Corporate Governance: Breaking Board Deadlocks with a Provisional Director
Like any human activity, running a business can be fraught with disagreements and disputes. Sometimes these disagreements are severe enough to result in deadlocks on the corporation’s board of directors. This is possible if your corporation has an even number of directors (and this is among the reasons to consult an experienced San Diego corporate attorney with respect to properly structuring your San Diego corporation). Corporate deadlock has been common enough over the years that the California State Assembly has enacted a couple of statutory provisions that provide methods for breaking deadlocks among the directors. See Cal. Corp. Code, §308(a). In simple terms, the Corporations Code allows for the appointment — by the courts — of a provisional director. The request for a provisional director can come from one of the other directors or from a shareholder or shareholders holding at least one-third of the “voting power.”
To be eligible for the appointment of a provisional directions, these conditions must be met:
- The board has an even number of directors
- The board is deadlocked as to the “management of [the] affairs” of the corporation
- The voting deadlock is such that (i) the business of the corporation can no longer be conducted to advantage or that (ii) there is a danger to the corporation’s property and business will be impaired or lost and
- Suit is brought by the proper persons (see above)
Provisional directors can also be appointed for not-for-profit public benefit corporations under Corporations Code, §5225 as long as notice is provided to the California Attorney General. A family law judge may also appoint a provisional director in a divorce proceeding under certain circumstances. See Cal. Fam. Code, § 290.
Here are a few other frequently asked questions with respect to provisional directors:
How Long Does the Provisional Director Serve?
In general, if appointed, the judge will appoint a provisional director for an indeterminate length of time. The appointment ends if the director
- Is removed by court order
- Is removed by a vote of the shareholders
This last point is important since the purpose of the provisional director is to be a tie-breaker. The provisional director does not have the power to run the company or override the board or to take control of the company. The shareholders still run the company and, if they are in agreement to remove the provisional director, then that is allowed.
On What Decisions/Issues can the Provisional Director Participate and Vote?
Simply put, the provisional director is allowed to vote and have input on everything. The provisional director is like the other directors.
Does the Provisional Director Get Paid, How, and How Much?
Yes, provisional directors get paid. They are paid by the corporation (as are the other directors) and they are paid as the court orders.
Contact San Diego Corporate Law
If you would like more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard provides a full panoply of legal services for San Diego and California businesses. Mr. Leonard can provide advice and counsel on starting up a new business, with respect to forming a new corporate entity, assist with corporate formalities, and can help review and draft business contracts. Mr. Leonard can be reached at (858) 483-9200 or via email. Like us on Facebook.