BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Senator Ellen M. Corbett, Chair
2009-2010 Regular Session
AB 1233
Assemblymember Silva
As Amended May 6, 2009
Hearing Date: July 7, 2009
Corporations Code
GMO:jd
SUBJECT
Nonprofit Corporations and Unincorporated Associations
DESCRIPTION
This bill would revise various provisions in the Corporations
Code pertaining to the governance of nonprofit public benefit
corporations, mutual benefit corporations, religious
corporations, consumer cooperative corporations, and nonprofit
unincorporated associations. The revisions would involve
directors and their titles, directors' elections and voting
rights, quorum requirements, board committees and actions, third
party rights, mergers and dissolutions, and private foundation
restrictions.
BACKGROUND
This bill, sponsored by the Nonprofit and Unincorporated
Organizations Committee of the Business Law Section of the State
Bar of California, intends to modernize and clarify the laws
governing nonprofit public benefit corporations, mutual benefit
corporations, consumer cooperative corporations, religious
corporations, and unincorporated nonprofit associations.
CHANGES TO EXISTING LAW
1. Existing law governing nonprofit public benefit
corporations and nonprofit consumer cooperative associations
defines "directors" to mean natural persons, designated in the
articles or bylaws or elected by the incorporators, and their
successors and natural persons designated, elected, or
appointed by any other name or title to act as members of the
governing body of the corporation or association. (Corp. Code
(more)
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Secs. 5047, 12233.) Nonprofit consumer cooperative
associations, through their bylaws, also permit the election
or appointment of "alternate directors" of the association.
(Corp. Code Sec. 12331.)
This bill would add language to these code sections to clarify
that: (1) a person who does not have authority to act as a
member of the governing body of the corporation or association
is not a director for purposes of these laws, regardless of
title; and (2) a natural person designated by the articles or
bylaws of the organization as a director or member occupying a
specified position within or outside the corporation or
association is a director for all purposes and has the same
rights and obligations, including voting rights, as other
directors or members.
2. Existing law permits a public benefit corporation to merge
with another corporation, partnership, or business entity.
(Corp. Code Sec. 6010.) The definition of "other business
entity" in Section 5063.5 and Section 12242.5 excludes an
unincorporated nonprofit association from those able to merge
with a public benefit corporation.
This bill would remove the exclusion, thereby allowing an
unincorporated nonprofit association to merge with a public
benefit corporation.
Existing law permits an unincorporated association to merge
into a corporation, limited or general partnership, or limited
liability company. (Corp. Code Sec. 18360.)
This bill would permit the merger of an unincorporated
association with a corporation, limited or general
partnership, or limited liability company, thereby
facilitating a two-way merger, consistent with other code
provisions.
3. Existing law permits the drafters of articles or bylaws of
a nonprofit public benefit corporation, consumer cooperative
corporation, nonprofit mutual benefit corporation, or
nonprofit religious corporation to allow for nonmember or
nondirector governance actions such as the amendment or repeal
of the articles of incorporation, approval of the bylaws, or
designation of a director (appointment rather than election by
members or directors). (Corp. Code Secs. 5132(c)(4), 5150(d),
5220(d); 7132(c)(5), 7150(d), 7220(d), 7222(f); 12330(d),
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12360(d), 12362(g); and 9132(c)(4).)
This bill would establish default provisions to address these
governance issues in the event the drafters of the
corporation's articles or bylaws do not, or in the event the
designator of a director ceases to exist or is unable to take
those governance actions. The default provisions would
transfer the authority to take action to the members or, if no
members, to the directors of the organization.
This bill would further specify that unless otherwise provided
in the articles or bylaws, the entitlement to designate or
select a director or directors shall not apply if: (a) the
specified designator of that director or directors has died or
ceased to exist; or (b) the entitlement of the specified
designator of that director or directors to designate is in
the capacity of an officer, trustee, or other status and the
office, trust, or status has ceased to exist.
4. Existing law requires the bylaws of nonprofit corporations
to establish the number of directors of the corporation
(unless already stated in the articles) but does not permit
nonprofit corporations to determine the number of directors of
the corporation by a method or formula set forth in the
bylaws. (Corp. Code Secs. 5151, 7151, 9151, 12331.)
This bill would amend the various nonprofit corporation laws
to allow the bylaws to provide for a method of determining the
number of directors.
5. Existing law does not expressly permit nonprofit
corporations to require that certain specified directors must
be present and included in the requisite quorum for any or
specified meetings of the board of directors to proceed.
(Corp. Code Secs. 5211, 7211, 9211, 12351.)
