BILL ANALYSIS                                                                                                                                                                                                    

                             SENATE JUDICIARY COMMITTEE
                           Senator Ellen M. Corbett, Chair
                              2009-2010 Regular Session

          AB 2158 (Hagman)
          As Amended May 18, 2010
          Hearing Date: June 22, 2010
          Fiscal: No
          Urgency: No

                  Corporations: Bylaws: Board of Director Meetings


          This bill would remove the sunset on existing provisions of law  
          requiring an interested or common director of a corporation to  
          disclose all material facts in transactions in which the  
          interested or common director has a self-interest, thereby  
          making these provisions of law permanent. 


          Directors of corporations may become personally interested in  
          transactions involving the corporation.  An example of this is  
          when the director loans the corporation money.  The board of  
          directors would vote on whether the corporation should take a  
          loan from the loaning director, who would have a personal  
          interest as to whether the corporation takes the loan and how  
          much interest could be charged for the loan.  

          Prior to 2005, the board of directors of the corporation,  
          including the interested director, could sign a written consent  
          voting in favor of the loan transaction.  Litigation arose by  
          shareholders alleging that interested directors were not  
          properly disclosing their personal interest in the transaction  
          with the corporation.  An example of this situation is when the  
          interested director of Corporation A owns shares of Corporation  
          B.  The board of directors of Corporation A is unaware that the  
          interested director has a financial interest in the transaction  
          based upon his or her relation to Corporation B.  The interested  
          director may have touted the advantages of the transaction  


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          between the corporations for the purpose of benefiting the  
          director rather than benefiting Corporation A.  Based on the  
          information received by the interested director, the board of  
          directors of Corporation A vote in favor of the transaction with  
          Corporation B, potentially to the detriment of Corporation A. 

          SB 119 (Ackerman, Chapter 102, Statutes of 2005) addressed these  
          issues stemming from the self-interested director.  SB 119  
          required the interested director to make appropriate disclosures  
          of his or her interest in the transaction prior to the board of  
          directors' vote.  When this committee heard SB 119, it amended  
          the bill to include a sunset date of December 31, 2010, in order  
          to revisit whether the disclosure requirements were working  

          This bill originally contained revisions to the Corporations  
          Code regarding close corporations.  Those provisions were  
          deleted and the bill would make permanent the existing  
          transaction disclosure requirements by an interested director.

                                CHANGES TO EXISTING LAW
           Existing law  provides that a transaction involving an interested  
          director is not void or voidable due to the presence of the  
          interested director during the vote on the transaction as long  
          as the self-interested director discloses his or her interest in  
          the transaction.  (Corp. Code Secs. 310, 5233, 7233, 9243,  

           Existing law  permits a board of directors to take any action  
          without a formal meeting, provided all the members of the board  
          consent in writing.  The action taken by written consent is  
          given the force and effect as if it was unanimously approved by  
          the directors.  (Corp. Code Secs. 307, 5211, 7211, 9211, 12351.)
          Existing law  , until December 31, 2010, provides that for actions  
          by written consent involving an interested or common director,  
          the interested or common director must disclose his or her  
          interest in the transaction pursuant to the requirements under  
          Corporations Code Section 310. (Corp. Code Sec. 307(b).)

           Existing law  , until December 31, 2010, requires the interested  
          or common director to disclose his or her interest to the  
          noninterested or noncommon directors prior to the execution of  
          written consents regarding the transaction.  (Corp. Code Sec.  


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           Existing law  , until December 31, 2010, requires the written  
          consent to conspicuously state the required disclosure of  
          interest by the interested or common director.  (Corp. Code Sec.  

           Existing law  , until December 31, 2010, requires that in order  
          for the transaction to be approved by the board of directors,  
          there must be sufficient written consents excluding those  
          submitted by the interested or common directors.  (Corp. Code  
          Sec. 307(b).)

           This bill  would delete the December 31, 2010 sunset, thereby  
          making permanent existing laws regulating written consents  
          regarding interested or common directors.
          1.  Stated need for the bill  
          The author writes:
            A "close corporation," also known as "closely held  
            corporation," is a corporation with no established market for  
            shares and restrictions on the transfer of shares.  It is  
            characterized by having few shareholders (a maximum of 35) who  
            are active in the management of their business.

