Section 307 – No More Sunset

Some readers may have noticed that there are currently two Section 307s in the Corporations Code.  One version of Section 307 provides in subdivision (d) that it remains in effect only until January 1, 2011.  This is commonly referred to as a “sunset provision”.   Subdivision (d) of the other Section 307 provides that it will become operative on January 1, 2011.

So why the two sections?

The answer requires a bit of history.  Prior to 2005, Section 307 permitted board action by unanimous written consent.  This presented a concern when the board was asked to approve a contract or transaction for purposes of Section 310 (relating to so-called “interested director” transactions).  The unanimity requirement for consents meant that an interested director would need to consent whereas if the action was taken at a meeting, the interested director could abstain.  To address this concern, the Corporations Committee of the Business Law Section of the California State Bar sponsored SB 119 (Ackerman) which amended, repealed and added Section 307.

That’s right, the bill actually did all three!  Subdivision (b) of Section 307 was amended to allow an interested director to abstain in writing from providing a consent provided certain conditions were met.  However, there was concern that this might be altogether too radical a change and so the legislature decided to give the change a test run by providing that Section 307 would be repealed on January 1, 2011 unless a later enacted statute that is enacted before January 1, 2011, deletes or extends that date.  The legislature then added the former version of Section 307 to become operative on January 1, 2011.

Apparently, Section 307 as amended has performed satisfactorily.  As a result, the Corporations Committee sought legislation to repeal the sunset provision.  The legislature passed AB 2158 (Hagman) earlier this month and the Governor recently signed the bill.  Thus, the Section 307 that would have taken effect next year has been repealed and the existing Section 307 was amended to remove the sunset provision.  Ergo, finem occidentem habemus!

Incidentally, AB 2158 was originally introduced to expand and consolidate the provisions of the General Corporation Law relating to statutory close corporations.  These changes encountered some headwinds and the bill was gutted and amended to eliminate the Section 307 sunset.

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