This bill would expressly permit nonprofit corporations to
create such a requirement through the corporation's articles
or bylaws, as long as the death of that director or the death
or nonexistence of the person or persons otherwise authorized
to appoint or designate that director does not prevent the
corporation from transacting business in the normal course of
events.
This bill would also clarify that: (1) the number of directors
that must be present to constitute a quorum of the board for
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the transaction of business is that number authorized in or
pursuant to the articles or bylaws of the corporation; and (2)
each director has only one vote and no director may vote by
proxy.
6. Existing law restricts the authority of board committees,
including the approval of actions that require approval of
members or a majority of all members. (Corp. Code Secs.
5212(a), 7212(a), 9212(a), 12352(a).)
This bill would clarify that the restriction (in current law)
applies regardless of whether the corporation has members or
not.
Existing law allows boards of nonprofit corporations to create
board committees and "advisory" committees that may include
not only directors but also nondirector members, to advise the
board or implement the board's decisions. (Corp. Code Secs.
5212(b), 7212(b), 9212(b), 12352(b).)
This bill would clarify that board committees may only have
directors as members, but that other committees with
nondirector members may be created as long as they do not
exercise the authority of the board.
7. Existing law sets forth the required officers for nonprofit
corporations (public benefit, mutual benefit, consumer
cooperative, religious), specifically requiring the
corporation to have a "chairman of the board or a president or
both," a "chief financial officer," and a "secretary." The
law allows the board to allow titles of "other officers" but
does not allow the board to change the title of "chairman of
the board." (Corp. Code Secs. 5213, 7213, 9213, 12353.)
This bill would allow a nonprofit corporation to use any of
the titles "chairman of the board," "chairwoman of the board,"
"chair of the board," or "chairperson of the board," to
designate the person who serves in this statutory officer
role.
Existing law requires a nonprofit corporation to have a "chief
financial officer" but not a "treasurer."
This bill would allow a nonprofit corporation to have "a
treasurer or a chief financial officer or both" and provide
that unless otherwise provided in the corporation's articles
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or bylaws, the treasurer will fulfill the role of "chief
financial officer" if there is no separate chief financial
officer.
8. Existing law provides that until a successor to a director
who has been removed has been elected and qualified to serve
on the board, that director continues to serve.
(Corp. Code Secs. 5220(b), 7220(b), 9220(c), 12360(b).)
Existing law also provides 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.
(Secs. 5222(c), 7222(c), 9222(c), 12362(d).)
This bill would clarify that any reduction of the authorized
number of directors does not remove any director prior to
expiration of the director's term of office unless the
reduction or any amendment also provides for the removal of
one or more specified directors.
9. Existing law provides that the board of a nonprofit
corporation may delegate certain duties to anyone, but must
retain ultimate responsibility; that the board may delegate
board authority, within specified limits, to committees of the
board composed only of two or more directors; and that
directors, in discharging their fiduciary duties, may rely on
information, opinions, reports, or statements prepared or
presented by a committee of the board upon which the director
does not serve.
This bill would clarify that the committee of the board upon
which a director may rely must be a committee composed
exclusively of any or any combination of (a) directors, (b)
directors or employees of the corporation whom the director
believes to be reliable and competent in the matters
presented, or (c) counsel, independent accountants, or other
persons as to matters which the director believes to be within
that person's professional or expert competence. The director
must also believe that the committee merits the director's
confidence.
10. Existing law permits a nonprofit public benefit
corporation, nonprofit mutual benefit corporation, nonprofit
religious corporations, and consumer cooperative corporations
to voluntarily dissolve the corporation upon approval of the
board, if there are no members and in certain other
situations. (Corp. Code Secs. 6610, 8610, 9680, 12630.)
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This bill would provide that, if the number of directors then
in office is less than a quorum, "approval of the board" for a
voluntary dissolution may be taken by the same vote as would
be taken for the board to elect additional directors (i.e., by
unanimous consent of all remaining directors, or a vote of
majority of the remaining directors at a meeting, or the
approval of the sole remaining director). The same vote would
be required for an election to revoke the dissolution, or for
all actions required during the period of winding up and
dissolving the corporation.
11. Existing law allows a nonprofit public benefit corporation
that is a private foundation to satisfy the Internal Revenue
Service requirement that its governing instrument contain
special provisions relating to distribution of income, acts of
self-dealing, retention of excess business holdings,
investments that could make the corporation subject to
taxation, and making taxable expenditures, in addition to all
other requirements for all organizations that hold tax-exempt
status under Internal Revenue Code Section 501(c)(3), without
the governing instrument actually containing these provisions,
by obligating the corporation to those provisions under
Section 5260. (Corp. Code Sec. 5260.)
