Who is a “Director” With Respect to Your San Diego Corporation?

In general, San Diego corporations are run by a Board of Directors. The Board meets regularly to make important, strategic decisions. Among those decisions are hiring a chief executive officer (“CEO”) and then authorizing the CEO to run the day-to-day operations of the company. As a corporation grows, board of director meetings can be populated with a large number of people like the CEO, people designated as “directors ex-officio,” lawyers, managers, other employees and, as you look around the table, you think to yourself: “Who is a director?” Here is some guidance.

Who/What is a Director?

Under California law, a director of a corporation must be a natural person. Thus, a corporation cannot be a director of another corporation. See Cal. Corp. Code § 164.

Further, whether a person is a director under the law depends on several factors including;

• Is the person designated as a “director?”
• Was the person listed on the articles of incorporation?
• Was the person properly elected as a director?
• Does the person have a vote on matters considered by the board?
• Does the person receive compensation?

If these conditions are satisfied, very likely the person is a “director.” Questions might arise, however, if the “director” does not have a vote. In general, a person designated as “Director Ex Officio” is a non-voting member of the Board and is likely to be deemed not a director.

In general, directors are elected by the shareholders of the corporation. As such, many issues can and have arisen about such elections. Were the votes cast for that particular director proper votes from shareholders entitled to vote? Was the meeting at which the director was elected a properly noticed election meeting? Was the election properly called in time and place pursuant to the corporate governing bylaws? Did the director receive sufficient votes to be elected? Were proxy votes used and where the proxies valid? Was there any other impropriety in the voting process?

These factors arise from California law. For example, with respect to for-profit corporations, under Cal. Corp. Code § 164, a director is defined as “natural persons designated in the articles as such or elected by the incorporators and natural persons designated, elected or appointed by any other name or title to act as directors, and their successors.”

With respect to not-for-profit corporations, Cal. Corp. Code § 5047 states:

“directors” means natural persons, designated in the articles or bylaws or elected by the incorporators, and their successors and natural persons designated, elected, or appointed by any other name or title to act as members of the governing body of the corporation … A person who does not have authority to vote as a member of the governing body of the corporation, is not a director … ”

Cal. Corp. Code § 5047.5 provides a shield from liability for certain directors of not-for-profit corporation where the director serves without compensation.

Thus, when a court is confronted with a challenge as to “who is a director?” the courts will look to all the foregoing factors and will closely examine facts related to elections.

What Do Directors Do?

Corporations can only act through human beings. Those human beings must be properly authorized to take whatever actions were taken on behalf of the company. Thus, occasionally, there is a dispute about whether certain corporate actions were authorized. Aside from whether a vote by the board of directors was taken, one can challenge who cast the votes. If directors voted, but those directors were not proper directors, then the corporate action itself might not be legitimate.

At the individual level, whether you are a director or not determines if you owe certain fiduciary duties to the corporation and whether the business judgment rule applies. As we discussed here, directors can be sued by shareholders and others for breach of their various duties as directors of the corporation. But, at the same time, directors are shielded by the business judgment rule, which provides personal immunity to directors if any decision made by him or her turns out to be a bad decision. Such decisions might be hiring a key employee, buying certain property, entering a certain market segment with a new product, etc. If you are not a director, then various duties do not apply to you and, in general, you do not have to worry about being sued in a shareholder derivative action lawsuit.

Contact San Diego Corporation Law Today

The foregoing discussion highlights again the need for well-drafted and complete minutes of the Board of Directors meetings. Among other things, it is crucial to list the persons present at the meeting and who at the meeting is a voting director and non-voting participant. At election meetings, it is essential to detail the process and all votes, particularly if proxies are being used. Every corporation needs experienced and trusted corporation counsel like attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard proudly serves the San Diego area, offering a full range of legal services to his business clients and can provide advice and assistance with meetings of your Board of Directors. Mr. Leonard can be reached at (858) 483-9200 or via email.

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