Board Qualifications: Why You Need Clearly Written Corporate Bylaws
San Diego and California corporations are created by the filing of Articles of Incorporation with the California Secretary of State’s office. Two documents establish and set out the manner in which any given corporation is governed — the Articles and the Company bylaws. A company’s bylaws are a lengthy document that sets out the rules of governance for how the corporation will operate.
It is essential to have an experienced San Diego corporate attorney draft your company’s bylaws. Like a good business contract, it is important that the bylaws be clearly written. Unclear and vague bylaws can invite expensive and time-consuming litigation. A good example of what not to do can be found in a recent case decided by the California Court of Appeals called Brown v. Pacifica Foundation, Inc., Case No. A152824 (Cal. App. 2nd Dist. April 29, 2019). Pacifica Foundation involved the interpretation of a vague bylaw provision with respect to qualifications for being on the board. Under the Corporations Code, a corporation can establish various eligibility qualifications for who can be elected by the shareholders to the board of directors. Examples might include: “must own shares of the Company” or “must live in California” or something similar. See Cal. Corp. Code, § 212. The specific bylaw at issue in Pacifica Foundation prohibited a person from being on the board if they held “any elected or appointed public office at any level of government …” The plaintiff in the case was a member of the Los Angeles Small Business Commission (“LASBC”). Members of the Commission are not elected but are appointed by the Los Angeles Board of Supervisors. The LASBC only serves in an advisory capacity for the City and does not have any sort of rule-making or law-making authority. Brown argued that she did not hold a “public appointed office” and that, therefore, she was eligible to be elected to the board of the Pacifica Foundation. The Foundation disagreed, and litigation ensued.
At the trial level, Brown was successful. The trial court held that being on the LASBC was not the holding of an “appointed public office.” The trial court held that, for Brown to be considered holding an “appointed public office,” she LASBC would need to exercise “some portion of the sovereign functions of government.” This concept was based on various cases that have discussed what constitutes a public office. Because the LASBC was a “purely advisory” body, the trial court held that no one on the LASBC was holding public office.
On appeal, the Court of Appeals reversed. The Court of Appeals held that there was no one definition under California law of “public office” and held that the phrase in the corporate bylaws was ambiguous. The court then looked to the remainder of the bylaws and other evidence to understand the purpose of the rule and to harmonize various provisions of the bylaws. The court concluded that the purpose of prohibiting a person from serving on the board if they held a “public office” was to prevent board members from having loyalties to political incumbents and/or administrations that might interfere with the not-for-profit mission of the corporation. As such, the court held that Pacifica’s public office ban was intended to apply broadly to exclude persons such as members of the LASBC.
As noted above, clearly written corporate bylaws could have prevented this case from ending up in the courts. If your corporation desires to set various qualifications for who can serve on the board of directors, it is important to have those bylaw provisions written by an experienced corporate attorney and it is important to have the bylaws written in clear and unambiguous terminology.
Contact San Diego Corporate Law
For more information, contact attorney Michael Leonard of San Diego Corporate Law. To schedule a consultation, contact Mr. Leonard via email or by calling (858) 483-9200. Mr. Leonard has been named a “Rising Star” four years running by SuperLawyers.com and “Best of the Bar” by the San Diego Business Journal. Like us on Facebook.