BILL ANALYSIS
AB 1233
Page 1
Date of Hearing: May 4, 2009
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Pedro Nava, Chair
AB 1233 (Silva) - As Amended: April 2, 2009
SUBJECT : Nonprofit and consumer cooperative corporations:
nonprofit medical associations.
SUMMARY : Clarifies various sections of the Corporations Code
so that nonprofit and consumer cooperative corporations may have
more certainty in their operations. Specifically, this bill :
1)Specifies that a person who does not have authority to act as
a member of the governing board is not a director, but if the
articles or bylaws provide that a natural person is a director
or a member of the governing body because he or she occupied a
certain position, then that person is a director for all
purposes.
2)Specifies the approval requirement for nonprofit corporations
and consumer cooperatives shall not apply if any of the
following circumstances exist:
a. The specified person or persons have died or
ceased to exist.
b. If the right of the specified person or
persons to approve is in the capacity of an officer,
trustee, or other status and the office, trust, or
status has ceased to exist.
c. If the corporation has specific proposal for
amendment or repeal, and the corporation has provided
written notice of that proposal, including a copy of
the proposal, to the specified person or person at the
most recent address for each of them, based on the
corporation's records, and the corporation has not
received written approval or nonapproval within the
period specified in the notice, which shall not be
less than 10 nor more than 30 days commencing at least
20 days after the notice has been provided.
3)Authorizes the articles or bylaws to require the presence of
one or more specified directors in order to constitute a
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quorum of the board to transact business.
4)Prohibits a committee exercising the authority of the board
from including, as members, persons who are not directors.
5)Authorizes the board to create other committees with
nondirectors that do not exercise the authority of the board.
6)Requires a nonprofit corporation or consumer cooperative to
have a chair or a president or both, a secretary, a treasurer
or a chief financial officer or both, and other officers as
provided in the bylaws or determined by the board.
7)Authorizes a nonprofit corporation or consumer cooperative
meeting certain requirements, including the lack of a quorum,
to elect to voluntarily wind up and dissolve.
8)Subjects the Federal Internal Revenue Code requirements to
nonprofit religious corporations deemed to be a private
foundation.
9)Prohibits a cause of action if the corporations or
associations maintain a liability insurance policy that is
applicable to the claim.
10)Authorizes an unincorporated association to merge into a
specified corporation, limited partnership, general
partnership, or limited liability company.
EXISTING LAW
1)Defines "directors" as a natural persons, designated in the
articles or bylaw or elected by the incorporators, and their
successor, and natural persons designated, elected or
appointed by any other name or title to act as members of the
governing body of the corporation. (Corporations Code,
Section 5047, all further references are to the Corporations
Code)
2)Defines "officers' certificate" as a certificate signed and
verified by the chairman of the board, the president or any
vice president and by the secretary, the chief financial
officer, the treasurer or any assistant secretary or assistant
treasurer. (Section 5062)
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3)Defines "other business entity" as a domestic or foreign
limited liability company, limited partnership, general
partnership, business trust, real estate investment trust,
unincorporated association (other than a nonprofit
association), or a domestic reciprocal insurer organized after
1974 to provide medical malpractice insurance as set forth in
Article 16 (commencing with Section 1550) of Chapter 3 of Part
2 of Division 1 of the Insurance Code. As used herein, general
partnership means a partnership as defined in subdivision (7)
of Section 16101; business trust means a business organization
formed as a trust; real estate investment trust means a real
estate investment trust as defined in subsection (a) of
Section 856 of the Internal Revenue Code of 1986, as amended;
and .unincorporated association has the meaning set forth in
Section 18035. (5063.5)
4)Provides restrictions on the authority of board committees,
including, the approval of any action for which this part also
requires approval of the members or approval of a majority of
all members. (5212 (a), 7212 (a), 9212 (a), and 12352 (a))
5)Requires a corporation to have a chairman of the board or a
president or both, also requires a chief financial officer and
a secretary. (5213 (a))
6)Allows the board to delegate the management of the activities
of the corporation to anyone, although it retains ultimate
responsibility. (5210, 7210, 9210, 12350)
7)Requires approval of the board for voluntary dissolution of a
nonprofit public benefit corporation if there are no members
and in certain other situations. (6610)
FISCAL EFFECT : None.
