Section 311 of the California Corporations Code authorizes the creation of one or more committees. Unlike Delaware, a committee of the board must have two or more members. The board of directors may vest all of the authority of the board in a committee except with respect to seven specified actions. One of these actions is authorization of a distribution to the corporation’s shareholders.
Because Section 166 defines “distribution to its shareholders” to include a corporation’s purchase or redemption of its own shares, a board may not delegate to a committee of the board its authority with respect to share repurchases. The statute, however, includes an exception to the limitation. Subdivision (f) of Section 311 permits such a delegation if the repurchase or redemption is “within a price range set forth in the articles or determined by the board”.
Many publicly traded corporations that engage in stock repurchases rely upon Securities and Exchange Commission Rule 10b-18, which provides a voluntary “safe harbor” from liability for manipulation under Sections 9(a)(2) and 10(b) of the Exchange Act, and Rule 10b-5 under the Exchange Act, when an issuer or its affiliated purchaser bids for or purchases shares of the issuer’s common stock in accordance with the rule’s manner, timing, price, and volume conditions. Consequently, boards of Delaware corporations will typically authorize a share repurchase program that authorizes a total dollar amount that may be spent on repurchases but will delegate to management the discretion to determine the timing and amount of specific repurchases based on a variety of factors, such as the market price of our common stock, corporate requirements, general market economic conditions and legal requirements, including Rule 10b-18.
Section 311 does not address the authority of the board of a California corporation to make such a delegation to management as opposed to a committee of the board. However, such a delegation would be consistent with Section 300 which requires that the business and affairs of the corporation be managed and exercised by or under the direction of the board. Directors, however, should recognize that they face potential personal liability under Section 316(a)(1) for approving distributions contrary to Sections 500 and 501. Because Section 166 specifies that the time of a distribution in the form of a repurchase or redemption is when the cash or property is transferred, it is possible that even though the requirements of Section 500 and 501 are met when a repurchase program is authorized, those requirements will not be met when shares are purchased pursuant to the program.