            Current law, under Section 307 of the Corporations Code,  
            allows board members and shareholders of a closely held  
            corporation to decide on a transaction without a board meeting  
            if all board members consent in writing to that action.  The  
            written consents in order to be effective must be unanimous.

            However, under Section 310 of the Corporations Code a  
            transaction could be considered void or voidable if one of the  
            directors has a financial interest in the transaction or is a  
            board member of a corporation with which this corporation was  
            involved in a transaction.  If either of these scenarios apply  
            the board director would be considered an "interested"  
            director and would need to disclose his/her interest.

            Since a transaction could be contested or impaired as a result  
            of an interested director approving it, interested directors  
            are reluctant to sign on to a written consent.  Without their  
            approval, however, the written consents cannot be effective


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            Code Section 307(b) was enacted to resolve this issue.   
            According to it the interested director can disclose his/her  
            interest in the transaction (as required by Section 310) and  
            also abstain from approving the transaction, with the written  
            consents being effective if the majority of the non-interested  
            directors approved the transaction.
          The sponsor of this bill, the Business Law Section - Corporation  
          Committee of the State Bar, discusses the need for this bill as  

            Section 307(b) allows an interested director to sign on to a  
            written consent so it can be effective - written consents must  
            be unanimous.  The interested director, however, can also  
            disclose her interest in the transaction and also abstain from  
            the approval of the transaction.  The provision is a helpful  
            tool for corporations to allow for written consents otherwise  
            to be used in connection with the approval of interested  
            director transactions.  Otherwise, directors sometimes are  
            unwilling to sign on to a written consent if they have an  
            interest in the transaction.  This provision was introduced  
            from input by the Corporations Committee.  [SB 119] was  
            amended to include a sunset of December 31, 2010.   
            Practitioners continue to believe that this is a helpful  
            provision and hope that it does not disappear from the code at  
            the end of this year.  When the sunset was discussed by the  
            Corporations Committee at its last meeting, no member of the  
            Committee was aware of any negative impacts of keeping Section  
            307(b) as currently in effect.

          2.  Effect of sunset clause on the regulation of interested  

          This bill seeks to make permanent the provisions under existing  
          law, Corporations Code Section 307(b), by removing the December  
          31, 2010 sunset clause which was added to make certain that  
          provisions of the bill did not result in unintended consequences  
          with respect to the disclosure requirements by interested or  
          common directors.  

          Existing law, enacted by  SB 119 (Ackerman, Chapter 102,  
          Statutes of 2005), was created to codify the existing practice  
          under Corporations Code Section 310, whereby interested and  
          common directors were required to disclose their interest  
          pertaining to pending transactions of the corporation.    


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          However, there was no definitive statute regarding disclosure  
          requirements pertaining to written consents.  When no formal  
          meeting was held regarding the transaction, the board could vote  
          through written consent.  It was uncertain if a shareholder  
          later could challenge a written consent vote based on the  
          failure to comply with the procedures for self-interest  
          disclosure provided by Corporations Code Section 310.  

          Once this statute sunsets, the prior statute will become  
          effective.  The prior statute contains no cross-reference to  
          Corporations Code Section 310 requiring interested or common  
          directors to disclose their self-interest in the corporation's  
          transactions.  It would then, again, be unclear as to whether  
          shareholders later could challenge written consent votes based  
          on self-interest disclosure.  
          Given that the sunset was added to make certain no unintended  
          consequences resulted from the regulations specified in SB 119,  
          and there have been no reports of problems with these  
          regulations or negative impacts, it appears to be appropriate to  
          remove the sunset thereby making the provisions of existing law  

           Support  :  Secretary of State

           Opposition  :  None Known

           Source  :  Business Law Section - Corporations Committee of the  
          State Bar of California

           Related Pending Legislation  :  None Known

           Prior Legislation  :  See Background.

           Prior Vote  :

          Assembly Banking and Finance Committee (Ayes 11, Noes 0)
          Assembly Floor (Ayes 77, Noes 0)




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