Must The Board Approve All Corporate Giving?

Allen Matkins

Allen Matkins

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.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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