Rules Governing Voting by Directors and the Tallying of the Votes by Corporate Boards in California
By Gerald P. (“Jerry”) Burleson, Member of the California Bar, and Robert Kaufman, Senior Law Student, University of San Diego School of Law
The board of directors of a corporation is responsible for managing the business and affairs of the corporation. Cal.Corp.Code §300(a). While the board of directors may delegate the management of the day-to-day operations to the corporate officers, the board retains the power to make the major decisions of the corporation, such as electing or removing officers, authorizing the issuance of securities, declaring dividends, and deciding all transactions between the corporation and its directors, officers or shareholders. Id.
Director actions are generally made through resolutions adopted at board meetings or by unanimous written consent of the directors. §307(b). In order to adopt a resolution at a board meeting, the board must have a quorum, meaning that a majority of the authorized number of directors must be present. §307(a)(7). Directors may participate in a meeting by being physically present or through the use of a conference telephone or video screen, either of which allow those members to be counted toward the quorum requirement. §307(a)(6). With the exception of board decisions on the indemnification of a director for litigation costs, directors with personal or financial interests in a matter before the board can be counted in determining the presence of a quorum, even if that director is disqualified from voting on the matter in question. §317(e)(1); §310(c).
Once a quorum is present at a board meeting, the directors participating in the meeting may vote on a matter before them and usually all that is required for the adoption of an action is a simple majority of the directors present. The corporate articles may require more than a simple majority vote to pass a resolution, but any act of the board must be passed by at least a simple majority of the directors present in order to be adopted. §204(a)(5); §307(a)(8). In California, a board may continue to meet and vote on an action after one or more of the board members have departed the meeting, even if such departures reduce the number of directors present to less than a quorum, as long as a quorum was initially present at the beginning of the meeting. §307(a)(8). However, any action or resolution voted on in the absence of a quorum still requires approval by at least a majority of the initial quorum required for the meeting. Id.
In a situation where a director has a financial or personal interest in a matter before the board, the board may adopt the resolution so long as the material facts as to that director’s interest in the transaction are fully disclosed to the board and the transaction is “just and reasonable” as to the corporation at the time it is authorized. §310(a)(2), (3). If a majority of the board present and approving the transaction is disinterested, then there is a presumption of fairness and the person challenging the transaction has the burden of proving either inadequate disclosure or that the transaction was not just and reasonable to the corporation. Friedman, Cal. Practice Guide: Corporations ¶ 6:223.3. An interested director can vote or participate in a transaction in which he or she has a personal or financial interest, and that director’s vote will be counted if necessary for approval of the transaction. However by participating in the vote, if the transaction is later challenged, the burden shifts to the interested director or other person asserting the validity of the transaction to prove that the transaction was “just and reasonable” to the corporation at the time the resolution was passed. §310(a)(3); Sammis v. Stafford (1996) 48 CA4th 1935, 1944.
A director’s decision to abstain from voting on a resolution is not the same as a director recusing himself from a matter before the board. Abstention is “the withholding of a vote,” whereas recusal is the “[r]emoval of oneself as judge or policy-maker in a particular matter, esp. because of a conflict of interest.” Black’s Law Dictionary (8th ed. 2004). “Abstention focuses on the final decision, where recusal usually entails withdrawing from the entire proceeding.” Neb. Atty.Gen.Op. No. 05007 (April 12, 2005). To abstain is to refrain from voting, meaning that an abstaining member’s vote is not counted in favor of or against the action, but that member’s presence can be counted towards the existence of a quorum. §310(c); Friedman, Cal. Practice Guide: Corporations ¶ 6:223.1. If a director recuses himself from participation in a particular matter, that director cannot vote on the action and should remove himself from the meeting when his transaction comes up for discussion. Kenneth B. Davis, Jr., Approval by Disinterested Directors, Journal of Corporation Law, 20 J.Corp.L. 215 (Winter 1995). In situations where a director recuses himself from a vote, that director cannot be counted for the presence of a quorum, however under California law any actions voted on after the departure of that director may still be passed as long as a majority of the initial quorum approves the action. §307(a)(8). For example, if a corporation has 7 directors and 4 are present at the meeting, if one director recuses himself and departs the meeting, the meeting can continue, but for an action to be adopted it will require 3 votes in favor, which was the majority of the initial quorum of 4 required for the meeting to be held. Id. Therefore, in California, a director’s characterization of his or her decision not to vote on a resolution as -an abstention or as a recusal should not have a practical effect on the number of votes required to approve a board action.