The Board of Directors and Authorizing a Corporation’s Lawsuit
Corporations are complex entities. There are many moving parts and people that make up the structure of a corporation. One such important group is the board of directors. The board of directors is responsible for representing the shareholders of a corporations. The board also establishes policies and procedures to oversee management and major company decisions that are made. The California Corporations Code Section 300(a) states “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.” The board of directors is a powerful group of individuals within a corporation. Just how much power do they hold, though? The California Corporations Code can make it seem like the board holds all of the power in a corporation. This brings up the question of whether or not a board of directors must authorize filing a lawsuit that is brought in the name of the corporation.
Recently, the California Court of Appeals decided on this issue of authorizing lawsuits. In St. Mary’s Holy Apostolic Church of the East v. Benjamin, a religious corporation was bringing suit against its former board of directors. During trial, the president of the board of directors, who had verified the complaint, resigned. The defendants in this case argued that because the president who had verified the complaint resigned, the corporation lost its standing – meaning that there was no valid lawsuit.
The court did not agree with the defendant’s argument. Instead, they quoted precedent that declared, “a corporation has an inherent right to sue without the board adopting a resolution that specifically authorizes the action.” Thereby, the court rejected the argument that the plaintiff lacked standing. Furthermore, the court stated that a “corporate plaintiff is not required to prove it had authority to institute suit.” Finally, a “defendant may waive question regarding right to maintain action if not raised.” A board of directors has a lot of power, but they are not the penultimate ending to lawsuits if there is any change in the composition of the board of directors.
In addition to the California Court of Appeals rejecting the argument with precedent, the court also looked at the California Code of Civil Procedure. The Code of Civil Procedure, Section 446 does not require that there be board verification. Specifically, the code states that “when a corporation is a party, the verification may be made by any officer thereof.” In other words, the former president of the board of directors does not invalidate the lawsuit.
The business law attorney at the Law Office of Kris Mukherji is here to help you with your business planning needs. Whether you have questions regarding your corporation’s board of directors, pending lawsuits, or any other issue that can arise in the day to day aspects of a business, we can help you. With a proven track record of success, attorney Mukherji is a reputable business law attorney with years of experience. Contact us today for a consultation and get your business law needs handled.