Can A Corporation Change Its Board Size In Proprio Motu?

Allen Matkins
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Allen Matkins

As noted in yesterday's post, Secretary of State Shirley N. Weber is asking U.S. District Court Judge R. Gary Klausner to dismiss a challenge to California's board quota statutes.   In her motion to dismiss, the Secretary of State advances the following argument:

The Legislature explicitly provided corporations subject to SB 826 and AB 979 flexibility to comply with their terms without excluding any sitting or potential director based on gender or lack of membership in an underrepresented group: “A corporation may increase the number of directors on its board to comply with this section.” Cal. Corp. Code §§ 301.3(a) and 301.4(a).

It is hard to know what to make of this statement.  It is accurate insofar as that is what the statutes say, but did the legislature really provide any additional flexibility?  

Under the California General Corporation Law, the authorized number of directors may either be a fixed number or a number fixed within a specified range.  Cal. Corp. Code § 212(a).  Corporations do not change these numbers - shareholders do.  After shares have been issued a change in specifying or changing a fixed number of directors or the maximum or minimum number or changing from a fixed number to a variable board or vice versa requires the approval of the outstanding shares (as defined in Section 152).  Id.  For publicly held corporations securing the requisite shareholder approval is both time consuming an costly because of the need to comply with the federal proxy rules.  

Even if the Secretary of State were correct that the legislature conferred some flexibility, this flexibility is limited to "corporations", a term defined in Section 162 as corporations organized under the GCL and certain other domestic corporations.  The statutes at issue, however, apply publicly held foreign corporations.  As much as California's legislature might wish to do so, it has no authority to change other state's laws governing how their corporations fix the sizes of their boards of directors.  

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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