NEED FOR BILL :
This bill, sponsored by the Business Law Section of the
California State Bar, will clarify nonprofit and consumer
cooperative corporations director voting rights, authorized
number of directors, quorum, board committees, and officer
titles and board reliance. AB 1233 will also provide for a
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streamlined merger and liquidation process, default provisions
in the case of third party approvals, procedures for board
reductions and the requisite private foundation restrictions.
Defining Director
Many nonprofit corporations utilize titles, including the word
"director", although such persons are not part of the governing
body of the corporation as specified in Corporation Code
Sections 5047 and 12233. AB 1233 would amend the definition of
"director" in Sections 5047 and 12233 to clarify that (1)
persons who have a title suggesting they are directors (e.g.,
"honorary directors," "directors emeritus," "advisory
directors") but who have not been designated, elected or
appointed to act as members of the corporation's governing body
and vote on actions or decisions taken by it on behalf of the
corporation are not directors for purposes of the code, and (2)
persons who become directors by reason of having a particular
status or holding a specified position ("ex officio directors")
are directors for all purposes. This would eliminate common
misperceptions and confusion about the ability of a nonprofit or
consumer cooperative corporation to have nonvoting directors and
about the voting rights of "ex officio" directors.
Unincorporated Nonprofit Association Mergers
Under present law, unincorporated nonprofit associations may not
merge into nonprofit or consumer cooperative corporations due to
the exclusion of nonprofit associations from the definition of
"other business entity" in Corporation Code Sections 5063.5 and
12242.5. As a consequence, such mergers presently occur in a
two-step process: the nonprofit association is first
incorporated and then the merger is consummated.
To authorize a one-step merger process for nonprofit
unincorporated associations and streamline their merger with
nonprofit or consumer cooperative corporations, it is
recommended that Sections 5063.5 and 12242.5 be amended to
delete "other than a nonprofit association" so that all
unincorporated associations are included in the definition of
"other business entity."
AB 1233 would also remove the restriction which limits
unincorporated associations to one-way mergers "into" a
corporation, limited or general partnership, or limited
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liability company under Corporations Code Section 18360. It
would remove the word "into" and replace it with the word
"with", which is used in the other sections of the Corporations
Code permitting two-way mergers by for-profit corporations,
nonprofit corporations, partnerships and limited liability
companies.
Third Party Rights
The Nonprofit Public Benefit Corporation Law has three
provisions allowing nonmember/nondirector approvals or
designations: Corporation Code Section 5132(c)(4) allows the
articles of incorporation to provide that amendment or repeal of
the articles of incorporation or bylaws must be approved by a
specified person or persons other than the board or the members.
Section 5150(d) allows for the bylaws to provide that amendment
of the bylaws must be approved by a specified person or persons
other than the board or the members. Section 5220(d) allows for
designation of the directors by a third party rather than
election by members. These sections present similar problems if
the specified third person(s) ceases to exist, disappears, or
declines to participate in the governance of the corporation and
act on a proposed amendment. In all cases, the third person(s)
may be either an entity or an individual.
Internal changes and turnover at an institution with authority
to designate a director all too frequently results in no
response at all when requests are made for appointment of a
replacement director. In some cases, the designating entity may
have dissolved or merged, resulting in a question of whether an
appropriate successor entity even exists. Simple loss of
interest or the like by the designating entity can have the same
effect. And, if the person with designating authority is an
individual rather than an entity, death, poor health, or even
senility can also result in no response when requests are made
for appointment of a replacement director. In those situations,
failure to appoint a replacement director can have the effect of
preventing the corporation from conducting its business in the
ordinary course of events.
AB 1233 provides a default provision to address this problem if
drafters of articles or bylaws do not. In such a situation the
authority defaults to the members or, if no members, to the
directors. Section 5222(f), relating to removals of directors,
is also amended to mesh with Section 5220(d) as amended.
