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Does The Foolish Director Abide Whilst The Wise Director Flees?

Never fear? Smith Is No Longer Here

Yesterday's post highlighted Section 316 of the California Corporations Code, a statute that imposes joint and several liability on directors who approve specified transactions such as a loan to an officer contrary to Section 315.  Now consider the following scenario:

Dr. Zachary Smith, a director, attends a meeting of the board of directors of Jupiter 2, Inc., a California corporation.  At meeting, Dr. Smith learns that the board will consider an approval of a loan to Professor Maureen Robinson, the chief executive officer of Jupiter 2, Inc.  Knowing that this loan will likely violate Section 315 of the California Corporations Code, Dr. Smith decides to leave the meeting before a vote is held on the loan.

Has Dr. Smith escaped liability under Section 316?  As I pointed out yesterday, Section 316(b) provides that a director who is present at a meeting of the board at which any of the three specified actions was taken and who abstains is considered to have approved the action.  Thus, an abstention is tantamount to an approval. Thus, the question is how to characterize Dr. Smith's departure from the meeting.

"Abstention" is derived from two Latin words - ab, meaning away or from, and tenere, meaning to hold.  Thus, to abstain is to hold a vote away. See Jeremy Bentham - Present But Not Voting.   If Dr. Smith remained for the vote and simply didn't vote, he would clearly would be abstaining and approving the loan pursuant to Section 316(b).

Section 316(b) requires that a director be present at the meeting, it doesn't expressly require that the director be present when the action is taken.  Thus, the question is whether a departure prior to the vote constitutes an abstention for purposes of the statute.  A premature departure has exactly the same effect as staying and declining to vote.  Indeed, Dr. Smith's leave-taking would not have necessarily prevented action by the board.  Under Corporations Code Section 307(a)(8), directors at a meeting at which a quorum is initially present may continue to transact business despite the withdrawal of directors (any action taken must be approved by at least a majority of the required quorum for that meeting).  Thus, it might be argued that Dr. Smith should bear the same consequences of not voting whether absents himself or remains and abstains.

Should intent, however, play a role in fixing liability?  In my hypothetical, Dr. Smith is leaving in order to avoid liability.  What if he had intended to stay for the entire meeting but was called away without knowing that the directors would later vote on the loan?  This certainly could happen because a notice of a regular or special board meeting need not specify the purpose of the meeting.  Cal. Corp. Code § 307(a)(2).  It does seem to be an unduly harsh result to impose personal liability on a director simply because he unwittingly left a meeting early.

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30172DBAB0084D3A8F39D7AF0A8E79BC.ashx Keith Paul Bishop
Partner at Allen Matkins
(949) 353-6328
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