Section 308 of the California Corporations Code provides for the appointment of a provisional director when a corporation has an even number of directors who are equally divided and cannot agree as to the management of the corporation’s affairs, so that its business can no longer be conducted to advantage or so that there is danger that its property and business will be impaired or lost.

The corporation in Verma v. Okev, 2015 U.S. Dist. LEXIS 11432 (Jan. 29, 2015) had just two directors who couldn’t agree.  Accordingly, the plaintiff filed a motion under Section 308 for the appointment of a provisional director.  Chief U.S. District Court Judge Morrison C. England, Jr., however, refused to grant the motion.  He found that the corporation had ceased operating over two years ago and there is no ongoing business for the corporation to conduct.  He also found that it is unclear that the corporation’s property and business would be lost because it had not been operating and was suspended by the Secretary of State.

Judge England’s ruling seems fairly straightforward: Section 308 requires both a deadlock and an adverse consequence to the corporation.  However, the ruling raises at least two interesting questions.

Judge England raised the first question in a footnote – Does a court have the authority to appoint a provisional director for a suspended corporation?  Here’s the Court’s answer:

Moreover, Plaintiffs again fail to cite any relevant authority standing for the proposition that this court may appoint a provisional director to serve an already suspended corporation in the first place. Under California law, a suspended corporation is disqualified from exercising any right, power, or privilege, including prosecuting or defending an action, or appealing a judgment.  Timberline, Inc. v. Jaisinghani, 54 Cal. App. 4th 1361, 1365 (2d Dist. 1997).  Absent some authority to the contrary, then, the Court finds it unlikely a provisional director may be appointed in this context either.

I’m inclined to see the matter differently.  Section 308(b) provides that the action for appointment may be brought by any director or by the holders of not less than 331/3 percent of the voting power.  A suspended corporation may have its rights suspended, but this shouldn’t suspend the rights of others to seek relief that may result in the corporation’s resurrection.

The other question is not raised in the opinion – Does a federal court have the authority to appoint a provisional director in any case?  Section 308(a) is quite specific.  It provides that the superior court of the proper county may appoint a provisional director.  There’s no mention of a federal court having that authority.  Perhaps some reader can point to a principle that allows federal courts to exercise powers statutorily vested in a state court.  Judge England’s opinion doesn’t address the jurisdictional basis for the plaintiffs’ suit.