authority to manage the corporation. ORS 60.301(2). "The board of directors of a corporation represents the corporate body, and the directors are entrusted with authority to conduct and manage the corporate affairs." Mease v. Warm Mineral Springs, Inc., 128 So2d 174, 179 (Fla 2d DCA 1961). A corporation’s "general business" is "under the control and management of a board of directors. Under this statute the directors have full authority to act for the corporation, and represent it in all matters related to corporate business." (citation omitted) Crowe v. Gary State Bank, 123 F2d 513, 516 (7th Cir 1941). Although the shareholders "own" the corporation, their power to manage the corporation is extremely limited. Shareholders "have no direct power to manage the affairs of the corporation" and "must function through the board of directors." Lycette v. Green River Gorge, Inc., 21 Wash 2d 859, 862, 153 P2d 873, 875 (1944). The shareholders’ management power is generally limited to the election of directors and to voting on certain extraordinary events – events such as mergers, the sale of all corporate assets, dissolutions and the like. Shareholders may not assert direct management authority over a corporation which they own, even if a majority of shareholders so vote. Kelly v. Galloway, 156 Or 301, 66 P2d 272, 68 P2d 474 (1937). Shareholders "have no direct power to manage the affairs of the corporation" and "must function through the board of directors." Lycette v. Green River Gorge, Inc., 21 Wash 2d 859, 862, 153 P2d 873, 875 (1944). A. Collective power, not individual power. The power of the directors is a collective power – not an individual one. A corporation’s board of directors may only act by collectively deliberating and acting. A director "exercises his corporate office only through the collective action of the Board of which he is a member." Georgia Casualty and Surety Co. v. Seaboard 95 Section 5.01 Surety Co., 210 F Supp 644, 651 (ND Ga 1962), affirmed, 327 F2d 666 (5th Cir 1964). "The directors were wholly without authority to act in a representative capacity except as a board of directors." Flick v. Jordan, 74 Ind App 314, 319, 129 NE 42, 44 (1920). A corporation is represented by its officers, and a director thereof in his individual right possesses no authority to act for it unless he has been appointed its agent, or his acts and declarations have been ratified by it. (citations omitted) Guillaume v. K.S.D. Land Co., 48 Or 400, 404, 86 P 883, 884, 88 P 586 (1907). See also Delaney v. Georgia-Pacific Corp., 278 Or 305, 564 P2d 277, supplemented, 279 Or 653, 569 P2d 604 (1977), appeal after remand, 42 Or App 439, 601 P2d 475 (1979); Fradkin v. Ernst, 571 F Supp 829 (ND Ohio 1983). A director has no authority to act unilaterally to dissolve and wind up corporate affairs, even if the only other director has breached his fiduciary duty to the corporation and caused its business to fail. Horton v. Whitehill, 121 Or App 336, 854 P2d 977 (1993). The law believes that the greatest wisdom results from conference and exchange of individual views, and it is for that reason that the law requires the united wisdom of a majority of the several members of the board in determining the business of a corporation. Ames v. Goldfield Merger Mines Co., 227 F 292, 301-2 (WD Wa 1915). “[D]irectors act as a body, not by the statements of an individual director.” Georgia Casualty and Surety Co. v. Seaboard Surety Co., 210 F Supp 644, 652 (ND Ga 1962). B. Directors are not corporate agents. While the proper function of the board of directors is to deliberate and decide, the board of directors does not itself act to implement those decisions. Corporate officers and agents implement those decision. NOTE: The proper form for a board of directors resolution is to set out the board's decision and then to authorize corporate agents to implement that decision. This is an example of a proper resolution: RESOLVED, that the corporation enter into a lease agreement with Smith and that the president is hereby authorized to execute such lease agreement on behalf of the corporation. The role of a board of directors is one of policy maker. An individual director has little power beyond that of deliberating, persuading and, ultimately, casting a vote on board decisions. Georgia Casualty and Surety Co. v. Seaboard Surety Co., 210 F Supp 644, 652 (ND Ga 1962); Farrar v. Pesterfield, 216 Ga 311, 116 SE2d 229 (1960). Once a board of directors sets a policy, that policy is then implemented by the corporation's