California Corporations Code Section 5227 caps the number of “interested persons” on a nonprofit public benefit corporation’s board at 49 percent. When a board exceeds that ceiling, a court can order corrective measures including adding new independent directors, enlarging the board, or removing directors who put the board over the limit.1California Legislative Information. California Code CORP 5227
Who Counts as an Interested Person
The 49 percent cap only matters once you know who counts. Section 5227 defines two categories.
The first is anyone the corporation has compensated for services within the previous 12 months, whether as an employee, an independent contractor, or in any other paid capacity. Routine compensation paid to someone solely for serving as a director does not, by itself, make that person interested.1California Legislative Information. California Code CORP 5227
The second category covers close family of any compensated person. That includes a spouse, parent, child, sibling, grandparent, grandchild, mother-in-law, father-in-law, brother-in-law, sister-in-law, son-in-law, and daughter-in-law. So if a nonprofit employs someone and that employee’s spouse sits on the board, both count as interested for purposes of the cap.1California Legislative Information. California Code CORP 5227
How the 49 Percent Ceiling Works in Practice
The limit is a hard ceiling, not a guideline. A five-member board can have at most two interested persons. A seven-member board can have at most three. Even a single excess interested director puts the board out of compliance.
The math has to hold at all times, not just on election day. When an employee’s family member joins the board, or when an independent director takes a paid consulting role, the composition can shift into violation without any formal vote. Boards that track compensation and family relationships in writing tend to catch these shifts early.
What a Court Can Do About a Violation
Section 5227 does not force a court to remove the excess interested directors. The statute gives courts broad flexibility to fashion whatever remedy is equitable, which can include ordering the election of additional independent directors or enlarging the board to bring the interested share back under 49 percent.1California Legislative Information. California Code CORP 5227 Removal is one option among several, and often not the least disruptive one.
One practical point matters for organizations already in violation. Section 5227 specifies that a violation does not affect the validity of any transaction the corporation has already entered into. Contracts signed while the board was out of compliance remain enforceable.1California Legislative Information. California Code CORP 5227 The remedy runs forward against the composition of the board, not backward against the deals it approved.
Who Can Sue to Enforce the Rule
Section 5227 borrows its standing rules from Section 5142, which defines who can bring an action to correct a breach of charitable trust. The list is broader than most people expect:
- The corporation itself, or a member suing on the corporation’s behalf through a derivative action under Section 5710
- An officer of the corporation
- A director of the corporation
- A person with a reversionary, contractual, or property interest in the charitable trust assets
- The Attorney General, or any person to whom the Attorney General grants relator status
The Attorney General must receive notice of any action brought by private parties and may intervene at any point.2California Legislative Information. California Code CORP 5142 A director or officer inside the organization can file, but so can an outside party with a property interest in charitable assets. That opens the door to enforcement even when everyone inside the boardroom is content with the status quo.
What Section 5227 Does Not Cover
The 49 percent rule polices the overall composition of the board. It does not, by itself, provide a mechanism for removing a director who has committed misconduct. That is the job of a different statute.
Section 5223 lets a court remove an individual director for fraudulent or dishonest acts, gross abuse of authority or discretion, or a breach of fiduciary duty that has caused injury or threatens to cause injury to the corporation. Removal under that section requires the corporation to be named as a party, and the court can bar the removed director from reelection for a period it prescribes.3California Legislative Information. California Code CORP 5223 So a director who is both interested and dishonest may draw actions under both statutes, but the two provisions answer different questions: 5227 asks whether the board’s makeup is legal, and 5223 asks whether a specific director should stay in office.
Section 5227 also is not a general conflict-of-interest statute. Self-dealing transactions are governed elsewhere in Article 3 of the Corporations Code, starting at Section 5230. A board that stays under the 49 percent ceiling can still run afoul of the self-dealing rules if an individual interested director profits improperly from a specific transaction.
Keeping a Board in Compliance
Practical compliance with Section 5227 comes down to record-keeping and timing. Before a new director joins, the board should confirm whether that person, or any close family member on the defined list, has received compensation from the organization in the previous 12 months. When an existing director begins receiving compensation for services outside their director role, they move into the interested column, and the board needs to recount. The 12-month look-back means a director who stopped consulting for the organization may still count as interested for the remainder of that period.
The cost of ignoring the count is not just legal exposure. Because standing to sue reaches beyond the boardroom to the Attorney General and to holders of interests in charitable assets, a composition problem can be raised by parties the board cannot control. Fixing the count on the board’s own terms, through elections or expansion, is almost always less painful than waiting for a court to do it.