Suppose your corporation has a five member board of directors but two seats are vacant. Suppose further that your corporate bylaws included the following two provisions:
A. Three members of the board shall constitute a quorum for the purpose of transacting any business of the board.
B. Any final action of the board shall be taken by a majority of all the members of the board, at a meeting duly called and held.
If the three members of the board attend a meeting and the vote is two to one in favor of a resolution, does the resolution pass? That was essentially the question facing the court in California Building Industry Ass’n v. State Water Resources Control Board, 2015 Cal. App. LEXIS 328 (April 20, 2015).
The Court of Appeal interpreted the quorum provision as also prescribing the vote required – a majority of a quorum. Writing for the majority, Justice J. Anthony Kline found that this was consistent with the common rule. Justice James A. Richman in dissent conceded ambiguity but looked to legislative history and the purposes of the statutes.
The case concerns two provisions of the California Water Code – Sections 181 and 183. Thus, it isn’t directly applicable to corporations or bylaws. In fact, Corporations Code Section 307(a)(8) is much more direct, providing:
An act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present is the act of the board, subject to the provisions of Section 310 and subdivision (e) of Section 317.
Nonetheless, I do think that the case has some relevance for corporate lawyers. It is important to remember the basics of board meetings. Is there a quorum? If there is a quorum, does a vote require a majority of a quorum or a majority of the authorized number of directors? California permits the default rule in Section 307(a)(8) to be varied by the articles of incorporation or, subject to Section 204(a)(5), in the bylaws. Therefore, it always pays to check the articles and the bylaws for a contrary rule.
Finally, I believe the case reinforces the issues that I recently raised concerning the procedures of the Securities and Exchange Commission. I noted that while SEC Rule 200.41 establishes a quorum rule for meetings of the Commissioners, neither Congress nor the SEC seems to have adopted any general voting standard for action by the Commissioners. (There are several rules requiring a recorded vote of a majority of the entire membership of the SEC with respect to specific matters (Rules 200.403, 200.404, and 200.405).). From a public policy perspective, it makes sense to require action by a majority of the Commissioners since that encourages the majority to get the support of the minority party. In fact, Section 4(a) of the Securities Exchange Act of 1934 provides that not more than three Commissioners may be members of the same political party, and in making appointments, members of different political parties must be appointed alternately as nearly as may be practicable.
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