Baldwin Haspel Burke & Mayer LLC

Article: Sales of Real Estate by La. Corporations Without Boards of Directors

Brian Johnson - 

By: Brian Johnson

Imagine an energetic group of young Louisiana philanthropists with a great idea for a charity. They form a Louisiana non-profit corporation, elect themselves as the initial Board of Directors and appoint themselves as its officers. They make the exciting decision to have the non-profit purchase some cheap land on which they intend to build their new headquarters. Fast forward a few years and we sadly find that their big idea didn’t work. Our energetic youngsters have grown old and weary, and their attention to the charity wanders. Building plans are dropped, board meetings go uncalled and corporate housekeeping is forgotten, other than annual reports. Fortunately, there are few bills to pay since the real estate is exempt from property taxes[1] and there are no utility bills. One by one, they drop off the board of directors until there is no one left.

Now, imagine a business corporation formed by prominent men in the late 19th century to engage in a line of business rendered obsolete decades ago. It is discovered that this old corporation is still the record owner of some unassessed batture land along a navigable river in a rural parish. A shipping concern wishes to purchase the batture land at a good price. Every board member, director, shareholder or employee of record that the corporation ever had died decades ago.

Under either scenario, who has the authority to sell the corporation’s property?

Any person or business who has been through a real estate closing knows how important authorization issues are for corporations, partnerships, limited liability companies and other business entities. All natural persons, with certain exceptions for minors and interdicts and the like, have the authority to enter into contracts.[2] Business entities, such as corporations, are creations of the law. They are also recognized as “juridical persons” with the right to contract[3], but one must look to the laws of the State under which the entity was incorporated and to the entity’s founding documents to discover how the entity takes action and who has the authority to enter into contracts on its behalf.

For a corporation like our defunct batture owner or a non-profit corporation like our sad charity, the Louisiana Business Corporation Act[4] and the Louisiana Non-Profit Corporation Law[5] govern the corporation’s authority to buy and sell real estate. Such Acts also govern how a corporation appoints agents to execute acts of sale or other transfer instruments on its behalf. The publicly filed Articles of Incorporation and the privately kept By-Laws will identify the specific methods to take and authorize corporate action. Generally, absent an absurdly negligent buyer, you will not be able to close a Louisiana real estate transaction if the selling corporation does not have proper resolutions, or other evidence of the corporation’s authority to sell, and its appointment of a person to act on its behalf to execute the sale documents.

For a corporation, whether it is a non-profit corporation or a business corporation, that authorization must come from the Board of Directors, since all corporate power is vested in a corporation’s Board of Directors.[6] The law gives a Board the authority to delegate day-to-day power to its officers, such as a President, but the sale or encumbrance of corporate real estate is not an inherent power of any officer. A President does not have authority to sell real estate simply by virtue of his title.[7] The authority to buy or sell real estate can only be given through a resolution or other action adopted by the Board of Directors, and in some cases requires the additional consent of the shareholders or members.[8]

This is a problem when the corporation no longer has a Board of Directors. Either a new Board of Directors must be reconstituted just so that it may authorize the sale of the real estate, or some other alternative must be found to authorize a transfer of the title to the real estate out of the corporation.

Reconstituting the Board of Directors may be more difficult than it sounds. A business corporation’s Board of Directors are elected by its shareholders.[9] Similarly, the Board of Directors of a non-profit corporation are generally elected by its members.[10] In order to elect new directors, it should be a matter of either calling the appropriate shareholder or member meeting and voting for new directors, all in accordance with the requirements of the law, the articles and the by-laws of the corporation, or examining any other power of the corporation to fill vacancies. Many closely-held corporations and non-profit corporations may not operate with much formality, so the members of the Board and the members or shareholders of the corporation might be synonymous.

In the case of our sad charity, the Articles and By-Laws made this official. They expressly stated that the non-profit corporation is organized on a non-stock basis and that the “members” of the corporation shall be its Board of Directors. The Articles and By-Laws call for re-election of directors at annual board meetings, which also serve as annual meetings of members and allow remaining directors to fill any vacancies on the Board. In other words, the Board of Directors of the non-profit elects itself. When the last director drifted away, there was no one left with the authority to elect new directors to replace the departed ones.

