When Abstaining From A DIRECTOR Vote Isn’t Enough To Avoid Liability
Over the last two decades, there has been a rise in the number of actions seeking to hold the directors of a company liable for actions that are taken by the board. Given this increased scrutiny, it is now more important than ever that directors understand their legal obligations.
One area that could trip up an unsuspecting director is Section 316(a) of the California Corporations Code. It provides that directors of a corporation who approve any of the following corporate actions can be held jointly and severally liable:
- The making of any distribution to its shareholders to the extent that it is contrary to the provisions of Sections 500 to 503;
- The distribution of assets to shareholders after institution of dissolution proceedings of the corporation, without paying or adequately providing for all known liabilities of the corporation, excluding untimely claims;
- The making of any loan or guaranty contrary to Section 315.
One might think that by simply abstaining from a vote, a director would be able to shield themselves from liability. But that would be wrong.
The Corporations Code explicitly provides that a director who is present at a meeting at which any of the above mentioned actions are taken and abstains from voting "shall be considered to have approved the action.” Accordingly, in order to avoid the risk of liability under Section 316(a), a director must either be absent from the meeting or vote against the action.