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Sections 7132(c)(5), 7150(d), 7220(d) and 7222(f) in the
Nonprofit Mutual Benefit Corporation Law and Sections 12330(d),
12360(d) and 12362(g) in the Consumer Cooperative Corporation
Law are amended similarly. Section 9132(c)(4) in the Nonprofit
Religious Corporation Law is amended to correspond with Section
5132(c)(4); there is no Religious Corporation Law provision
similar to Sections 5150(d) or 5220(d).
Method of Determining Authorized Number of Directors
Nonprofit corporations sometimes wish to determine the size of
the board of directors by a formula tied to specific objective
factors. The Corporations Code currently provides that (i) the
bylaws may fix the number of authorized directors within a range
specified by them, or (ii) the board may determine the number of
directors within that range by resolution. However, there is no
provision clearly permitting the number of directors to be
determined by a formula set forth in the bylaws.
AB 1233 would amend Sections 5151, 7151, 9151 and 12331 to allow
the bylaws to provide for a method of determining the number of
directors.
Quorum; One Director One Vote; No Proxy Voting by Directors
Nonprofit corporations may wish to ensure that certain board
actions may not be taken without the presence, at the meeting
where such action is taken, of certain directors or
constituencies who are on or represented on the board. Sections
5211(a)(7), 7211(a)(7), 9211(a)(7), and 12351(a)(7) do not
expressly provide that the requisite quorum must include certain
specified directors. This practice is relatively common and
expressly permitted in some other states. The Corporations Code
should state expressly that the articles or bylaws may specify
that certain directors must be present for a quorum to exist as
long as that does not prevent efficient decision-making for the
corporation when those directors die or the person or persons
authorized to appoint or elect them died or ceased to exist.
In addition, Sections 5211(a)(7), 7211(a)(7), 9211(a)(7), and
12351(a)(7) refer to the authorized number of directors as
stated in the articles or bylaws. In many cases, the bylaws
provide for a range of directors (for example from three to
nine) and the authorized number is set by the board in a
resolution. AB 1233 adds the language "or pursuant to" before
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the articles or bylaws to clarify that the authorized number may
be the number authorized by resolution and not the highest end
of a range in the articles or bylaws.
Constituents of nonprofit corporations sometimes wish to permit
certain directors to possess more than one vote. However, that
is inconsistent with the Corporations Code and a director's
fiduciary duties. While the existing provisions suggest that an
action or decision taken by a board of directors is determined
by a headcount of directors present rather than a vote cast by
them, that subtlety is not always clearly recognized by
volunteers trying to manage the affairs of a corporation. In
addition, although the code does not expressly forbid a director
from participating in a decision by proxy, this restriction
should be made clear as such volunteers may not recognize the
risk of that being inconsistent with fiduciary duties. AB 1233
adds a new subdivision (c) to Sections 5211, 7211, 9211 and
12351 to state that each director has only one vote and no
director may vote by proxy.
Board Committees; Board and Advisory Committees
Sections 5212(a), 7212(a), 9212(a), and 12352(a) list
restrictions on the authority of board committees, including
"the approval of any action for which this part also requires
approval of the members ? or approval of a majority of all
members." This restriction applies to actions the law states
require approval by members as defined in Sections 5034 and 5033
(and Sections 12224 and 12223), regardless of whether the
corporation has or does not have members. Because of some
confusion that periodically arises, AB 1233 would add language
clarifying that the restriction applies regardless of whether
the corporation has members.
It is common practice to provide in bylaws for the creation of
both "board" committees - committees comprised entirely of
directors, to whom the board of directors may delegate its
authority, except as provided in Sections 5212, 7212, 9212, and
12352 - and "advisory" committees - committees that may be
partially or wholly comprised of nondirectors, and which advise
the board or board committees or implement their decisions, but
do not hold the authority of the board. AB 1233 amends Sections
5212(b), 7212(b), 9212(b), and 12352(b) to clarify that board
committees may only have directors as members but that other
committees with nondirector members may be created as long as
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they do not exercise the authority of the board.
