California Corporations Code Section 5227 caps the number of “interested persons” who may serve on a nonprofit public benefit corporation’s board at 49 percent of the total directors. When a board crosses that line, a court can step in and order corrective measures, which may include adding independent directors, enlarging the board to dilute the interested share, 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 rule only works if you can identify who falls on the “interested” side of the ledger. Section 5227 recognizes two categories.
The first is anyone the corporation has compensated for services within the previous 12 months. That compensation can come in any form: employee wages, independent contractor fees, or payment in any other capacity. One important carve-out: routine compensation paid to a person 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 members of any compensated person. The statute lists 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. If a nonprofit employs someone and that employee’s spouse sits on the board, both the employee and the spouse count as interested persons for purposes of the cap, even though only one of them draws a paycheck.1California Legislative Information. California Code CORP 5227
How the 49 Percent Cap Works in Practice
The cap is a hard ceiling, not an aspiration. Any director who meets either definition counts toward the limit, and the math does not round in the board’s favor.
On a five-member board, no more than two directors can be interested persons. On a seven-member board, the maximum is three. A single extra interested director puts the whole board out of compliance, which matters because enforcement does not require a pattern of abuse or a bad outcome. The composition itself is the violation.
Small nonprofits run into this most often. A founder who draws a modest salary as executive director, a spouse on the board, and a part-time bookkeeper who also serves as a director can quickly add up to more than half of a small board, even when everyone involved is acting in good faith.
What a Court Can Do When the Cap Is Violated
Section 5227 gives courts broad flexibility rather than a single mandatory remedy. The statute allows a judge to order the election of additional independent directors, enlarge the authorized size of the board to dilute the interested share below 49 percent, or remove directors to bring the ratio into compliance.1California Legislative Information. California Code CORP 5227 Removal is on the menu, but it is not the only option, and courts can craft whatever equitable fix suits the situation.
One piece of practical reassurance sits in the same statute: a violation of the 49 percent rule does not invalidate transactions the corporation has already entered into. Contracts, grants, leases, and other commitments signed while the board was out of compliance remain enforceable.1California Legislative Information. California Code CORP 5227 Vendors, donors, and counterparties do not need to unwind their dealings because of a composition problem on the other side of the table.
Who Can Sue to Enforce the Rule
Section 5227 borrows its standing rules from Section 5142, which defines who may bring an action to correct a breach of charitable trust. The list is wider than many directors realize:
- 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 the Attorney General grants relator status.
The Attorney General must receive notice of any action brought by a private party and may intervene in the case at any stage.2California Legislative Information. California Code CORP 5142 In practice, that means a composition dispute initiated by a single director or member can draw the state’s attention even if the AG does not file first.
How 5227 Differs From Removal for Misconduct
Section 5227 is a composition rule. It addresses the ratio of interested to independent directors on the board as a whole; it is not a tool for ousting a specific director who has done something wrong. If the problem is fraud, abuse of authority, or breach of fiduciary duty by an individual director, that falls under a separate statute, Section 5223, which has its own grounds, its own narrower standing rules, and its own set of consequences.3California Legislative Information. California Code CORP 5223 A director can be perfectly ethical and still push the board over the 49 percent cap by virtue of being a paid employee or a relative of one, and the fix for that is structural rather than disciplinary.
Keeping a Board Within the Limit
The practical work of complying with Section 5227 happens before any dispute reaches a courtroom. Boards that stay in compliance tend to do a few things consistently: they keep a current list of who is being compensated by the organization and in what capacity, they track family relationships among directors and paid personnel using the specific relatives Section 5227 names, and they recalculate the ratio whenever a director joins or leaves, whenever a staff change puts a new person on payroll, and whenever a director’s family circumstances change in a way that touches the statute.
Because the carve-out for director compensation is narrow — it covers only payment for serving as a director — any additional role a director takes on for pay flips that person into the interested category. A board member who agrees to serve as interim executive director for a few months, or who takes a consulting contract with the organization, becomes an interested person for the next 12 months even after the paid engagement ends. Planning board recruitment around that 12-month tail is often the difference between a compliant board and one that needs a court to sort it out.