What Happens When Directors Elected By The Shareholders Are Not A Majority?

Section 305(a) of the California Corporations Code empowers a board of directors to fill vacancies with two important exceptions. First, the articles of incorporation or bylaws may provide otherwise. Second, the board may only fill a vacancy created by removal of a director if the articles of incorporation or bylaws so provide.

In some cases, the number of directors elected by the shareholders after the filling of vacancies may be fewer than a majority of the directors then in office. For example, four directors of a corporation with a five member board may resign. If neither the articles of incorporation nor the bylaws prohibit the filling of vacancies by the board, the sole remaining director may fill the four vacancies pursuant to Section 305(a). In that case, only 20% of the board will have been elected by the shareholders.

The Corporations Code includes a "relief valve" for this situation. Section 305(c) provides that in these cases, an holder or holders of an aggregate of 5% or more of the total number of shares at the time outstanding having the right to vote for those directors may call a special meeting. Alternatively, that holder or those holders may apply to the Superior Court of the proper county to order summarily a special meeting to elect the entire board. The statute provides some additional procedural details with respect to the hearing.

If the corporation is not a California corporation, it may still need to concern itself with Section 305(c) if it is a foreign corporation that meets the conditions in Section 2115(a). Section 2115(b) includes Section 305(c) in the list of California Corporations Code statutes applicable to such a foreign corporation "to the exclusion of the law of the jurisdiction in which it is incorporated".

Will the SEC stop the gagging?

Last month, I wrote about recent attacks on the Securities and Exchange Commission's so-called "gag" rule: see Why Does The SEC Insist That Some Defendants Lie? Earlier this week, the Cato Institute announced that it had filed a complaint challenging the constitutionality of the gag rule. The Cato Institute's claim rests on its alleged inability to publish a book by someone who had settled with the SEC and agreed to be gagged.