I think most deal lawyers would agree that one of the most dangerous situations you’re likely to face during your career is a CEO with a bad case of “deal fever” & a pen in hand. Armed with the sense of invincibility & omniscience that so often goes along with the job – and the corporate law doctrine of apparent authority – a free-range CEO can bind the company to a whole slew of potentially regrettable obligations.
Fortunately, as Prof. Bainbridge points out in his recent blog addressing the authority of CEOs & other corporate officers, a merger or other transaction requiring board approval isn’t likely one of them:
An important line of cases limits the implied actual and the apparent authority of corporate officers—of whatever rank—to matters arising in the ordinary course of business.
There is no bright line between ordinary and extraordinary acts. It seems reasonable to assume, however, that acts consigned by statute to the board of directors will be deemed extraordinary. The Model Business Corporation Act provides that the following decisions may not be delegated to a committee of the board, but rather must be made by the board as a whole: (1) Authorize dividends or other distributions, except according to a formula or method, or within limits, prescribed by the board of directors. (2) Approve or propose to shareholders action that the statute requires be approved by shareholders. (3) Fill vacancies on the board of directors or, in general, on any of its committees. (4) Adopt, amend, or repeal bylaws. DGCL § 141(c) is similar. Certainly, if those decisions may not be delegated to a board committee they may not be delegated to officers.
This is critical for our purposes, because approval of a merger requires approval by both the board of directors and the shareholders. Hence, it seems clear a CEO would lack both implied actual and apparent authority to bind the corporation to a merger.
The blog includes citations for each of these propositions, which I’ve omitted in the interest of giving you something you can easily digest with your first cup of coffee – but read the whole thing.
– John Jenkins