ASSURING CORPORATE AUTHORIZATION
Entering into a contract with a corporation requires more than a signature. If a contract, lease or promissory note is signed by the president, or other officer, of a corporation, it may not be valid and the corporation can later escape liability.
The executive officers of a corporation are ordinarily authorized only to carry on the daily or usual business of the corporation. The Board of Directors must approve or ratify special contracts, leases or other obligations that are not a part of the usual business of the corporation. If such an obligation has not been authorized or ratified by the corporation’s Board of Directors, the corporation is not bound.
Thus, when a corporation enters into a contract, it is important that there be evidence that it was authorized by the Board of Directors. There are two basic ways to obtain this insurance. First, the Board of Directors must pass a resolution specifically authorizing the contract, lease or other obligation. A certified copy of the resolution is then signed by the corporate secretary and sealed with the corporate seal. This certified resolution is then delivered with the contract. Opening a bank account for a corporation is usually done in this manner. Banks have prepared forms of such resolutions and require the corporate secretary and the corporate seal to open the account.
Another way to assure corporate authorization is to have two separate officers sign the contract. California Corporations Code § 313 provides in pertinent part that, “any note, mortgage, evidence of indebtedness, contract, share certificate, initial transaction statement or written statement, conveyance or other instrument in writing” is presumed valid “when signed by the chairman of the board, president or any vice president and the secretary, assistant secretary, the chief financial officer or any assistant treasurer.” Thus, the signature of two corporate officers, one from each category, assures authorization, unless the other party has reason to believe otherwise. One of the signatures must be that of the chairman, president, or vice president; the other must be that of the secretary, assistant secretary, chief financial officer, or any assistant treasurer. The chairman and the president, or the chief financial officer and the secretary are not sufficient. There must be one signature from each group identified in Corporations Code § 313.
In many small corporations, the same person holds more than one office. In the case of Snukal v. Flightways Manufacturing, Inc. (2000) 23 Cal.4th 754, Flightways wanted to escape liability for a lease signed by Kurt Lyle, its president. The lease was for Mr. Lyle’s personal residence and was signed on behalf of the corporation by him as president of the corporation. The corporation’s board never authorized the lease. The California Court of Appeal held that the corporation would not be held liable for the lease. However, the California Supreme Court reversed that decision.
The Supreme Court concluded that since Mr. Lyle held the corporate offices of president, chief financial officer and secretary, California Corporations Code § 313 applied, even though Mr. Lyle only signed the lease once, as president.
This case has some important lessons. First, always be sure that contracts with corporations are authorized either with a certified resolution or signatures of two officers from the appropriate groups. Second, corporations which expect to be protected from unauthorized actions of its officers, must have different people hold different offices. A person who holds the office of chairman, president or vice president, should not also hold the office of secretary, chief financial officer or assistant treasurer. Directors of corporations who elect an officer to hold more than one position could be personally liable to the shareholders for the unauthorized acts of the officer.
