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Challenging the Validity of a Corporate Act

Every day, news stories are published concerning corporations’ ongoing internal and external battles over specific corporate activities. If a party transacting business with a corporation later questions the validity of a negotiated deal or a shareholder suspects improper corporate behavior has occurred, litigation often follows.

            However, courts must always first determine if the complaining party has proper “standing” (or “rights”) to sue the corporation and whether or not the corporation has properly exercised one of its express or implied powers.

What Limits Exist on Corporate Power?

            A corporation’s most basic powers are set forth in its articles of incorporation and bylaws, as well as various state statutes and case law. When examining a corporate contract, a transaction conveying property, or a distribution of profits to shareholders, all governing documents must be carefully reviewed.

            The first inquiry a court may make could be whether or not the corporation violated its own certificate of incorporation or any of its other controlling documents. Additional efforts may be taken to see if any basic equitable rights of either party were violated and if so, whether or not a valid cause of action has been stated.

            Perhaps the most penetrating inquiry will be into whether or not the corporate action being challenged was truly a valid exercise of corporate power. This type of examination must further look into which specific officers of the corporation took part in or approved the challenged action. Were all of these parties acting within the proper scope of their authority? If not – and should the action later be deemed illegal – who is actually responsible to pay any possible damages owing?

            Furthermore, questions of “agency” are also frequently raised. The court may be asked to decide if a “promoter” working for the corporation made proper “promises” to outside parties on the corporation's behalf, believing that those “promises” would later be honored.  Should s/he be held personally liable under such circumstances?

Did the Corporation Honor Its Own Internal Bylaws?

            Once a court decides that a party challenging a corporate action has stated a valid claim and has standing, efforts must then be made to determine if individuals within the corporation exceeded their own rights and/or failed to obtain proper approval of the acts in question.

            For example, most corporations require the board of directors to properly adopt or ratify certain decisions. Was the act complained of a unilateral one – where one or more corporate officers acted without the board’s approval? Likewise, courts also have to determine if the action in question was properly put to the shareholders for their voting approval. Efforts also will be made to see if a member of the board of directors should have disqualified himself/herself from voting on certain measures due to a conflict with separate personal financial interests.

            All of these questions will need to be properly answered to determine if the entire corporation may be liable – or just one or more of the directors.

            Finally, a court may need to determine if the complaint filed (when relevant) can support a proper shareholder derivative lawsuit. Likewise, the state may also need to consider bringing quo warranto proceedings, challenging the corporation to declare on what legal basis (if any), it acted.

As all of these separate issues and questions indicate, courts are forced to carefully review all of these matters to determine if they can or should “pierce the corporate veil,” thereby declaring that one or more of the corporation’s individual directors, officers or shareholders can be held personally liable on the claim, debt or lawsuit – if the entire corporation itself cannot be found legally liable. Fortunately for big business, it’s usually very hard to succeed at “piercing” this veil.           

 

To obtain help with handling all of your Georgia business planning needs, please contact the Law Offices of Shane Smith today.  You can schedule your free initial consultation with a knowledgeable Peachtree City estate planning attorney by calling: (770) 487-8999.


Shane Smith
Advocate for the Seriously Injured in Georgia