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CALIFORNIA CORPORATE & SECURITIES LAW

Getting To The Point On Director Elections

Last week in The Mentor Blog, Broc Romanek mentioned a blog posting of mine from September 2015: Was This Director Duly Elected Or Appointed?  My post was concerned Intelligent Digital Systems, LLC v. Beazley Ins. Co., Inc., 2015 U.S. Dist. LEXIS 82742 (June 23, 2015).  Briefly, an insurer claimed that the director had been duly elected or appointed and this triggered a policy exception for insured versus insured claims.  The dispute centered around whether under Nevada law and the corporation’s bylaws, the directors must adopt a resolution increasing the size of the board and then adopt a second resolution filling the vacancy thereby created.  Ultimately, the case went to trial and a jury returned a verdict finding that the director had been “duly elected or appointed”.

A question remains, however. Is there a difference between electing and appointing a director? My conceit has been that stockholders elect directors and boards and courts appoint directors.  Thus, it came as a surprise to see that the applicable Nevada statute uses neither term:

 All vacancies, including those caused by an increase in the number of directors, may be filled by a majority of the remaining directors, though less than a quorum, unless it is otherwise provided in the articles of incorporation.

NRS 78.335(5).  Thus, the question may not be whether the director was “duly elected or appointed” but whether the vacancy was “filled”.  However, the very next subdivision suggests that “filling” a vacancy is tantamount to “appointing” a director:

Unless otherwise provided in the articles of incorporation, when one or more directors give notice of resignation to the board, effective at a future date, the board may fill the vacancy or vacancies to take effect when the resignation or resignations become effective, each director so appointed to hold office during the remainder of the term of office of the resigning director or directors.

NRS 78.335(6).

California’s General Corporation Law also seems to support the distinction between shareholder elections (e.g., Cal. Corp. Code § 708) and appointment (e.g., Cal. Corp. Code § 308).  Other provisions of the GCL, however, follow Nevada’s use of the verb “fill” (e.g., Cal. Corp. Code § 305).

Etymologically, “elect” comes to English from the past participle of the Latin eligo (I choose).  “Appoint” descends also from the Latin (via French) from the preposition ad (to or towards) and the noun punctum (a point).  This meaning likely is derived from the voting procedures in early republican Rome.  In those days, citizens would give their oral vote in public assemblies (comitia) to a tabulator who would record the vote with a point on a tablet.

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