May The Board Let The CEO Decide To Sell The Company?

Professor Stephen Bainbridge recently addressed the question of whether a board of directors could delegate to the CEO the decision about when and whether to sell the company.  Professor Bainbridge points out that the CEO is an agent of the corporation and a board can vest authority in the corporation's agents.  

As a question of agency law, I agree that a board could delegate to the CEO decisions as to when, whether and on what terms the corporation could be sold.  However, Section 300 of the California Corporations Code provides that the business and affairs of the corporation shall be managed and all corporate powers shall be exercised under the "ultimate direction of the board".    Thus, it is possible that a court would conclude that a grant of unfettered discretion would constitute an abdication of the "ultimate direction of the board".

Moreover, any board making such a delegation would run the very real risk that it will be found to have breached its fiduciary duties of care and loyalty.  For example, a breach of the duty of care could result from a delegation to a CEO with no prior experience in selling a company.  A breach of duty of loyalty claim might be premised on a failure of the board to exercise proper oversight.

Even if a board has the authority to empower an agent to sell the company, the California General Corporation Law would in most cases require board and stockholder approval .  For example, Section 1001(a) requires that the principal terms of a sale of all or substantially all of the corporate assets be approved by the board, and, unless the transaction is in the usual and regular course of business, by the outstanding shares.  Similarly, Section 1101 requires board approval of the agreement of merger.   Even if the acquisition takes the form of a tender offer, the SEC’s tender offer Rule 14e-2 requires that a board tell the stockholders that it supports, opposes or has no position with respect to the offer.   Thus, it would be a rare situation in which a board would not be obligated to make a decision.

Assuming that a board authorizes the CEO to sell the company, the CEO would likely face greater risk of liability than the directors in making the decision.  Under Section 204(a)(10),  the CEO would not have the benefit of exculpatory provisions in the corporation’s articles of incorporation.  In addition, the CEO may not have the benefit of the business judgment rule.