Extracts of Statutory Requirements Concerning Corporate Director Standards of Conduct and Conflict of Interest

California Corporations Code:

Standards of Conduct

Section 5230.

  1. Any duties and liabilities set forth in this article shall apply without regard to whether a director is compensated by the Corporation.
  2. Part 4 (commencing with Section 16000) of the Probate Code does not apply to the directors of any corporation. (1/88)

Section 5231.

  1. A director shall perform the duties of a director, including duties as a member of any committee of the Board upon which the director may serve,
    in good faith, in a manner such director believes to be in the best interests of the corporation and with such care, including reasonable inquiry, as an
    ordinarily prudent person in a like position would use under similar circumstances.
  2. In performing the duties of a director, a director shall be entitled to rely on information, opinions, reports or statements, including financial statements and
    other financial data, in each case prepared or presented by:

    1. One or more officers or employees of the corporation whom the director believes to be reliable and competent in the matters presented;
    2. Counsel, independent accountants or other persons as to matters which the director believes to be within such person’s professional or expert
      competence; or
    3. A committee of the board upon which the director does not serve, as to matters within its designated authority, which committee the director believes
      to merit confidence, so long as, in any such case, the director acts in good faith, after reasonable inquiry when the need, therefore, is indicated by the
      circumstances and without knowledge that would cause such reliance to be unwarranted.
  3. Except as provided in Section 5233, a person who performs the duties of a director in accordance with subdivisions (a) and (b) shall have no liability based
    upon any alleged failure to discharge the person’s obligations as a director, including, without limiting the generality of the foregoing, any actions or omissions
    which exceed or defeat a public or charitable purpose to which a corporation, or assets held by it, are dedicated. (1/80)

Section 5232.

  1. Section 5231 governs the duties of directors as to any acts or omissions in connection with the election, selection, or nomination of directors.
  2. This section shall not be construed to limit the generality of Section 5231. (1/80)

Section 5233.

  1. Except as provided in subdivision (b), for the purpose of this section, a self-dealing transaction means a transaction to which the corporation is a party and
    in which one or more of its directors has a material financial interest and which does not meet the requirements of paragraph (1), (2), or (3) of subdivision (d).
    Such a director is an “interested director” for the purpose of this section.
  2. The provisions of this section do not apply to any of the following:
    1. An action of the board fixing the compensation of a director as a director or officer of the corporation.
    2. A transaction which is part of a public or charitable program of the corporation if it: (i) is approved or authorized by the corporation in good
      faith and without unjustified favoritism; and (ii) results in a benefit to one or more directors or their families because they are in the class
      of persons intended to be benefited by the public or charitable program.
    3. A transaction, of which the interested director or directors have no actual knowledge, and which does not exceed the lesser of 1 percent of
      the gross receipts of the corporation for the preceding fiscal year or one hundred thou¬sand dollars ($100,000).
  3. The Attorney General, or if the Attorney General is joined as an indispensable party, any of the following may bring an action in the superior court
    of the proper county for the remedies specified in subdivision (h):

    1. The corporation, or a member asserting the right in the name of the corporation pursuant to Section 5710.
    2. A director of the corporation.
    3. An officer of the corporation.
    4. Any person granted relator status by the Attorney General.
  4. In any action brought under subdivision (c) the remedies specified in subdivision (h) shall not be granted if:
    1. The Attorney General, or the court in an action in which the Attorney General is an indispensable party, has approved the transaction before or
      after it was consummated; or
    2. The following facts are established:
      1. The corporation entered into the transaction for its own benefit;
      2. The transaction was fair and reasonable as to the corporation at the time the corporation entered into the transaction;
      3. Prior to consummating the transaction or any part thereof, the board authorized or approved the transaction in good faith by a vote of
        a majority of the directors then in office without counting the vote of the interested director or directors, and with knowledge of the
        material facts concerning the transaction and the director’s interest in the transaction. Any other provision of this part notwithstanding,
        no action by a committee of the board shall satisfy this paragraph; and
      4. (i) Prior to authorizing or approving the transaction, the board considered and in good faith determined after reasonable investigation
        under the circumstances that the corporation could not have obtained a more advantageous arrangement with reasonable effort under the
        circumstances or (ii) the corporation in fact could not have obtained a more advantageous arrangement with reasonable effort under the
        circumstances; or
    3. The following facts are established:
      1. A committee or person authorized by the board approved the transaction in a manner consistent with the standards set forth in paragraph
        (2) of this subdivision;
      2. It was not reasonably practicable to obtain approval of the board prior to entering into the transaction; and
      3. The board, after determining in good faith that the conditions of subparagraphs (A) and (B) of this paragraph were satisfied,
        ratified the transaction at its next meeting by a vote of the majority of the directors then in office without counting the
        vote of the interested director or directors.
  5. Except as provided in subdivision (f), an action under subdivision (c) must be filed within two years after written notice setting forth the material
    facts of the trans-action and the director’s interest in the transaction is filed with the Attorney General in accordance with such regulations, if any,
    as the Attorney General may adopt, or if no such notice is filed, within three years after the transaction occurred, except for the Attorney General, who
    shall have 10 years after the transaction occurred within which to file an action.
  6. In any action for breach of an obligation of the corporation owed to an interested director, where the obligation arises from a self-dealing transaction
    which has not been approved as provided in subdivision (d), the court may, by way of offset only, make any order authorized by subdivision (h),
    notwithstanding the expiration of the applicable period specified in subdivision (e).
  7. Interested directors may be counted in determining the presence of a quorum at a meeting of the board which authorizes, approves or ratifies a contract or
    transaction.
  8. If a self-dealing transaction has taken place, the interested director or directors shall do such things and pay such damages as in the discretion of the
    court will provide an equitable and fair remedy to the corporation, taking into account any benefit received by the corporation and whether the interested
    director or directors acted in good faith and with intent to further the best interest of the corporation. Without limiting the generality of the foregoing,
    the court may order the director to do any or all of the following:

    1. Account for any profits made from such transaction, and pay them to the corporation;
    2. Pay the corporation the value of the use of any of its property used in such transaction; and
    3. Return or replace any property lost to the corporation as a result of such transaction, together with any income or appreciation lost to the
      corporation by reason of such transaction, or account for any proceeds of sale of such property, and pay the proceeds to the corporation together
      with interest at the legal rate. The court may award prejudgment interest to the extent allowed in Section 3287 or 3288 of the Civil Code.
      In addition, the court may, in its discretion, grant exemplary damages for a fraudulent or malicious violation of this section. (1/80)

Section 5234.

  1. No contract or other transaction between a corporation and any domestic or foreign corporation, firm, or association of which one or more of its directors
    are directors is either void or voidable because such director or directors are present at the meeting of the board or a committee thereof which authorizes,
    approves, or ratifies the contract or transaction, if:

    1. The material facts as to the transaction and as to such director’s other directorship are fully disclosed or known to the board or committee, and
      the board or committee authorizes, approves, or ratifies the contract or transaction in good faith by a vote sufficient without counting the vote of
      the common director or directors; or
    2. As to contracts or transactions not approved as provided in paragraph (1) of this subdivision, the contract or transaction is just and reasonable
      as to the corporation at the time it is authorized, approved or ratified.
  2. This section does not apply to transactions covered by Section 5233. (1/80)

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