Deadlocked But Not Out Of Options

While not prohibited by the General Corporation Law, a board comprised of an even number of directors suffers from one potential disability.  It can become deadlocked.  When that unfortunate situation arises, there are options.

One option involves a judicial appointment of a provisional director.  Pursuant to Corporations Code Section 308, any director or the holder(s) of not less than 33 1/3 percent of the voting power may petition the Superior Court for the appointment of a provisional director.  In order to obtain this relief, the following conditions must be met:

  • There must be an even number of directors;
  • The directors must be equally divided;
  • The directors must not agree as to the management of the corporation’s business so that
    • the business can no longer be conducted to advantage; or
    • there is a danger that the corporation’s property and business will be impaired or lost.

(As an aside, I can imagine the possibility of an odd number of directors who are equally divided, but Section 308 doesn’t appear to reach that situation.)

The provisional director must have both positive and negative characteristics.  On the positive side, she must be “an impartial person”.  On the negative side, she must be:

  • A shareholder;
  • A creditor; or
  • Related by consanguinity or affinity within the third degree according to the common law to:
    • Any of the other directors; or
    • Any judge of the court appointing the provisional director.

A provisional director has all of the rights and powers of a director, but her life expectancy is short.  The code provides that she has these rights and powers until the deadlock is broken or until she is removed by the court or approval of the outstanding shares (Section 152).

This is but one option that may be available in the case of a deadlock.  I’ll try to address others in a future post.