Question

Question #5(a) Paul is the shareholder that owns most (90%) of the outstanding stock of Purple Machine, Inc. Paul is not involved in the day-to-day running of Purple Machine, Inc. However, last week he approached by Red Supply Corporation with what he believed to be a very favorable Supply Agreement for the purchase of inventory that Paul is certain Purple Machine, Inc. can use. Paul signs the Supply Agreement on behalf of Purple Machine, Inc. Is the execution of the Supply Agreement valid against Purple Machine, Inc.? Why? (5 pts) Question #5(b) Suppose Paul approaches David, a director on the board of directors of Purple Machine, Inc., about the transaction with Red Supply Corporation, and David thinks it’s a great deal. David executes the agreement on behalf of Purple Machine, Inc. Is the execution of the Supply Agreement valid against Purple Machine, Inc.? Why or why not? (5 pts)

Answer 1

1. Can Paul majority share holder sign agreement on behalf of his company when he is not involved in day to day activity of company?

This depends on laws formed by board. In extraordinary case board can authorizes Paul to sign the contract on behalf of corporation. But this is almost impossible because he is not involved in day to day activities of organization. As a majority share holder he does not have authority to sign if board rejects, this is because corporation is an independent entity and does not come under shareholders.

1. Can David one of the board member of Red supply corporation execute agreement?

No, As per companies law David cannot execute agreement until board authorizes it. As per law, board has as to define who as to sign contract and execute it. Generally Chairmen, CEO and Treasury secretary are empowered to do that. Hence board members cannot execute it. In extraordinary cases board members can authorize David to execute it.