How are California Corporations Managed?

⚖️ Corporation Management, Directors + Officers

✅ Director required: All Corporations must have at least 1 director (no maximum + numbers may vary);

✅ Articles of incorporation are publicly filed with the state to establish the Corporation, and any provisions contained in the articles will govern the Corporation;

✅ By-laws: Management of the Corporation is conducted in accordance with the articles of incorporation and any by-laws (private internal to the Corporation) adopted by the board, which typically contain management provisions;

✅ Election of the Board of Directors: The initial board is elected at the first annual meeting and each year thereafter unless terms are staggered;

✅ Officers + Committees are appointed by the Board to implement Board decisions + carry out operations.

A Committee of 1 or more Directors can make recommendations to the full board for its action, but cannot:

❌ Fill board vacancies; or

❌ Declare dividends.

✅ Officer authority: Officers have authority to act on behalf of the Corporation based on agency law principles.

An Officer's authority to bind the Corporation may be express, implied or apparent.

Officers owe the same Duties of Care and Loyalty as Directors.

The president or chief executive of a Corporation has implied actual authority (and apparent authority) to bind the Corporation to contracts in the ordinary course of business.

Traditionally, and in California a Corporation must have a president, secretary and treasurer. Can have others.

Today, and in California, one person can hold multiple offices simultaneously.

The Revised Model Business Corporation Act (RMBCA) doesn't require that a Corporation have any officers.

Removal of a Director: A Director may be removed with or without cause by a majority shareholder vote, unless the articles state removal only with cause permitted.

Who selects the Director's replacement?

Generally the Board or the Shareholders.

If the Shareholders caused the removal of the Director, generally they must select the replacement.

Removal of an Officer: The Board may remove an officer at anytime with or without cause (subject to the terms of their employment agreement).

It can therefore be assumed that removal of an officer without cause will in most cases incur liability for contractual breach by the Corporation.

A principal can always terminate an agent.

Resignation: A Director or Officer may resign at anytime with notice.

💡 Shareholders hire and fire Directors, and the Board hires and fires Officers.

⚖️ Actions of the Board of Directors

Meetings: The Board of Directors must hold meetings, which may be regular meetings (no notice required) in accordance with the by-laws or unscheduled special meetings requiring at least 2 days' notice of time + place [no need to specify the purpose].

Failure to give required notice: Voids the meeting, unless the Directors not sufficiently notified waive the notice defect.

✅ Directors can do this in writing at anytime, or by attending the meeting without objecting.

Quorum requirement: A quorum, which is the majority of the Board of Directors, must be present at the time a vote is taken for board action to be valid, unless by-laws or articles allow otherwise.

Note: No fewer than 1/3 of Board members can be used to establish a quorum.

Presence: Presence can be by any means of communication (zoom conference call is an example) so long as all members can hear each other and the means is not prohibited by the articles or by-laws.

❌ Members with conflicts don't count toward the quorum.

❌ Proxies or Voting Agreements not allowed for Directors.

Broken Quorum: Unlike the situation for shareholders, a Director may break quorum by withdrawing from a meeting before the vote is taken.

Dissenting members: A Director is presumed to concur with Board action unless their dissent or abstention is noted in writing in corporate records.

In writing means:

1️⃣ Recorded in the minutes; or

2️⃣ Delivered in writing to the presiding officer at the meeting; or

3️⃣ Written dissent, delivered to the Corporation immediately after the meeting.

❌ A Director cannot dissent if they voted for the resolution at the meeting.

Actions without meetings: An action can be taken without a meeting:

✅ If all Directors sign a written consent describing the action taken and include that in the minutes or file it with corporate records; otherwise

❌ The action is void, unless ✅ Validly Ratified by the Board at a later time.

Delegation: The Board may delegate authority to a committee, or an officer.

⚖️ Fundamental Corporate Changes

Fundamental changes to the corporate business cannot be decided by the Board alone, they must be approved by a Majority Shareholder Vote.

