Corporations Law: What Corporate Actions Require Board Approval?
In general, corporations are run by their boards of directors. The California Corporations Code says, for example, that “the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board.” See Cal. Corp. Code, §300(a). The owners of the corporation, the shareholders or stockholders, meet (usually once a year) and elect the various members of the board. The usual number of board members ranges from three to a dozen or more for large corporations. The board of General Motors Corp., for example, now contains twelve members as of October 2018. See here.
Note in the statute quoted above the importance of the words “under the direction of the board.” This gives the board wide authority to delegate many tasks to the senior officers of the corporation. Indeed, the board hires the Chief Executive Officer and the Chief Financial Officer of the corporation and often hires other senior management employees. The board then generally delegates to those senior employees the day-to-day running of the company.
This raises the questions of what actions can be taken by the senior officers and what actions must be approved first by the board? As with many things concerning corporations, the short answer is: “it depends.” A good “rule of thumb” is that routine matters do not need prior approval; but “major” decisions do.
Take the example of filing lawsuits. If the potential lawsuit is “routine” — like a lawsuit to collect unpaid invoices — likely this is an action that can be taken without prior board approval. Indeed, such activity might be previously delegated and expected if collection actions are needed. A recent California Court of Appeals decision held this to be the case with respect to lawsuits. See St. Mary’s Holy Apostolic Church of the East v. Benjamin, Case No. F073705 (Cal App. 5th Dist. August 30, 2018) (unpublished). In that case — involving a religious not-for-profit corporation — the person being sued argued that the case should be dismissed because the board of directors had not specifically voted or approved the filing of the case. However, the Court of Appeals rejected the argument holding that a corporation has the right to begin a lawsuit without “… the board adopting a resolution that specifically authorizes the action.” The Court of Appeals cited a California case from the 1930s and other legal authority from other jurisdictions.
St. Mary’s stands for the general legal principle that a board resolution is not needed for the court’s purposes. But as a practical matter, if the litigation is “major” – not something routine for business — then, very likely the board should approve the litigation before it begins. At minimum, the board should ratify and approve major litigation after the case has been filed and should engage in ongoing monitoring.
Contact San Diego Corporate Law Today
For more information on this topic, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard provides a full panoply of legal services for businesses including formation of corporate entities of all types. Mr. Leonard can be reached at (858) 483-9200 or via email. Mr. Leonard proudly provides legal services to business owners and residents in San Diego and in the surrounding communities.