This bill would create a similar provision for nonprofit
religious corporations, so that a nonprofit religious
corporation that is also a private foundation need not contain
the specified IRC language in its governing instrument in
order to preserve its tax-exempt status. (Proposed Sec. 9260)
12. Existing law provides that no cause of action for monetary
damages shall arise against any person serving without
compensation as a director or officer of a nonprofit public
benefit corporation, a nonprofit mutual benefit corporation,
or nonprofit religious corporation based on any negligent act
or omission occurring: (1) within the scope of that person's
duties as a director acting as a board member, or within the
scope of that person's duties as an officer acting in an
official capacity; (2) in good faith; (3) in a manner that the
person believes to be in the best interest of the corporation;
and (4) is in the exercise of his or her policymaking
judgment. (Corp. Code Sec. 5047.5)
Existing law also requires a nonprofit tax-exempt corporation
to maintain a general liability insurance policy with a
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minimum coverage of $500,000 if the corporation's annual
budget is less than $50,000 and $1,000,000 if the
corporation's annual budget exceeds $50,000.
Existing law would provide this immunity from liability for a
director or officer only if the claim against the officer or
director may also be made against the corporation and a
general liability insurance policy that is in force both at
the time of the injury and at the time the claim against the
corporation is made, is applicable to the claim.
This bill would change the requirement for a general liability
insurance policy to a liability insurance policy applicable to
the claim.
COMMENT
1. Need for the bill
The Nonprofit and Unincorporated Organization Committee of the
Business Law Section of the State Bar of California, sponsor of
AB 1233, states that the bill seeks to clarify various sections
of the Corporations Code so that nonprofit and consumer
cooperative corporations may have more certainty in their
operations.
It should be noted that while the sponsor and the author
describe the changes made by this bill as merely "clarifying"
existing law, in fact some are substantive changes that
modernize governance of these nonprofit corporations, make the
rules less cumbersome to the directors that set policy for the
nonprofit corporations and more comprehensible to the officers
and employees that have to implement the policies adopted by the
directors, and to the members or beneficiaries of these
nonprofit corporations.
2. Mergers of Unincorporated Nonprofit Association
One major change this bill would make is to allow an
unincorporated nonprofit association to merge into a nonprofit
public benefit or mutual benefit corporation, or a consumer
cooperative corporation. Currently, such a merger can occur
only in a two-step process, with the unincorporated nonprofit
association first incorporating then merging into the other
organization.
The change would further allow a two-way merger, i.e., an
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unincorporated nonprofit association merging with (rather than
"into") a corporation, limited or general partnership, or
limited liability company. This is consistent with other
provisions relating to mergers elsewhere in the Corporations
Code.
3. Directors: election or designation, holding office, quorum,
voting, proxy
This bill would make similar changes to the nonprofit
corporations law and consumer cooperative corporations law with
respect to directors in several areas. The changes would
clarify the law, in order to curtail some current practices of
nonprofit corporations that foster disputes and inefficiencies
in the management of the corporations.
a. Where nonmember/nondirector actions or director
designations are required by articles or bylaws
Under current law, a corporation's bylaws may allow for the
designation (by appointment) of a director or directors
rather than election by members or directors. When a
designator dies, ceases to exist, or declines or is unable
to participate, or even when there has been a merger of
entities and it is not clear who is the appropriate
successor entity that may designate a director, or when the
office of the designator that created the entitlement to
designate a director or directors ceases to exist, the
selection of a director may become problematic if the
corporation's bylaws are silent on this issue. This bill
would provide a default provision, stating that if the
bylaws do not provide for this eventuality, the authority
devolves to the members and, if there are no members, to
the directors.
This default provision, i.e., devolving the authority held
by a nonmember/ nondirector to take certain actions (such
as approval of amendments or repeal of articles of
incorporation or approval of amendments to bylaws) or to
designate directors, to the members, and if no members, to
the directors, would apply to nonprofit public benefit
corporations, nonprofit mutual benefit corporations, and
nonprofit consumer cooperative corporations.
b. Number of directors, quorum, and votes
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The sponsor of AB 1233 states that nonprofit corporations
sometimes wish to determine the size of the board of
directors by a formula tied to specific objective factors.
Currently the corporation's bylaws may fix the number of
authorized directors within a specified range (three to
fifteen, for example) or the board may fix the number of
directors within that range by resolution. There is no
current ability for corporations to create a formula or a
method for determining the number of directors of the
corporation. This bill would specifically authorize a
nonprofit corporation or nonprofit consumer cooperative
corporation to do just this.
