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Does This California Statute Arbitrarily Shackle Corporate Boards In Times of Emergency?

In 2013, the Corporations Committee of the Business Law Section California State Bar sponsored legislation, A.B. 491, to provide California corporations with certain flexibility in the case of an emergency.  Among other things, the legislation amended Section 212 of the Corporations Code to provide that the bylaws may contain:

"[A]ny provision, not in conflict with the articles, to manage and conduct the ordinary business affairs of the corporation effective only in an emergency as defined in Section 207, including but not limited to, procedures for calling a board meeting, quorum requirements for a board meeting, and designation of additional or substitute directors."

Cal. Corp. Code § 212(c)(1).  Note that the references in the statute are solely to meetings of the board of directors, not meetings of shareholders.  All provisions of the regular bylaws consistent with the emergency provisions remain effective during the emergency and the emergency provisions cease to be effective after the emergency ends. Cal. Corp. Code § 212(c)(3). 

The law includes a very specific and problematical limitation on board action.  Section 212(c)(2) states that during an emergency, a board may not take any action that (i) requires the vote of the shareholders (unless, of course, the vote was obtained before the emergency); or (ii) otherwise is not in the corporation's ordinary course of business.  The latter restriction is inexplicable because an emergency might be just the very time when a board should take action outside of the corporation's ordinary course of business.  I doubt that the legislature intended to impose unreasonable restraints on corporate boards during an emergency, sed quod scripsit, scripsit.  Section 212(c) applies to California corporations regardless of whether they have adopted emergency bylaws.

Finally, the legislature included a savings clause.  Corporate actions taken in good faith in accordance with emergency bylaws bind the corporation, and may not be used to impose liability on a corporate director, officer, employee, or agent.  Cal. Corp. Code § 212(c)(4).

© 2010-2020 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume X, Number 80

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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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