Majority Shareholder Vote: At a meeting where a quorum was present to start the meeting, votes cast in favour must exceed votes cast against.

Typical procedure to make a fundamental change:

✅ Board adopts a resolution of fundamental change;

✅ Written Notice is given to Shareholders (10-60 days before next shareholder meeting where vote will occur);

✅ Shareholders approve the change by Majority Vote;

✅ The change is updated in the articles, which are filed with the state [Not required if only assets have been sold].

Note: Some jurisdictions require the vote to be by a majority from the votes entitled to be cast, which is a higher standard than the typical quorum rule.

⚖️ Types of Fundamental Corporate Changes

1️⃣ Merger (or Consolidation where A Corp., and B Corp., form C Corp.);

Short-form merger [No shareholder meeting/approval required if a 90% or-more owned subsidiary is merged into a Parent Corporation].

💡 Note: Surviving Corporation succeeds to all rights and liabilities.

2️⃣ Share exchange;

3️⃣ Sale of Substantially All [varies from state to state: rule of thumb at least 75%] of the Assets Not in the Ordinary Course of Business;

💡 Note: Only a Fundamental Corporate Change for the Selling Corp.

4️⃣ Conversion;

5️⃣ Amendment of Articles or by-laws after shares have been issued requires:

✅ Approval of the directors and shareholders;

✅ The amendment must be filed with the state

No Shareholder approval needed to delete names of directors or agents, change company name or corporate abbreviations (eg., Inc. to Corp.), or to change the number of shares in share split if only 1 class (if more than 1 class, then each class can vote as a group).

6️⃣ Dissolution + Winding Up

Voluntary Dissolution

Judicial Dissolution [By Court Order]

1️⃣ A Shareholder can petition for involuntary dissolution because of:

❌ Director abuse, waste of assets, misconduct;

❌ Director deadlock that harms the Corporation; or

❌ Shareholders have failed at two consecutive annual meetings to fill a vacant Board position.

A Court might order buy-out of the objecting Shareholder as an alternative to ordering involuntary dissolution especially in a closely-held Corporation.

2️⃣ A Creditor may petition because the Corporation is insolvent and they have a unsatisfied judgment or the Corporation admits the debt in writing.

Next Step: Wind-up or Liquidate the Corporation.

✅ Gather all assets;

✅ Convert to cash;

✅ Pay Creditors;

✅ Distribute remainder to Shareholders, pro-rata by share unless there is a liquidation preference.

A liquidation preference must be specified in the Articles.

Involuntary Administrative Dissolution

When a Corporation fails to timely file an annual report, fails to maintain a registered agent, the Secretary of State may administratively dissolve the Corporation.

⚖️ Dissenter Appraisal Rights

A dissenting Shareholder to [any of the following: Merger or Consolidation, Transfer of substantially all assets not in the ordinary course of business, or transfer of shares in a share exchange, or an Amendment of the Articles that effectuates a reverse stock-split] may exercise their right to force the Corporation to buy them out at fair value.

❌ Right not available if the stock is listed on a national exchange; or has

❌ 2,000 or more Shareholders.

✅ So, in effect, the right of appraisal exists in closely-held Corporations.

💡 The right may exist even without dissenting at an actual Shareholder Meeting - as in the case of a short-form merger.

To perfect the right:

1️⃣ Before Shareholder vote, file written notice of objection + intent to demand payment;

2️⃣ Abstain or vote against the proposed change; and

3️⃣ After the vote, within time set by Corporation, makewritten demand to be bought out and deposit stock with the Corporation.

If the Shareholder and the Corporation cannot agree on a fair value, the Court may appoint an appraiser.

This is the Shareholders' only remedy for these fundamental changes (absent fraud).

Credits:

This FAQ was prepared by James D. Ford GAICD | Principal Solicitor, Blue Ocean Law Group℠.

Important Notice:

This FAQ is intended for general interest + information only.

It is not legal advice, nor should it be relied upon or used as such.

We recommend you always consult a lawyer for legal advice specifically tailored to your needs & circumstances.