A. P. Smith Manufacturing Company V. Barlow Case Study

Introduction

The case of A.P. Smith Manufacturing Company v. Barlow has been used to cite an important rule of law i.e. state legislation can be applied to pre-existing corporations under reserve power. The company A. P.Smith Mfg. was incorporated in 1896 and is engaged in the manufacture of sale of valves, fire hydrants for water and gas industry.

Issue

In the case A.P. Smith Mfg. Co. v. Barlow case, the issue was: can state legislation adopted in the public interest be constitutionally applied to pre-existing corporations under the reserved power i.e. whether A.P. Smith Manufacturing Company could donate money to a charity without authorization from stockholders or through the certificate of incorporation.

Ruling

The New Jersey court

Today’s stakeholders want more accountability. The debate over Corporate Social Responsibility (CSR) has shifted from whether companies should engage in CSR to how to make substantial commitment to CSR?

The added pressure from stake holders has increased as accountability plays a key role for the demand for favourite brands grow. Consumers are more demanding than ever. Safeguarding the brand image and corporate reputation has become important as markets all over the world have become very competitive and image has become more vulnerable.

The reputational risk in consumer markets has also made the companies shift their role as only profit maker for shareholder. Today’s consumers know that if they boycott the brands they use, it works. Product boycotts are associated with negative stock market reactions for the company and hence affect the image of the company both directly and indirectly. An example: Nike in the late 80s and early 90’s faced considerable negative publicity for slave wages, forced overtime and arbitrary abuse. In 1997, the company made significant changes by employing 90 people in CSR positions and did independent third party audits of its suppliers in Asia. The risk of losing bulk share of footwear and apparel consumer market forced Nike to commit to

The court stated: that “encouragement be given to the creation and maintenance of institutions engaged in community fund, hospital, charitable, philanthropic, educational, scientific or benevolent activities or patriotic or civic activities conducive to the betterment of social and economic conditions;

“That the contribution shall not be permissible if the donee institution owns more than 10% of the voting stock of the donor and provided, further, that the contribution shall not exceed 1% of capital and surplus unless the excess is authorized by the stockholders at a regular or special meeting”.

Term ultra vires and intra vires

The term ultra vires means acts done by a company which are not authorised by its constitution as set out in its memorandum of association. The term intra vires means acts which are authorised by the memorandum of association of a company.

The CSR activities can be described as intra vires. It is due to the reason that an intra vires organisation can undertake those activities for which specifically it has pledged in its CSR guidelines to do. All charitable work done by a company are established as intra vires so that the charitable purpose for the company is clearly defined.

Responsibilities corporations have towards