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
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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 officers?
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
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

A.
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
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.
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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
the firm makes a contract, the firm bound by that contract. If an employee doing her job
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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.
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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.
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
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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 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.
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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
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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
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.”
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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.
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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.
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
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(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.
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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
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
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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.
Lee 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
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)
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Facts: Arthur Sterling was president and member of the board of directors of DageMTI, 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
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?
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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
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.” .
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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.
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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
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:
“The record persuasively
demonstrates that the land
transaction in question was an
‘Extraordinary transaction’ for
Dage, which manufactures
Indiana Supreme Court
“[w]hile representations of the
principal to the third party are
central for defining apparent
authority, the concept of
inherent authority differs and
Dissent
“It is difficult to know how
lawyers will advise their
[corporate clients] after
today’s decision. Where all
parties to a corporate
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electronic video products. ***
Thus, the [trial] court
concluded that "Sterling was
not performing an act that was
appropriate in the ordinary
course of Dage's business."
originates from the customary
authority of a person in the
particular type of agency
relationship so that no
representations beyond the
fact of the existence of the
agency need be shown.”
transaction understand that
board approval is required,
*** the black letter law points
towards a conclusion that the
buyer’s offer was not
accepted by the seller.”
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
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,
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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?
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
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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:

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
15
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.
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
16
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
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:
17
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:


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-presidentfinance.
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?
18
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?
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
19
(b)
(c)
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.
Action taken under this section is effective when the last director signs
the consent, unless the consent specifies a different effective date.
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)
(b)
2.
The board of directors may hold regular or special meetings in or out
of this state.
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.
Notice and Quorum
Regular meetings do not necessarily require notice.
MBCA § 8.22. Notice of Meeting.
(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.
20
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)
(b)
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.
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.
(a)
(b)
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.
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.
21
(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.
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;
22
(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
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?
23
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
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?
24
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.
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
25
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
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?
26
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.
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
27

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.
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
28
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.
(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.
29
(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?
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
30
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?
Answer: Often only partners or similar principals in a firm may sign an opinion, which
is seen as representing the opinion of the firm.
31
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.
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