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
TW:jd
SUBJECT
Corporations: Bylaws: Board of Director Meetings
DESCRIPTION
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.
BACKGROUND
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
(more)
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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
effectively.
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,
12373.)
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.
307(b).)
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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.
307(b).)
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.
COMMENT
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
follows:
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
directors
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
permanent.
Support : Secretary of State
Opposition : None Known
HISTORY
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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