Corporate Governance: What is Ratification of Corporate Action?
The legal concept of “ratification” is most commonly raised and used with respect to contracts. However, the doctrine of ratification also has application in the corporate world. An experienced San Diego corporate attorney can provide advice and guidance with respect to corporate ratification. Here is a quick synopsis.
Corporations are run by their boards of directors and day-to-day operations are conducted by the senior management (the President, Vice-President, etc.). As such, the actions of a corporation are the actions of the humans who occupy the positions of authority. There are some occasions when a person on the board or among senior management takes some action — signs some contract, for example — that exceeds the authority granted to that person by the board and/or by the bylaws and/or by the shareholders. However, a corporate officer acting beyond the authority granted does not necessary mean that the actions taken are void. It depends on whether those with the proper authority are willing to approve the action after-the-fact. This is the concept of corporate ratification. Under California caselaw, ratiﬁcation is defined as ” … the subsequent adoption by one person of an act which another without authority assumed to do as his agent.” See Anderson v. Fay Improvement, Co., 134 Cal.App.2d 738 (Cal. App. 1955). Ratification is explicitly allowed and provided for in the California Corporations Code. See, for example, Cal. Corp. Code, § 310.
As a simple example, assume that the Operating Agreement for a California limited liability company (“LLC”) requires approval of a majority of members for the purchase of any real property. However, the managing member signs a contract to purchase an office building before getting approval. In theory, under the law, the managing member has exceeded the authority granted. A contract signed without authority is, in general, not valid and not binding.
However, in our example, the managing member can have the signing of the contract ratified. A meeting of the LLC members can be called and the issue fully discussed. A resolution of the members could then be proposed to ratify the actions of the managing member. If there is a vote to approve such a resolution, then the action is deemed to have been approved regardless of whether there was authority in advance. Put another way, the effect of ratification is to treat the actions as if those actions were originally authorized.
Legally, two conditions are required for explicit corporate ratification — the person who is acting must be some sort of agent or employee or officer of the corporate entity and then the ratification must be done with full knowledge and understanding by the board of directors (or the shareholders). Our example above is one of explicit corporate ratification. It is possible to have implicit corporate ratification. The legal requirements are similar. For an implicit corporate ratification, two conditions must be met: The person who is acting must be some sort of agent or employee or officer of the corporate entity and the corporation must knowingly accept the benefit of the action.
Contact San Diego Corporate Law Today
For more information, 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 serves business owners and residents in San Diego and in the surrounding communities.