In California, Directors Who Abstain May Still Face Liability

Section 316(a) of the California Corporations Code imposes joint and several liability on directors who approve any of the following actions:

• The making of any distribution to shareholders to the extent contrary Sections 500 - 503;
• The distribution of assets to shareholders after institution of dissolution proceedings of the corporation, without paying or adequately providing for, all known liabilities of the corporation (excluding untimely claims); or
• The making of any loan or guaranty contrary to Section 315 (See D&O Loans: California Section 315 Versus Sarbanes-Oxley Section 402).

Given the potential for personal liability, some directors, deciding that discretion is the better part of valor, may simply abstain in any vote to approve these actions.  However, abstaining is neither valorous nor efficacious.  Section 316(b) deems that a director who abstains from voting will be considered to have approved the action if he or she was present at the board or committee meeting at which any of the above actions was taken.  To avoid the risk of liability under Section 316(a), a director must either not show up or vote against these actions.