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Workarounds to Meeting Shareholder Quorum Requirements in California Corporations

In a lot of cases, a California corporation will need shareholders' consent to take action, and in order for shareholders to take action, a quorum must be established. California Corporations Code Section 602(a) states that a quorum is established if a majority of the shares that are entitled to vote are represented in person or by proxy at a shareholders meeting, unless the articles of incorporation provides otherwise. But what happens if the corporation can't take action because its shareholders can never establish a quorum?

Below are a couple workarounds that a California corporation can consider taking in order to ease the quorum requirement and obtain shareholder consent.

Lower the Quorum Requirement

Many California corporations' bylaws establish that a quorum for its shareholders is met if 51% of the shares entitled to vote are present in person or by proxy at the meeting. However, if a corporation cannot take action because its shareholders cannot establish a quorum, California Corporations Code Section 602(a) allows for a corporation to lower its quorum requirement down to one-third (1/3) of the shares entitled to vote at the meeting.

Assuming a corporation's bylaws allow the board of directors ("BOD") to amend its existing bylaws (and generally, most do so long as the amendment does not change the number of authorized directors or affect shareholders' rights), the company can lower its quorum requirement by having the BOD discuss and approve the change at a BOD meeting or approve the change via unanimous written consent of the BOD. Although the BOD would have the authority to amend the company's bylaws in this particular scenario, it would be wise to obtain the shareholders' consent to approve the change as well.

Obtain Written Consent

Shareholders may be unable to meet the quorum requirement for a variety of reasons: they never received notice of the shareholders meeting, they don't show up or forget to send in their proxies for the shareholders meeting, etc.

If a corporation cannot take action because its shareholders cannot establish a quorum, it should try obtaining written consent from its shareholders instead of conducting an actual meeting. California Corporations Code Section 603(a) allows for the company's shareholders to take action by written consent so long as the action is approved by as many shares as would be required if the action were voted on at a shareholders meeting.

For further information or questions, please contact Andrew Lee or any of the other attorneys at Shulman Hodges & Bastian LLP at 949-340-3400.

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