I'm so sorry for your loss. 
Obviously you must go anyway.
I've just been doing a little reading around and it seems that there is deliberately no definition of "exceptional circumstances" so that the Head is given the maximum discretion. The Governors may not be able to answer the question your DH intends to ask - although they may of course wish to make enquiries as to the criteria applied by the Head in practice.
I would write back saying that it is utterly unconscionable that your DS should be told not to attend the funeral of his grandmother, and for you to be threatened with sanctions if you disregard the instruction. Aside from the inherent irrationality of the decision, it is one which severely undermines your confidence in the Head's judgment and the trust you can place in her and the school.
I would say that whilst you recognise that the Head has a discretion to exercise, she must do so within the bounds of reason. Her decision that the funeral of a pupil grandmother does not constitute exceptional circumstances is clearly flawed. To use the relevant legal terminology, Under Lord Diplock's classification, a decision is irrational if it is it is a decision which is "so outrageous in its defiance of logic or of accepted moral standards that no sensible person who had applied his mind to the question could have arrived at it."
[This ought to be of significance to the Head or her legal advisors is (one of) the tests for determining whether a decision should be susceptible to judicial review.]
I would invite the head to reconsider her approach. I would then tell her that if she chooses to act on the basis of such a poorly conceived decision, you will defend vigorously your position that the attendance of a grandparent's funeral obviously falls within the definition of exceptional circumstances. You will draw the case to the attention of your MP and the media, and will positively welcome the enquiry which will follow into the quality of the Head's decision making and the impact on that upon parents' trust and confidence in her.