As you may know from one of my past blog posts, a corporation owns its own assets and the shareholders do not necessarily own those assets (they own shares in the corporation).
But what you may not know is that the corporation’s board of directors has broad powers to mortgage or sell the corporation’s assets.
The board doesn’t even need to get the shareholders to approve the mortgage or sale, under California law.
Let’s say that the corporation has a piece of real property that has equity and the corporation is in need of some money. The board then seeks out a loan for the corporation that will be secured by the property
The lender agrees to loan the money to the corporation but requires that the real estate be put up as collateral with a mortgage on the property.
In other words, the lender wants security for the loan in the event there is a default. If there is a default, the lender can foreclose on the property.
This means that the mortgage on the property puts the corporation’s property at risk. Yet, the board of directors can authorize the mortgage even if such mortgage applies to all of the corporation’s property holdings.
Only if the corporation’s articles of incorporation require the shareholders’ approval would their approval be necessary.
Suppose, however, that instead of taking out a loan, the board decides to sell the corporation’s real property.
This situation is a little different from the loan-with-mortgage scenario.
Under California law, if the proposed sale is in the “usual and regular course” of the corporation’s business, the board alone can approve the sale. Even if it is a sale of all of the corporation’s property or assets.
So if the sale of the corporation’s assets is part of the corporation’s regular business operations, the board does not need to get the shareholders to approve the transaction.
On the other hand, if the sale of assets is not in the “usual and regular course” of the corporation’s business, the shareholders must also approve the transaction.
If the shareholders approve the sale before or after the sale is consummated, that is fine. But it is better practice for all approvals, of the board and shareholders, to be obtained prior to offering for sale any of of the corporation’s assets outside the regular course of business.
In the event any sale transaction craters or otherwise becomes ill-advised, the board has the power to abandon the transaction without the shareholders’ approval.
The board can end the transaction even after the shareholders approved the sale.
If the board takes such action, the board must be careful to not cause a breach of contract with the buyer when terminating any sale. The board’s right to abandon a sale transaction does not protect the corporation from liability owed to the buyer for breach of contract.
As you can see, the board of directors has broad powers regarding the disposition of the corporation’s assets. For this reason, members of the board must be carefully selected.
Also, board members must be careful to not run afoul of their fiduciary duties owed to the corporation and shareholders. Because even though board members are protected from liability if they exercise reasonable business judgment and discretion, they can be held liable if they acted in bad faith.
References: California Corporations Code sections 1000 and 1001.
This discussion is not legal advice, a solicitation of you as a client, nor the engaging in the practice of law in any jurisdiction.
This discussion is merely for information/education and should not be relied upon for legal advice by anyone because the facts discussed may be different from your own situation. If you need legal advice, consult a qualified attorney.
For more information please visit my website at www.palacioslawoffice.com.