Abstaining from Board Actions by Written Consent

October 5th, 2006

Prior to the start of this year, Board actions by written consent had to be unanimous for California corporations, as in every other state of which I am aware. This is generally good policy- all Board members should be made aware of proposed actions. Board meetings must be preceded by formal notice; written consent actions do not require notice and the easiest way to ensure that everyone was advised is to require everyone to sign.

A slight disconnect exists, though, where a director has a personal interest in a matter under consideration- e.g. approval of a loan to/by a director. If the action is approved at a meeting the interested director can abstain from voting, but if the action is by written consent the director was still required to sign her approval.

The new law, codified in Section 308(a)(8)(b) of the Corporations Code, now allows an interested director to abstain from a written consent action as well, provided that the potential conflict is described in the written consent and the director abstains in writing.
This seems like a reasonable step by the California legislature. I have certainly talked to many clients who would have preferred to be on the record abstaining from votes on matters concerning them. The procedural steps are also sensible; disclosure should be a part of any well-written set of resolutions in any case.

My only question is what happens if someone decides disclosure was not sufficient? The law introduces a gray area where none existed before: either a consent was signed by all directors and the action was approved, or it was not. The new law allows for some uncertainty, and it will be interesting to see how matters evolve.

The legislature apparently considered this as well- the law sunsets at the end of 2010, indicating to me that it is meant as a test run to see how it works in practice. I wonder how many companies will actually take advantage of the provision?

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