officers, employees, and other agents, not by the board itself or by an individual member of the board. Since a corporation acts through its officers, employees and agents, not 96 Section 5.01 generally through individual directors, individual directors have no inherent right to act on behalf of the corporation. "[A] member of the board of directors, acting as such, cannot legally contract for the corporation.” Beall v. Pacific National Bank of Seattle, 55 Wash 2d 210, 212, 347 P2d 550, 551 (1960). See also Twisp Mining & Smelting Co. v. Chelan Mining Co., 16 Wash 2d 264, 133 P2d 300 (1943). Nor is an individual director usually deemed to be an employee of the corporation, solely be reason of being a director. Grantham v. Beatrice Co., 776 F Supp 391 (ND Ill 1991). In Oregon, corporate directors serving solely as directors do not fall within the statutory definition of an "employee" for purposes of the unemployment tax. Necanicum Inv. Co. v. Employment Dept., 345 Or 138, 190 P3d 368 (2008). Although unusual, a corporation may confer actual authority upon a director to act individually as a corporate agent. United States v. Everett Monte Cristo Hotel, Inc., 524 F2d 127 (9th Cir 1975); Federal Deposit Ins. Corp. v. Aetna Casualty & Surety Co., 426 F2d 729 (5th Cir 1970). Some of the issues discussed in this Chapter do not necessarily apply to corporations in which the shareholders have entered into an agreement to restrict the power of the board of directors and otherwise complied with the requirements of ORS 60.265. A discussion of ORS 60.265 is contained in Section 4.07 of this book. C. Manner of acting. Generally, the board of directors acts by adopting resolutions authorizing action by the corporation and its agents. A resolution is not a bylaw; it is an informal enactment of a temporary nature providing for the disposition of a certain administrative business of the corporation. In contrast, bylaws are the laws adopted by the corporation for the regulation of its actions and the rights and duties of its members. (citations omitted) Brennan v. Minneapolis Society for the Blind, Inc., 282 NW2d 515, 523 (Minn 1979). The Act does not set out the procedures for proposing and adopting resolutions. NOTE: In this author’s experience, it is uncommon for the bylaws to contain much detail over the procedures for adopting a resolution. While some boards seem to follow a procedure akin to Robert’s Rules of Order, such procedures are usually not mandated by the bylaws or prior resolutions. While the custom of making and seconding a motion is sometimes used, such a custom seems inappropriate in boards of one to three members. Custom, however, may sometimes be deemed to be part of the bylaws. St. Yves v. Mid State Bank, 50 Wash App 95, 748 P2d 633 (1987); Johnson v. Busby, 278 F Supp 235 (ND Ga 1967); but see Powers v. Marine Engineers' Beneficial Ass'n., No. 35, 52 Cal App 551, 199 P 353 (1921); District Grand 97 Section 5.02 Lodge No. 4 v. Cohn, 20 Ill App 335 (1886). Section 5.02 Number and Qualification A. Size of the board of directors. An Oregon corporation may have any number of directors, including only one director. ORS 60.307. This was not always true. A board of directors is a body where collective decision-making occurs. Georgia Casualty and Surety Co. v. Seaboard Surety Co., 210 F Supp 644, 651 (ND Ga 1962), affirmed, 327 F2d 666 (5th Cir 1964); Ames v. Goldfield Merger Mines Co., 227 F 292, 301-2 (WD Wa 1915). "Collective" implies more than one. At one time, most states required that a board consist of at least three individuals. Most states now permit a corporation to have only one director. Oregon is such a state. ORS 60.307. To prevent deadlock, boards with an odd number of directors are recommended, but not required. In the event of a deadlock, the status quo generally prevails. Jackson v. Nicolai-Neppach Co., 219 Or 560, 348 P2d 9 (1959). For instance if the board is deadlocked, the person last appointed president would likely remain president indefinitely. Deadlock, however, is one ground for judicial dissolution of the corporation. ORS 60.661(2)(a) & 60.952(1). This power is discretionary and the courts are generally reluctant to dissolve corporations. Baker v. Commercial Body Builders, Inc., 264 Or 614, 507 P2d 387 (1973); Jackson v. Nicolai-Neppach Co., 219 Or 560, 348 P2d 9 (1959). See Sections 7.13 and 12.06 of this book. The number of directors may be specified in, or fixed in accordance with, either the articles or the bylaws.
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