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Another Quorum Quirk

Yesterday's post considered the anomalous workings of California Corporations Code Section 112 with respect to the determination of a quorum when some shares are disqualified from voting with respect to a matter.  Section 315(g) presents another oddity. 

With certain exceptions not covered in today's post, Section 315 generally prohibits loans of money or property to directors and officers of a corporation unless the  loan is approved by a "majority of the shareholders entitled to act thereon".  Subdivision (g)(2) provides that this phrase means "the affirmative vote of a majority of the shares present and voting at a duly held meeting at which a quorum is otherwise present, without counting as either present or voting any shares owned by any officer or director eligible to participate in the plan or transaction that is subject to the approval".

If a corporation is seeking approval of a loan to an officer who owns 90% of the outstanding shares, the effect of this provision is that the officer's shares could not be counted as present for purposes of establishing a quorum.  In this situation, shareholders could not approve a loan to the officer because the statute requires that a quorum be "otherwise present" but does not allow the officer's shares to be counted as present.  

There is a possible solution to this conundrum, but that is the subject of a future post.

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