Our business corporation did not have the same issue, as shares of its stock are heritable and the successors to ownership of the shares still technically have the ability to call a proper shareholder meeting and vote for new directors. As a practical matter, however, this would require the examination of multiple generations of heirs and legatees of the original shareholders and their respective estates, as well as any probate proceedings, potentially across the country, in order to identify potentially hundreds of heirs, each with fractional inherited ownership of the shares.

Could involuntary revocation of the corporation’s articles of incorporation be a backdoor way to move the title to the real estate out of the corporation’s name?

Unfortunately, the answer is no. If a corporation neglects to file certain annual reports with the Louisiana Secretary of State, the Secretary of State will revoke its charter.[11] It is a common misconception that upon such revocation, ownership of the corporation’s assets will automatically flow through to the entity’s shareholders or members.

The law has long provided that termination of a corporation’s existence by the Louisiana Secretary of State does not impact the corporation’s ownership of real estate. Title to the real estate remains titled and vested in the corporation until it is transferred out, even though its corporate existence has ended. Under old law, a revoked corporation still had the authority to sell its real estate without bothering to file a reinstatement.[12] New law is more strict and requires that the corporation take action to reinstate itself before the corporation regains the authority to sell its real estate.[13] In both cases, the title stays with the corporation and must be formally sold or transferred by the corporation. Even a voluntary dissolution of a corporation does not result in the automatic transfer of title to the corporation’s property to its shareholders.[14] The Board of Directors or a liquidator must still take action through the liquidation process to transfer title to the real estate out of the corporation.

Until there is a change in the law, there is no easy solution faced by a corporation without a Board of Directors and without a clear path to the election of a new one. The aid of counsel will be essential to scour the Articles of Incorporation, By-Laws and corporate records for any way forward. Perhaps a director’s resignation is not considered final because of his failure to give formal written notice. Perhaps a director can be located and a corporation’s By-Laws allows for a single director to re-appoint the entire Board of Directors. Perhaps the necessary quorum of shareholders to call a vote and elect directors is low enough that successor shareholders in sufficient numbers can be found without undue cost and effort. Each case will have its own set of circumstances that may either put up a barrier or give a path to a solution. If a means cannot be found to re-appoint a Board of Directions, then the only available recourse may be to go to court. If the corporation is still in existence, an action for a formal judicial dissolution can be sought, and if the corporation’s existence has been terminated, the appointment of a liquidator can be sought.[15] The purpose of such a court appointment is to obtain an order appointing a liquidator with the authority to distribute the real estate and other assets, with all the legal fees and costs that this implies.


[1] See La. Const. Art. 7 § 21(B).

[2] La. Civ. Code art. 27-28, 1919.

[3] See La. Civ. Code art. 24.

[4] See La. R.S. 12:1-101 et seq.

[5] See La. R.S. 12:201 et seq.

[6] Formerly La. Rev. Stat. Ann. § 12:81, now § 12:1-801; La. R.S. § 12:224.

[7] Marsh Inv. Corp. v. Langford, 490 F. Supp. 1320 (E.D. La. 1980); Snell v. Amite Oil Co., 178 La. 176, 151 So. 70 (1933)

[8] See, for example, La. R.S 12:207(D) of the Non-Profit Corporation Law (“Except as otherwise provided in the articles or by-laws, a corporation may * * * sell, lease, encumber or otherwise alienate any of its immovable property, only if a resolution so authorizing has been approval by the voting members at a regular or special meeting, convened after notice of its purpose.”)

[9] La. R.S. § 12:1-803.

[10] La. R.S. § 12:224.

[11] Former La. R.S. 12:163, La. R.S. 12:1-1442.

[12] Former La. Rev. Stat. Ann. § 12:163(G).

[13] La. Rev. Stat. Ann. § 12:1-1442.

[14] La. R.S. § 12:1-1405

[15] La. R.S. § 12:1-1430 et seq & La.R.S. § 12:1-1445


  |  

Meritas

Connect with us