Why Do Boards Get To Spend Money In Proxy Contests

Allen Matkins

Allen Matkins

Recently, UCLA Law School Professor posed the question "Why do boards get to spend corporate money to fight off proxy contests?" His answer is answer "because the courts say so". In California, it is because the legislature has said so, at least in the case of nonprofit mutual benefit corporations. Corporations Code Section 7526 provides:

Without authorization of the board, no corporation funds may be expended to support a nominee for director after there are more people nominated for director than can be elected.

This authority rests with the entire board and may not be delegated to a committee of the board. Cal. Corp. Code § 7212(a)(7). Analogous provisions can be found in the Nonprofit Public Benefit and Cooperative Corporation laws. Cal. Corp. Code §§ 5212(a)(7), 5226, 12352(a)(7), & 12476.

The negative implication of the statute is that no board authorization is required for the expenditure of corporate funds when the number of candidates is equal or less than the number of seats to be filled. However, all activities of the corporation must conducted under the direction of the board. Cal. Corp. Code § 7210.

In Olson v. Automobile Club of Southern California, 139 Cal. App. 4th 552, 558, 44 Cal. Rprt. 3d 1, 5 (2006), the Court of Appeal concluded that the legislature has removed the question from the purview of the courts:

As aptly discussed by the trial court, the question of whether it is unfair and unreasonable for a board to spend money to elect nominees it supports has been dealt with by the Legislature in section 7526, which permits spending on elections with the restriction that such expenditures are approved by the board. Even though the Auto Club's directors will likely continue to have an advantage, the matter has been debated and the Legislature has never modified the statute on corporate spending in elections.

This does not mean that the board's decision on the amount of spending is not subject to judicial review. As the Justice Roger W. Boren explained in Olson:

Regarding the amount of spending, campaign spending decisions are subject to the fiduciary duty standard in section 7231 (see § 7232, stating that § 7231 “governs the duties of directors as to any acts or omissions in connection with the election . . . of directors”), rather than any proportionate spending limits urged by Olson and Seidenberg. After directors have made a reasonable investigation, they must act in what they in good faith believe is in “the best interests of the corporation.” (§ 7231, subd. (a).) Moreover, no arbitrary campaign spending limits and no restrictions on the timing of campaign advocacy are imposed by the safe harbor elections procedures. (See § 7520.)

The Supreme Court affirmed Olson on a different issue and did not address the question of spending money on proxy solicitations. Olson v. Automobile Club of Southern California, 42 Cal. 4th 1142, 179 P.3d 882, 74 Cal. Rptr. 3d 81 (2008).

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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