Opinion ID: 2229677
Heading Depth: 2
Heading Rank: 1

Heading: validity of employment contract between web and nelson.

Text: The WEB bylaws provide the Board of Directors with the authority to discharge an employee at the pleasure of the Board. WEB asserts that its otherwise valid contract with Nelson was void because it was beyond the power of the Board as expressed in the bylaws of the corporation to enter a valid employment contract for a specified term. Nelson claims that because South Dakota law gives corporations the power to enter into contracts, the Board possessed the authority to enter valid employment contracts independent from its authority to terminate employment and thus, his contract is valid. The bylaws of the WEB Corporation provide in part: ARTICLE XIII Section 1. The Board of Directors subject to the restrictions of the law, the Articles of Incorporation, and By-Laws, shall exercise all of the powers of the Corporation. Without prejudice to, or limitation upon, their general powers, it is hereby expressly provided that the Board shall have, and are given, full power and authority to perform the duties and functions hereinafter set forth, to wit: [Emphasis added.]       b. To select and appoint all officers, agents, or employees of the Corporation or remove all such agents or employees of the Corporation, at the pleasure of the Board, and to prescribe such duties and designate such powers as may be consistent with these By-Laws, and fix their compensation and pay for faithful services. [Emphasis added.] ARTICLE XVI [T]hese By-Laws may be altered, amended or repealed by a majority of the members at any regular or special meeting, provided the notice of such meeting shall have contained a copy of the proposed alternation, amendment or repeal.... Changes in the By-Laws may be proposed by the Board of Directors subject to review and approval of the membership at any annual or special meeting. Proposed changes by the Board of Directors must be included in the notice of the meeting. The circuit court held there was no enforceable contract between Nelson and WEB because entering into a contract for a specified term was an amendment of the bylaws by the Board. SDCL 47-22-33 provides, in part: The power to alter, amend or repeal the bylaws or adopt new bylaws shall be vested in the board of directors unless otherwise provided in the articles of incorporation or the bylaws. The bylaws may contain any provisions for the regulation and management of the affairs of a corporation not inconsistent with law or the articles of incorporation. Unfortunately, the trial court and parties were laboring without the benefit of article X of the articles of incorporation. As shall be seen, there is an apparent conflict between article XVI of the WEB bylaws and article X of the articles of incorporation. The bylaw provision of article XVI to the effect that the members may alter or amend the bylaws is clearly in disaccord with article X of the articles of incorporation which provides that the Board of Directors shall be empowered to amend or repeal the By-Laws, from time to time, by means of a 66% favorable vote, after proper notice to Directors. SDCL 47-22-34 provides, in part: In all other cases, whenever a provision of the articles of incorporation is inconsistent with a bylaw, the provision of the articles of incorporation shall be controlling. In WEB's brief, it was conceded that authorities relied upon by Nelson stand for the proposition that a bylaw empowering the board of directors to remove a director or officer of the corporation does not authorize the board to terminate a contract with one whom they had employed for a definite term. See Short v. Columbus Rubber & Gasket Co., 535 So.2d 61, 65-66 (Miss.1988); Cuppy v. Stollwerck Bros., 216 N.Y. 591, 111 N.E. 249, 251 (1916); United Producers and Consumers Coop. v. Held, 225 F.2d 615, 618 (9th Cir.1955); In re Paramount Publix Corp., 90 F.2d 441, 443 (2d Cir.1937). This is especially true in a situation like the present case, where a board of directors has the power to amend the bylaws of the corporation. WEB's brief provides authority holding that where a corporation's board of directors have the express authority to amend the bylaws, a contract for a term of employment is valid and enforceable. See, e.g., Hernandez v. Banco de las Americas, 116 Ariz. 552, 570 P.2d 494, 498 (1977); Dixie Glass Co. v. Pollak, 341 S.W.2d 530, 535 (Tex.Civ.App. 1960); Realty Acceptance Corp. v. Montgomery, 51 F.2d 636, 637-38 (3d Cir.1930); Magnus v. Magnus Organ Corp., 71 N.J.Super. 363, 177 A.2d 55, 58 (Ch.Div.1962). As stated in WEB's brief, [t]hese cases clearly show that, regardless of whether an employment contract is written or oral, a contract of employment for a specified period could operate as an amendment or rescission of a by-law authorizing the removal of an officer or employee at the pleasure of the board if such contract was made by a board of directors having power to amend or rescind the by-laws of the corporation[.] This power to amend the bylaws is granted to the WEB Board in article X of the WEB articles of incorporation. Thus, the WEB Board of Directors had the authority to enter into a valid employment contract for a specified term. Under SDCL 47-22-2, all of chapters 47-22 through 47-28 apply to nonprofit corporations organized in South Dakota. WEB is a nonprofit corporation chartered under South Dakota law. SDCL 47-22-59 provides: Each corporation shall have power to make contracts and incur liabilities, borrow money at such rates of interest as the corporation may determine, issue its notes, bonds, and other obligations, and secure any of its obligations by mortgage or pledge of all or any of its property, franchises and income. [Emphasis added.] SDCL 47-22-59 clearly provides that WEB had the authority to enter into valid contracts. The authority to enter into valid contracts includes the power to enter employment contracts. Since a corporation can act only through individuals acting as agents for the corporation, it follows that the corporation may employ officers and agents to act for it.... The board of directors as the ultimate governing body of the corporation has the authority to make employment contracts of all kinds or to ratify such contracts made by others. 19 William M. Fletcher, Fletcher Cyclopedia of the Law of Private Corporations § 3:38 (perm. ed. rev. vol. 1988). Article XIII of the WEB bylaws authorized the Board to exercise the powers of the corporation. Further, SDCL 47-23-25 provides: Any officer or agent elected or appointed may be removed by the persons authorized to elect or appoint such officer whenever in their judgment the best interests of the corporation will be served thereby. The removal of an officer or agent shall be without prejudice to the contract rights, if any, of the officer so removed. Election or appointment of an officer or agent shall not of itself create contract rights. [Emphasis added.] The language of this statute is cleara nonprofit corporation may remove an officer or director at the pleasure of the board, but the removal of such officer or director may not prejudice any existing contract rights. The legislature's adoption of this statute is consistent with the view that employment contracts are designed to benefit both the corporation and the employee. See Paramount, 90 F.2d at 443 (stating that to allow either corporation or employee to ignore employment contracts would be disruptive of modern business practice). Likewise, the Arizona Supreme Court found that state's enactment of a statute similar to SDCL 47-23-25 was an adoption of the idea that modern business mandates that parties must be bound by the contracts they enter into absent fraud or duress. Hernandez, 570 P.2d at 498. WEB's discharge of Nelson as WEB manager did not affect his rights under a valid employment contract. [1] We reverse the trial court on this issue.