White v. Thatcher Financial Group, Inc.

Colorado Court of Appeals · Corporations

CorporationsBoard of directorsQuorumClosely held corporationsCorporate authorityBreach of contractstatutory minimum directorsboard vacancy

Facts

After a bank conversion, White became the controlling shareholder, chairman, and chief executive officer of TFG, a closely held corporation with about ten minority shareholders. Although the applicable statute required at least three directors when a corporation had three or more shareholders, TFG's board, originally properly constituted, later operated with only two directors because vacancies were not filled. During that period, White received no salary from TFG and advanced cash and paid certain expenses to help TFG operate and pursue projects, including preparation of a private placement memorandum. White later sued to recover unpaid salary and reimbursement after Pitkin County Bank became TFG's controlling shareholder and White resigned.

Issue

Whether actions and agreements approved by TFG's two-director board were invalid and nonbinding because the corporation had fewer directors than the statutory minimum, and whether White presented sufficient evidence that TFG agreed to pay him salary and reimburse his advances and expenses.

Rule

Where a corporation's board was initially properly constituted, later vacancies reducing the board below the statutory minimum do not invalidate board action if a quorum of directors is present and the action is approved by a majority of that quorum, unless the statute expressly makes such acts invalid. In a closely held corporation, informal board action consistent with the corporation's customs and practices may also be valid, and a jury verdict supported by competent evidence and reasonable inferences will not be disturbed on appeal.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Mesa Crest Holdings, a closely held corporation in Colorado Springs, had five shareholders and a three-member board when it was formed. After one director resigned, the remaining two directors met, both attended, and both approved a contract to reimburse CEO Lena Ortiz for business travel expenses she had personally paid while seeking investors in Denver.

If Mesa Crest later refuses payment on the ground that state law requires at least three directors when a corporation has three or more shareholders, is the reimbursement agreement most likely binding?

Explanation. The majority held that when a board was initially properly constituted, later vacancies reducing the board below the statutory minimum do not invalidate board action so long as a quorum is present and a majority of that quorum approves, unless a statute expressly says otherwise. The vacancy statute's use of permissive language does not require immediate filling of the vacancy. (Derived from White v. Thatcher Financial Group, Inc. (n.d.).)