In order to protect minority shareholders of a California corporation or S Corporation, the California Corporations Code limits how the size or number of directors on a corporation’s board of directors can be reduced. These limitations are found at Sections 194.5 and 212 of the Corporations Code. Scroll down for the text of these statutes.
Governing Documents Affecting Board of Directors
The Articles of Incorporation or Bylaws cannot be amended after shares have been issued to reduce the board of directors below 5 if at least 1/6th or 16.67 percent of the outstanding shares that can vote, do so against the reduction. This statute was enacted in order to ensure the holders of 16.67 percent of shares would not lose the power to elect at least one member to the board of directors on a five-member board.
California Corporations Code Section 194.5 (Retrieved September 2012):
“Voting power” means the power to vote for the election of directors at the time any determination of voting power is made and does not include the right to vote upon the happening of some condition or event which has not yet occurred. In any case where different classes of shares are entitled to vote as separate classes for different members of the board, the determination of percentage of voting power shall be made on the basis of the percentage of the total number of authorized directors which the shares in question (whether of one or more classes) have the power to elect in an election at which all shares then entitled to vote for the election of any directors are voted.
California Corporations Code Section 212 (Retrieved September 2012):
(a) The bylaws shall set forth (unless such provision is contained in the articles, in which case it may only be changed by an amendment of the articles) the number of directors of the corporation; or that the number of directors shall be not less than a stated minimum nor more than a stated maximum (which in no case shall be greater than two times the stated minimum minus one), with the exact number of directors to be fixed, within the limits specified, by approval of the board or the shareholders (Section 153) in the manner provided in the bylaws, subject to paragraph (5) of subdivision (a) of Section 204. The number or minimum number of directors shall not be less than three; provided, however, that (1) before shares are issued, the number may be one, (2) before shares are issued, the number may be two, (3) so long as the corporation has only one shareholder, the number may be one, (4) so long as the corporation has only one shareholder, the number may be two, and (5) so long as the corporation has only two shareholders, the number may be two. After the issuance of shares, a bylaw specifying or changing a fixed number of directors or the maximum or minimum number or changing from a fixed to a variable board or vice versa may only be
adopted by approval of the outstanding shares (Section 152); provided, however, that a bylaw or amendment of the articles reducing the fixed number or the minimum number of directors to a number less than five cannot be adopted if the votes cast against its adoption at a meeting or the shares not consenting in the case of action by written consent are equal to more than 16 2/3 percent of the outstanding shares entitled to vote.
(b) The bylaws may contain any provision, not in conflict with law or the articles for the management of the business and for the conduct of the affairs of the corporation, including but not limited to:
(1) Any provision referred to in subdivision (b), (c) or (d) of Section 204.
(2) The time, place and manner of calling, conducting and giving notice of shareholders’, directors’ and committee meetings.
(3) The manner of execution, revocation and use of proxies.
(4) The qualifications, duties and compensation of directors; the time of their annual election; and the requirements of a quorum for directors’ and committee meetings.
(5) The appointment and authority of committees of the board.
(6) The appointment, duties, compensation and tenure of officers.
(7) The mode of determination of holders of record of its shares.
(8) The making of annual reports and financial statements to the shareholders.