Officer Titles: Chairman of the Board and Chief Financial
Officer
Section 5213(a) of the California Corporations Code currently
sets forth the required officers for a nonprofit public benefit
corporation. This section requires that the corporation have a
"chairman of the board or a president or both." It also
requires that the corporation have a "chief financial officer"
and a secretary. The same requirements apply to mutual benefit
corporations (Section 7213(a)), religious corporations (Section
9213(a)), and consumer cooperative corporations (Section
12353(a)). For nonprofit corporations in existence on December
31, 1979, which are currently subject to the transition rule of
Section 9916, and consumer cooperative corporations subject to
Section 12694, the "treasurer" is deemed to be the "chief
financial officer."
Section 5062 defines an officers' certificate as a document
signed and verified by the chairman of the board or president
(or any vice president), and the secretary, chief financial
officer or treasurer (or any assistant secretary or treasurer).
This definition applies to public benefit, mutual benefit and
religious corporations. The same definition is found in section
12241 for consumer cooperative corporations.
The language of the current law allows titles of "other
officers" to be at the board's discretion, but does not
expressly allow the board to change the title given to the
"chairman of the board." Many corporations prefer to use a
gender-neutral term for this officer, such as "chair of the
board" or "chairperson of the board," or to grant the
alternative title of "chairwoman of the board" when the person
holding this office is female. In recent years, the Secretary
of State's office has rejected officers' certificates signed
under a title that does not exactly match the statutory text
("chairman of the board"). AB 1233 would add Sections 5039.5
and 12228.5, and amend Sections 5213(a), 7213(a), 9213(a) and
12353(a) to state that a corporation may use any of these four
titles to designate the individual who serves in this statutory
officer role.
The "chief financial officer" is a named and required office in
Section 5213(a), 7213(a), 9213(a), and 12353(a), but a
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"treasurer" is not. This language is inconsistent with the
treatment of the office of "president" and role of "chief
executive officer" in the same code section. This language also
causes confusion because many nonprofit corporations have both a
"treasurer" and a "chief financial officer," where the treasurer
is a board officer and the chief financial officer is an
executive staff member. To provide consistency in officer
titles in a manner that conforms to many corporations' existing
practices, these sections would be changed to permit a
corporation to have a "treasurer or a chief financial officer or
both." These sections and the transition rule in section 9916
would also be changed to note that unless otherwise provided in
the corporation's articles or bylaws, the treasurer will fulfill
the role of "chief financial officer" if there is no separate
chief financial officer.
Board Reduction
Occasionally, a nonprofit corporation will be engaged in a board
dispute whereby the board wishes to reduce the size of the
board, and the director occupying the seat that will be
terminated looks to the language "until a successor has been
elected and qualified" in Section 5220(b) as evidence that
unless that director is actually removed from the board, the
director continues to serve. Section 5222(c) further states
that any reduction of the authorized number of directors does
not remove any director prior to the expiration of that
director's term of office.
To remedy this problem, AB 1233 amends Sections 5220(b) and
5222(c) to state that this is the case unless the director has
been removed from office. The corresponding sections in the
Religious, Mutual Benefit and Consumer Cooperative Corporation
Law, i.e., Sections 7220(b), 7222(c), 9220(c), 9222(c),
12360(b), and 12362(d) would also be amended.
Reliance
Under Sections 5210, 7210, 9210, and 12350, the board may
delegate the management of the activities of the corporation to
anyone, although it retains ultimate responsibility. Under
Sections 5212, 7212, 9212, and 12352, the board may delegate
board authority, within specified limits, to committees of the
board composed only of two or more directors. Under subsection
(b)(3) of Sections 5231, 7231, 9241, and 12371, in discharging
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their fiduciary duties, directors may rely on "information,
opinions, reports or statements prepared or presented by" a
"committee of the board upon which the director does not serve,"
as to matters within its designated authority. It is assumed in
practice the only committee on which a director may rely is a
committee that complies with Section 5212 (and its parallel
sections), but Section 5231(b)(3) does not expressly provide
this limitation.
