Under California Corporations Code section 316(a) corporate directors are jointly and severally liable if they approve the following actions:

• Any distribution to shareholders to the extent contrary to Sections 500 – 503 that generally only allow distributions from retained earnings in excess of liabilities or that are likely to cause the corporation to be unable to meet its liabilities; or
• A distribution of assets to shareholders after institution of dissolution proceedings of the corporation, without paying or adequately providing for, all known liabilities of the corporation (excluding untimely claims); or
• The making of any loan or guaranty contrary to Section 315 (See D&O Loans: California Section 315 Versus Sarbanes-Oxley Section 402) that generally requires a majority vote of the shareholders.

Even directors who are present at the vote, but abstain from voting, under Corporations Code section 316(b) remain jointly and severally liable for the prohibited distributions and loans. The only way to avoid the risk of personal liability under Section 316(a), is for a director not to show up for the vote or to vote against the prohibited actions. If you are a director and faced with voting on a corporate distribution, loan or guaranty, in advance you may want to contact your attorney to help you decide whether you can vote for or against the action.

Otherwise, you may not want to show up for the vote at all.

The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.