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Why Your Next Director Might Not Be An LLC

From time to time the question arises about whether a limited liability company, corporation or some other form of entity.  This is, in fact, a question that I tackled four years ago in this post.  The short answer is that the corporate laws of California, Delaware and Nevada require that directors be natural persons.  Cal. Corp. Code § 164, 8 Del. Code § 141(b), and NRS 78.115.  Nevada, moreover, prohibits directors in their nonage, requiring that they be at least 18 years of age.

Even if California were to permit non-natural persons to serve, corporations would still face problems, particularly in providing equity compensation.  Existing equity compensation plans are likely to define eligible persons as natural persons because only natural persons may be "employees" for purposes of Rule 701 and Form S-8.   Further, an issuer could not rely on California's exemption for option and purchase plans (Cal. Corp. Code § 25100(o)) because one condition to that exemption is compliance with Rule 701.

Despite the clear language of Rule 701 and Form S-8, the SEC has allowed some daylight for a "wholly-owned corporate alter ego".  See Aaron Spelling ProductionsSEC No-Action Letter (July 1, 1987) and SEC Release 33-7646 footnotes 20 and 29.  

The express requirement in Rule 701 and Form S-8 that eligible persons have a pulse may be reevaluated in light of the new "gig" economy.  Last July, the SEC issued a concept release seeking comment on "possible ways to modernize rules related to compensatory arrangements in light of the significant evolution in both the types of compensatory offerings and the composition of the workforce since the Commission last substantively amended these rules in 1999".  

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About this Author

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

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...