Commercial Division Blog

Posted: January 18, 2023 / Written by: Jeffrey M. Eilender, Samuel L. Butt, Seth D. Allen, Joshua Wurtzel, Channing J. Turner / Categories Commercial, Breach of Contract, Derivative Actions

Company President Cannot Bring Litigation in Company’s Name Absent Board or Shareholder Approval

On December 28, 2023, Justice Melissa A. Crane of the New York County Commercial Division issued a case in NW Media Holdings Corp. v. IBT Media Inc., 2022 N.Y. Misc. LEXIS 8386, holding that where a closely held company’s by-laws require approval by a majority of the board or shareholders to bring litigation, the president of that corporation does not have the authority to bring litigation in the name of the corporation absent such a vote, explaining:

The by-laws of NW Media do not confer a right on the president to commence litigation. Instead, the by-laws specifically state "the business of the corporation shall be managed by its board of directors" (see By-Laws of NW Media Holdings Corp Article III § 1, NYSCEF Doc. No. 76), and require a vote of the majority of the Board to act (§ 8[a]).

The by-laws contain a tie breaking mechanism for director deadlock in § 8(d):

"If the Board of Directors is unable to act because they are deadlocked (an equal number of Directors have voted for and against a matter duly presented to the Board for vote), the matter shall be referred to the Shareholders of the Corporation for a vote pursuant to Article II of these By-Laws"

Thus, NW Media's corporate by-laws require a vote of the majority of the board of directors or, in the event of deadlock, the shareholders. However, it is undisputed that, although there was no formal vote, Davis did not consent. To the contrary, he expressed extreme disapprobation to the filing of this lawsuit. Thus, the board was deadlocked, there being only two members. Accordingly, under Sterling and its progeny, as the president of a closely held corporation, Pragad lacked the authority to act unilaterally against Davis' interest.

Shareholders or owners of a privately held corporation can always bring a derivative suit on behalf of the company if the meet the conditions for a derivative suit.  However, the by-laws govern when a lawsuit may be brought directly in the name of the company and individuals considering suing in the name of a company must review the by-laws before bringing suit to ensure the suit is properly made.  Contact the Commercial Division Blog Committee at commercialdivisionblog@schlamstone.com if you or a client have questions concerning bringing a lawsuit in the name of a company.