Thoughts on Handling a Dissident Director

Under California law, the board of directors of a San Diego corporation is charged with the management of the company. See Cal. Corp. Code, §300 which states that “… the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board.” The board’s authority and power must be exercised as a group — individual directors have no authority apart from the board.

One of the thorniest problems faced by corporate directors, officers, and corporate lawyers is when a board becomes consistently divided against itself. Worse still is the situation in which one or more directors files a shareholder or other lawsuit against the corporation. This generates the problem of handling a dissident director. Among the legal issues are:

• Appropriateness of removing the dissident director
• How can removal be accomplished legally?
• If the director is also a shareholder, how to avoid minority shareholder oppression
• What information must be shared with the dissident director — books and records yes, but what about counsel and advice covered by the attorney-client privilege?
• Can the dissident director be excluded from board meetings?
• What duties are owed to the corporation by the dissident director?
• And more

This article discusses a few of these issues. A good San Diego corporate attorney can provide advice and counsel if your company finds itself dealing with a dissident director.

San Diego Corporate Law: Legal Principles

In general, directors owe a fiduciary duty of care to the corporation and its shareholders and must serve “in good faith, in a manner such director believes to be in the best interests of the corporation and its shareholders.” See Cal. Corp. Code, § 309(a). This is the so-called “business judgment rule.” If a director is exercising his or her “best judgment,” then he or she cannot be held personally liable by the shareholders if the decision at issue turns out to be a bad business decision. In general, California courts will presume that directors are acting in good faith and the courts will defer to the business judgment rule. However, this rule does not apply to interested directors – those who are acting not on the merits of a particular decision, but rather on the basis of extraneous considerations or influences.

This, then, is the first legal issue with respect to dissident directors. Because they are in conflict with the other directors and at odds with the corporation itself, their decisions as members of the board are subject to a higher level of scrutiny. Their duty of loyalty and their business judgment will be examined more closely if a legal challenge is raised.

With respect to corporate books, records, documents, information, and the physical location of the corporation, in general, every director has an “absolute right” at any reasonable time to inspect and review such records and to inspect the “physical properties.” See Cal. Corp. Code, §1602.

A director cannot exercise his or her obligations as a director without access to the information needed to make a decision that is in the best interests of the corporation. That being said, under some circumstances, it can be proper to limit information or inspection that a dissident director is given, such as access to trade secrets and other confidential information, if such information/inspection is not relevant to a board decision that must be made. Likewise, attorney counsel and guidance can be limited. See Cal. Corp. Code, §1603. As one court stated it, this rule is necessary because a dissident director is an adversary of and to the corporation. The dissident director

“… cannot take off his “shareholder’s hat” and swap it for his “director’s hat” and claim an absolute right to access all corporate documents. In this situation, a court may properly limit a director’s inspection rights because the director’s loyalties are divided and documents obtained by a director in his or her capacity as a director could be used to advance the director’s personal interest in obtaining damages against the corporation.”

See Tritek Telecom, Inc. v. Superior Court, 169 Cal. App. 4th 1385 (Cal. Court Appeal 4th Dist. 2009).

With respect to attendance at meetings, no director — even a dissident director — can be excluded. However, a board could legitimately exclude a director from discussions that relate solely and specifically to the dispute with the dissident director.

With respect to removal, that is a shareholder decision, not a board decision. If the dissident has enough support among the shareholders or a sufficient number of shares owned by him- or herself, then the dissident director cannot be removed absent court intervention or dissolution.

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.

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