The proposed amendment to Sections 5231(b)(3), 7231(b)(3),
9241(b)(3), and 12371(b)(3) clarifies what committees can be
relied upon by substituting the ambiguous phrase, "committee of
the board," with a description of committees composed entirely
of directors. AB 1233 also widens the reliance category to
include advisory committees composed of (i) those with fiduciary
duties to the corporation (e.g., officers and employees), (ii)
those with relevant professional expertise (e.g., attorneys and
accountants), and (iii) directors.
Dissolution
California Corporations Code Section 6610 currently requires
"approval of the board" for voluntary dissolution of a nonprofit
public benefit corporation if there are no members and in
certain other situations. Similar rules apply to mutual benefit
and religious corporations in Sections 8610 and 9680 and to
consumer cooperative corporations in Section 12630.
By the time corporations find it appropriate to dissolve, it is
often impossible to find a sufficient number of directors to
make up the quorum necessary for that approval. Although
Section 5224 of the Code (and similar provisions in Sections
7224, 9224 and 12364) would allow the remaining directors to
elect new directors to create a quorum in order to make this
election, it can be difficult to find directors willing to join
a board for the limited purpose of dissolving and winding up the
corporation. This technical step should not be necessary before
dissolving.
AB 1233 would revise the requirement for board approval of a
voluntary dissolution under Section 6610, by adding a new
Subsection 6610(c). Under subsection (c), if the corporation
would be permitted to dissolve by approval of the board, but the
number of directors then in office is less than a quorum, an
action by the board to elect to dissolve could be taken by the
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same vote as would be required under Section 5224 for the
election of additional directors (that is, by a unanimous
consent of all remaining directors, a vote of a majority of the
remaining directors at a meeting, or the approval of the sole
remaining director). Furthermore, after such an election to
dissolve, any actions by the board during the period of winding
up and dissolving, including an election to revoke the
dissolution, would also require only the same vote that was
required for the dissolution. AB 1233 eliminates the need for a
board that is less than a quorum to recruit and elect more board
members to operate the corporation during this period.
Corresponding changes would be made to Sections 8610, 9680, and
12630 to apply the same rules to mutual benefit corporations,
religious corporations and consumer cooperative corporations.
Private Foundation Restrictions
A private foundation is not tax exempt under federal law unless
its governing instrument contains special provisions in addition
to those required of all other organizations holding tax-exempt
status under Internal Revenue Code Section 501(c)(3). A private
foundation's governing instrument is considered to satisfy this
requirement if applicable state law obligates it: (i) to act or
refrain from acting so as not to subject the foundation to the
taxes imposed on prohibited transactions, or (ii) to treat the
mandatory provisions as contained in the foundation's governing
instrument. Currently, Corporations Code Section 5260 allows a
public benefit corporation that is a private foundation as
described in that section to satisfy the IRS requirement without
including this language in its governing instrument. AB 1233
creates a new Section 9260 which makes the provisions of Section
5260 applicable to religious corporations.
Required Insurance
Sections 5047.5 and 24001.5 of the Corporations Code provide a
limitation of personal liability for officers and directors of
nonprofit corporations and associations. Both sections apply
only if the corporation or association maintains a "general
liability" insurance policy that is in force both at the time of
injury and at the time that the claim is made. In point of
fact, "general liability" insurance policies often do not cover
employment-related or other claims that are brought against
directors and officers. These claims frequently are covered by
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director's and officer's liability policies or employment
practices liability policies. Also, it is not necessary in many
cases that a policy be in effect both at the time of injury and
at the time of claim. The key measurement need only be that the
policy covers the claim. AB 1233 would make it possible for
nonprofit corporations and associations to assure their
directors and officers that this statute provides the type of
protection the legislature intended.
REGISTERED SUPPORT / OPPOSITION :
Support
Business Law Section of the California State Bar - Sponsor
California Association of Nonprofits (CAN)
Opposition
None on file.
Analysis Prepared by : Kathleen O'Malley / B. & F. / (916)
319-3081