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Deadlocks And The Provisional Director

Section 308 authorizes the Superior Court to appoint a provisional director in two different circumstances.  Although both involve the existence of a deadlock, the conditions under which a provisional director may be appointed are very different.

The first situation involves a deadlock on the board and is the subject of Section 308(a).  This requires an even number of directors who are equally divided and who cannot agree as to the management of the corporation's affairs.  The person seeking appointment must further show that the division and disagreement are such that either:

  • the corporation's business can no longer be conducted to advantage; or
  • there is danger that its property and business will be impaired or lost.

An action for appointment of a provisional director may be brought by any director or by the holders of not less than 33 1/3 percent of the "voting power" as defined in Section 194.5.  Section 308(a) authorizes the Superior Court to appoint only a single provisional director.

The second situation is the subject of Section 308(b) and involves a deadlock among the shareholders such that they cannot elect directors at an annual meeting.  This will be the case when two contending factions hold an equal number of shares.  In this case, there is no requirement to show either that the corporation's business can no longer be conducted to advantage or that there is a danger that the corporation's property will be impaired or lost.  Unlike Section 308(a), directors are not authorized to seek the appointment of a provisional director.  To seek an appointment, the petition must be made by a shareholder or shareholders holding 50 percent of the voting power.  The court may appoint one or more provisional directors.  The reason for authorizing the appointment of more than one provisional director is to avoid creating a deadlock on the board as a result of an even number of directors.

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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm
Partner

Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients...

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