Effective January 1, 2006, provisions of the California Corporations Code will be amended to enable interested directors to abstain when a board of directors approves an interested director transaction by written consent.

Senate Bill No. 119 (SB 119), which Governor Schwarzenegger signed on July 21, 2005, addresses the concern that a director who signs a written consent to approve a transaction in which the director is interested is subject to greater risk of liability to the extent that a claim is brought by other constituencies of the company, be it shareholders, employees or creditors, in connection with the transaction.  Prior to SB 119, board actions by written consent were required to be signed by all of the directors, including any interested directors.

SB 119 amends the California Corporations Code to enable interested directors to abstain when a board of directors approves an interested director transaction by written consent, under certain conditions.  These conditions include that:

• the number of directors serving at the time that the written consent is signed must constitute a quorum;
• the disclosures required by Section 310 of the California Corporations Code must be made prior to the signing of the written consent.  Section 310 requires full disclosure of the material facts as to the transaction and any director’s interest in the transaction;
• the Section 310 disclosures must be stated conspicuously in the written consent;
• all of the non-interested directors must sign the written consent and approve the action by a vote that is sufficient without counting the votes of the interested directors; and
• all of the interested directors must abstain in writing from providing consent.

SB 119 states that the same procedures apply to an action by written consent executed by members of a committee of the board.  SB 119 contains a five-year (January 1, 2011) sunset clause.

If an interested director transaction is approved by written consent in accordance with the foregoing procedure but the disclosures made regarding the action that is the subject of the consent do not comply with the requirements of Section 310, then the action that is the subject of the consent is deemed approved, but in any suit brought to challenge the action, the party asserting the validity of the action will have the burden of proof in establishing that the action was just and reasonable to the corporation at the time it was approved.