Corporate Governance: Directors Cannot Vote by Proxy
We wrote recently about use of shareholder proxies. As we discussed, San Diego and California corporations are owned by shareholders, but the management of the corporation is given over to the board of directors. As one court said long ago, “[t]he property of a corporation belongs to the stockholders, but the possession and management thereof is in the hands of the directors.” Part of being a shareholder is the power to vote — usually one vote per share — on who will be on the board of directors. In other words, the shareholders elect the board of directors. There is often an overlap between the categories. A large shareholder is often on the board and, many times, upper management has seats on the board of directors.
As we discussed, shareholders can give proxies for their votes if they cannot attend a meeting at which shareholders are expected to vote. These proxies must be in writing that designates the person entitled to vote and may or may not have limitations and instructions.
A board of directors also takes action via voting. Generally, a corporate action takes a majority vote of the directors (unless a larger majority is required by law or by the corporate governing documents). So, one of the questions that sometimes arises is whether directors can give proxies for voting on board decisions.
Under California and general corporations law, the answer is “no.” The prohibition against director-proxy-voting is specifically set forth for not-for-profit corporations at Cal. Corp. Code, §7211(c). That provision states: “No director may vote at any meeting by proxy.” There is no corresponding provision for regular corporations in California, but caselaw and general corporation law forbids directors from voting by proxy. The director must be present at the board meeting and must vote in person. See, for example, FLETCHER’S Cyclopedia of Corporations, § 427 (“The directors of a corporation generally cannot vote at directors’ meeting by proxy, but must be personally present and act themselves.”) See also Greenberg v. Harrison, 143 Conn. 519 (Conn. Supreme Court 1956) (“The affairs of a corporation are in the hands of its board of directors, whose duty it is to give deliberative control to the corporate business. This requires the physical presence of a director at directors’ meetings, and he cannot act by proxy.”); Haldeman v. Haldeman, 197 S.W. 376 (Ky. Supreme Court 1917).
There are several reasons for this. First, California law imposes on the directors of a corporation the duties and responsibilities of managing the corporation. Directors are agents for the shareholders. As such, they owe fiduciary duties to the shareholders. Among those duties is the responsibility to be present at board meetings; hear, read, and evaluate the relevant information provided at the meetings; and to use their independent and best judgment in making decisions for the corporation. Board meetings are intended to be deliberative endeavors. Delegating one’s vote via the proxy mechanism would abdicate these fiduciary duties and defeat the deliberative nature of the board’s decision-making process.
From the standpoint of the individual director, giving a proxy and allowing another director or another person to vote at a board of directors meeting will subject the director to potential liability for breach of fiduciary duty. Shareholders can sue directors if the directors fail to exercise their best business judgment in making decisions. Not being present at a board meeting and allowing another person to vote via proxy is not exercising one’s business judgment.
Contact San Diego Corporate Law
For more information, please contact Michael Leonard, Esq. of San Diego Corporate Law. Mr. Leonard’s law practice is focused on business, transactional, and corporate matters, and he proudly serves business owners in San Diego and the surrounding communities. Contact Mr. Leonard by email or by calling(858) 483-9200. Like us on Facebook.