It is also not unheard of for a nonprofit corporation to
want certain board actions to be taken only when specified
board directors or constituents are present or are
represented on the board. The sponsor states that this
practice is actually quite common and expressly permitted
in some other states. Thus AB 1233 would provide that the
articles and bylaws of a nonprofit corporation or consumer
cooperative corporation may specify that certain directors
must be present for a quorum to be present as long as that
does not prevent efficient decision-making for the
corporation when those persons die or the person or persons
authorized to appoint or elect them have died or ceased to
exist.
Current law provides that an action or decision taken by a
board of directors is determined by the number of directors
present and voting. The sponsor states that sometimes
constituents of nonprofit corporations wish to permit
certain directors to have more than one vote. However,
this is inconsistent with other provisions of the
Corporations Code and a director's fiduciary duties. AB
1233 would make it amply clear that each director present
gets only one vote and that no proxy vote will be
permitted.
Finally, this bill would distinguish between a person who
is not authorized to act as a member of the governing body
of the nonprofit corporation or nonprofit consumer
cooperative corporation ("honorary director," "director
emeritus," "advisory director"), and therefore is not a
director regardless of title, and a natural person who is
designated by the articles or bylaws of the corporation as
a director or a member of the governing body of the
corporation by reason of occupying a specified position
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within or outside the corporation ("ex officio director").
4. Board of directors and officers: committees, advisory
committees, titles of office
Corporate bylaws very often provide for the creation of both
"board" committees, which are comprised entirely of directors,
to whom the board of directors may delegate its authority
(subject to specified restrictions) and "advisory" committees
that may be partially or entirely 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
would clarify that the board committees may have only directors
as members, but that other committees with nondirector members
may be created as long as they do not exercise the authority of
the board.
This bill also would modernize the provisions dealing with
officers of the corporation. It would allow the title of
"chairman of the board," "chairwoman of the board," "chair of
the board," and "chairperson of the board," for the person who
occupies this statutory role. This change would ensure that the
Secretary of State does not reject an officers' certificate
signed under a title that does not exactly match the statutory
title of "chairman of the board."
The title of "chief financial officer" is also being made
interchangeable with "treasurer" under this bill, in order to
achieve consistency and to acknowledge and codify the current
practice of nonprofit corporations of having both a treasurer
and a chief financial officer.
5. Dissolution of the corporation when there are not
sufficient directors for a quorum
Current law requires the approval of the board of directors for
the voluntary dissolution of a nonprofit public benefit
corporation, mutual benefit corporation, religious corporation,
or consumer cooperative corporation. Where there are not a
sufficient number of directors left to satisfy quorum
requirements, this bill would allow the vote by unanimous
consent of all remaining directors, by a vote of a majority of
the remaining directors at a meeting, or by the approval of the
sole remaining director. After the vote to dissolve has been
taken, the same voting method would be permitted so the board
may take actions necessary for the winding up and dissolution,
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or the revocation of the dissolution, of the corporation.
6. Private foundation restrictions to be placed in statute for
consumer cooperative corporations
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). Its
governing instrument is deemed to satisfy this requirement if an
applicable state law obligates it to act or refrain from acting
so as not to subject the foundation to taxes imposed on
prohibited transactions, or to treat the mandatory provisions as
contained in the foundation's governing instrument. For
nonprofit public benefit corporations, Section 5260 is that
statute that saves putting all the necessary language into the
corporation's governing articles and bylaws. This bill would
create a new statute, Section 9260 of the Corporations Code, for
nonprofit religious corporations.
7. Arguments in support
The California Society of Association Executives (CalSAE) states
it supports AB 1233 "because of the prudent changes and
clarifications it makes relative to the authority and role of
boards of directors, organizational governance, and decision
making. The bill provides greater clarity in defining members
of a board ? also properly clarifies the authority of the board
and its ability to delegate authority to committees, including
preventing a committee from exercising the authority of the
board unless that authority has been delegated."
California Association of Nonprofits (CAN) declares that "[b]y
clarifying various sections of the Corporations Code so that
nonprofit and consumer cooperative corporations may have more
certainty in their operations. AB 1233 will allow nonprofits to
focus more efficiently and effectively on delivering services at
a time when dollars are scarce and community needs are growing
at an accelerating pace."
Support : California Society of Association Executives (CalSAE);
California Association of Nonprofits (CAN)
Opposition : None Known
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HISTORY
Source : Nonprofit and Unincorporated Organizations Committee of
the Business Law Section of the State Bar of California
(sponsor)
Related Pending Legislation : None Known
Prior Legislation : None Known
Prior Vote :
Assembly Business and Professions Committee (Ayes 9, Noes 0)
(Consent)
Assembly Judiciary Committee (Ayes 10, Noes 0) (Consent)
Assembly Floor (Ayes 77, Noes 0) (Consent)
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