california corporate-law shareholders
Can board members have unequal voting rights at a for-profit corporation in California?
<p>California requires multiple board members when there are multiple shareholders. With equal voting rights, this can allow a minority shareholder, who is a board member, to have a disproportional amount of power.</p>
<p>For non-profits, non-voting board members are prohibited, <a href="https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=CORP&amp;sectionNum=5047." rel="nofollow noreferrer">CORP 5047</a>:</p>
<blockquote>
<p> If the articles or bylaws designate that a natural person is a director or a member of the governing body of the corporation by reason of occupying a specified position within the corporation or outside the corporation, without limiting that person’s right to vote as a member of the governing body, that person shall be a director for all purposes and shall have the same rights and obligations, including voting rights, as the other directors. A person who does not have authority to vote as a member of the governing body of the corporation, is not a director as that term is used in this division regardless of title.</p>
</blockquote>
<p>It's unclear if unequal voting rights are allowed. Those with equal voting rights &quot;shall be directors&quot;. Those with no voting rights &quot;are not directors&quot;. But <a href="https://www.nonprofitkinect.org/article/6481-non-voting-ex-officio-nonprofit-board-members-prohibited" rel="nofollow noreferrer">people seem to interpret this as a total prohibition of unequal voting rights at non-profits</a>:</p>
<blockquote>
<p>Board members, or directors, as they are termed in the law, each have one vote on any matter presented to the board for action.</p>
</blockquote>
<p>In any case, I'm actually interested in for-profits, but couldn't find much information about them. Can they have directors whose voting rights are unequal?</p>
<p>Suppose the board consists of two people: the founder (who has 90% of the shares), and an investor (who has 10% of the shares). Must they have equal voting rights, as board members?</p>

<p><strong>Edited in response to the question being edited</strong></p>
<p>Disclaimer: I am not familiar with Californian law and my answer is based on my experience of English company law and from reading the relevant sections of the code you linked to in your question.</p>
<p>The provision you have quoted does not say that board members are required to have the same voting rights:</p>
<blockquote>
<p><strong>If the articles</strong> or bylaws <strong>designate that a natural person is a
director or a member of the governing body</strong> of the corporation by
reason of occupying a specified position within the corporation or
outside the corporation, <strong>without limiting that person's right to vote
as a member of the governing body</strong>, that person shall be a director for
all purposes and shall have the same rights and obligations, including voting rights, as the other directors. A person who does not have
authority to vote as a member of the governing body of the
corporation, is not a director as that term is used in this division
regardless of title.</p>
</blockquote>
<p>(emphasis added).</p>
<p>In other words, <strong>if</strong> the company's articles haven't limited the person's right to vote, <strong>then</strong> they shall have the same voting rights as the other directors. From this provision, only a person with <em>no</em> voting rights is prohibited from being a director.</p>
<p>However, in <a href="https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=CORP&amp;sectionNum=5211." rel="nofollow noreferrer">CORP 5211(c)</a>, we have a clear one-vote-per-director requirement for non-profit companies:</p>
<blockquote>
<p>Each director shall have one vote on each matter presented to the
board of directors for action. A director shall not vote by proxy.</p>
</blockquote>
<p>Turning to the equivalent section for profit-making companies at <a href="https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=CORP&amp;sectionNum=307." rel="nofollow noreferrer">CORP 307</a>, note the absence of the above rule. However, instead we have this (a similar version of which appears in CORP 5211) (emphasis added):</p>
<blockquote>
<p>(7) A majority of the authorized number of directors constitutes a
quorum of the board for the transaction of business. <strong>The articles or
bylaws may not provide that a quorum shall be less than one-third the
authorized number of directors or less than two, whichever is larger</strong>,
unless the authorized number of directors is one, in which case one
director constitutes a quorum.</p>
</blockquote>
<blockquote>
<p>(8) An act or decision done or made by a majority of the directors present
at a meeting duly held at which a quorum is present is the act of the
board, subject to the provisions of Section 310 and subdivision (e) of
Section 317. <strong>The articles or bylaws may not provide that a lesser vote
than a majority of the directors present at a meeting is the act of
the board.</strong> A meeting at which a quorum is initially present may
continue to transact business notwithstanding the withdrawal of
directors, if any action taken is approved by at least a majority of
the required quorum for that meeting.</p>
</blockquote>
<p>So that would appear to rule out the possibility of having the founder with 9 votes and the investor with 1 vote, as such an arrangement would allow the founder to make decisions with a &quot;<em>lesser vote than a majority of the directors present at a meeting</em>&quot;.</p>
