September 28, 2020

Volume X, Number 272

September 28, 2020

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Must The Board Approve All Corporate Giving?

When a corporation makes a gift, it is handing out money that belongs to the shareholders.  Therefore, it should come as no surprise that shareholders may sometimes object to corporate largess at their expense.  In this posting from six years ago, I discussed whether corporations possess the power to make gifts.  Today, I pick up the thread and discuss the question of authorization.

"I claim your gift, my due by promise . . .
The which you promised I should possess."

In Memorial Hospital Association v. Pacific Grape Products Co., 45 Cal. 2d 634 (1955), the president of a canning company pledged $5,000 toward the building of a new hospital without authorization from the board of directors.  When the corporation failed to make good on its promise, a lawsuit ensued.  The California Supreme Court held that while the gift may not have been a "usual" or "absolutely necessary act" on the part of the president, it appeared to be a "a reasonable means of benefitting the corporation and its business interests".  Accordingly, the Court found that the president had the full power and authority to make the pledge and bind the corporation.  

It was argued that enforcement of the pledge would undermine shareholder protection "in that a philanthropically inclined president and general manager, without specific authority of the directors, might thereby bankrupt the corporation by making large pledges to worthy charitable enterprises".  The Supreme Court rejected this argument stating: "there is a reasonable limit" to a president's authority to make gifts without board authorization.  What that limit is, however, will in the Court's view "depend on the particular facts and circumstances in each case".

The Court made a point of observing that the corporation would directly benefit from the presence of a hospital in the community capable of serving the corporation's employees.  The existence of a corporate benefit was a factor supporting the president's implied authority to make the pledge.  The Court's opinion therefore leaves open the question of whether an officer can ever have the implied authority to make corporate gifts that do not directly benefit the corporation.

© 2010-2020 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume X, Number 182

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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm
Partner

Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients...

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