<h2>Alternative solution 1</h2>
<p>One possibility is to require all decisions of the board to be approved by the shareholders. This is provided for at <a href="https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=CORP&amp;sectionNum=204." rel="nofollow noreferrer">CORP 204</a>:</p>
<blockquote>
<p>[The articles of incorporation may set forth any or all of the
following provisions, which shall not be effecftive unless expressly
provided in the articles:] (9) A provision requiring the approval of
the shareholders (Section 153) or the approval of the outstanding
shares (Section 152) for any corporate action, even though not
otherwise required by this division.</p>
</blockquote>
<p>This will ensure that no decision can be made without the approval of the founder. However this would be the case anyway with equal voting rights, since decisions have to be reached by the majority of a minimum quorum of 2. It will also not enable to the founder to push through decisions without the support of the investor.</p>
<p>However, it may become more useful if at any point the founder sells some of his shares or more directors are appointed.</p>
<h2>Alternative solution 2</h2>
<p>The best method for determing director's voting rights is in the articles (if permitted). This is because a decision which is made contrary to the articles can be directly challenged by the shareholders.</p>
<p>Where it is not possible to put a rule in the articles it may be possible to deal with it via a <a href="https://en.wikipedia.org/wiki/Shareholders%27_agreement" rel="nofollow noreferrer">shareholder's agreement</a>. For example, even though the two directors may have 50% voting rights, as shareholders they may agree between each other that they will or will not exercise those rights in certain circumstances (e.g. if the investor disagrees with something the founder wants to do).</p>
<p>This is less satisfactory than dealing with it in the articles because the directors are able to make decisions in accordance with their voting rights and that decision can't be challenged directly. Instead, the shareholders must sue each other for breach of contract.</p>
<p>You may need to be careful in doing this. In England and Wales, certain types of clauses in a shareholder's agreement will trigger a requirement to annex that agreement to the articles (<a href="https://www.legislation.gov.uk/ukpga/2006/46/section/36" rel="nofollow noreferrer">sections 36</a> and <a href="https://www.legislation.gov.uk/ukpga/2006/46/section/29" rel="nofollow noreferrer">29</a> of the Companies Act 2006)).</p>
<p><a href="https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=CORP&amp;sectionNum=300." rel="nofollow noreferrer">CORP 300(b)</a> may be relevant for Californian law (see <a href="https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=CORP&amp;sectionNum=158." rel="nofollow noreferrer">CORP 158</a> for the definition of a &quot;close corporation&quot;) (emphasis added):</p>
<blockquote>
<p>Notwithstanding subdivision (a) or any other provision of this
division, but subject to subdivision (c), <strong>no shareholders’ agreement,
which relates to any phase of the affairs of a close corporation</strong>,
including but not limited to management of its business, division of
its profits or distribution of its assets on liquidation, <strong>shall be
invalid as between the parties thereto on the ground that it so
relates to the conduct of the affairs of the corporation as to
interfere with the discretion of the board</strong> or that it is an attempt to
treat the corporation as if it were a partnership or to arrange their
relationships in a manner that would be appropriate only between
partners.</p>
</blockquote>
<p>See also <a href="https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=CORP&amp;sectionNum=706." rel="nofollow noreferrer">CORP 706(a)</a> and note that is provides for specific performance (i.e. an injunction to compel a party to vote in accordance with the agreement):</p>
<blockquote>
<p>Notwithstanding any other provision of this division, an agreement
between two or more shareholders of a corporation, if in writing and
signed by the parties thereto, may provide that in exercising any
voting rights the shares held by them shall be voted as provided by
the agreement, or as the parties may agree or as determined in
accordance with a procedure agreed upon by them, and the parties may
but need not transfer the shares covered by such an agreement to a
third party or parties with authority to vote them in accordance with
the terms of the agreement. Such an agreement shall not be denied
specific performance by a court on the ground that the remedy at law
is adequate or on other grounds relating to the jurisdiction of a
court of equity.</p>
</blockquote>
<h2>Alternative solution 3</h2>
<p>More drastically, if the board is deadlocked (as it will be in every case of disagreement for a 2 person board with equal voting rights), the founder can remove the investor as a director pursuant to <a href="https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=CORP&amp;sectionNum=152." rel="nofollow noreferrer">CORP 152</a> and <a href="https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=CORP&amp;sectionNum=303." rel="nofollow noreferrer">303</a> and then re-appoint them after the decision is made. Such a procedure can potentially be made compulsory in a shareholder's agreement pursuant to CORP 706(a) above (although note that I have not checked for any exceptions relating to removal/appointment of directors).</p>
