BILL ANALYSIS
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|SENATE RULES COMMITTEE | AB 1233|
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THIRD READING
Bill No: AB 1233
Author: Silva (R)
Amended: 8/17/09 in Senate
Vote: 21
SENATE JUDICIARY COMMITTEE : 5-0, 7/7/09
AYES: Corbett, Harman, Florez, Leno, Walters
ASSEMBLY FLOOR : 77-0, 5/18/09 (Consent) - See last page
for vote
SUBJECT : Nonprofit corporations and unincorporated
associations
SOURCE : Nonprofit and Unincorporated Organizations
Committee of
the Business Law Section of the State Bar of
California
DIGEST : This bill revises 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
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.
Senate Floor Amendments of 8/17/09 clarify entitlement to
CONTINUED
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designate a director and make technical corrections, and
make other corrections that are purely technical, and are
made by the Legislative Counsel for clarity and
consistency.
ANALYSIS : 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. (Sections 5047 and 12233 of
the Corporations Code) Nonprofit consumer cooperative
associations, through their bylaws, also permit the
election or appointment of "alternate directors" of the
association. (Section 12331 of the Corporations Code)
This bill adds 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.
Existing law permits a public benefit corporation to merge
with another corporation, partnership, or business entity.
(Section 6010 of the Corporations Code) 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 removes 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. (Section 18360 of the
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Corporations Code)
This bill permits 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.
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).
(Sections 5132(c)(4), 5150(d), 5220(d), 7132(c)(5),
7150(d), 7220(d), 7222(f), 12330(d), 12360(d), 12362(g),
and 9132(c)(4) of the Corporations Code)
This bill establishes 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 further specifies that unless otherwise provided
in the articles or bylaws, the entitlement to designate or
select a director or directors shall not apply if (1) the
specified designator of that director(s) has died or ceased
to exist, or (2) the entitlement of the specified
designator of that director(s) to designate is in the
capacity of an officer, trustee, or other status and the
office, trust, or status has ceased to exist.
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. (Sections 5151, 7151, 9151, and 12331 of the
Corporations Code)
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This bill amends the various nonprofit corporation laws to
allow the bylaws to provide for a method of determining the
number of directors.
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. (Sections 5211, 7211, 9211, and 12351 of the
Corporations Code)
This bill expressly permits 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(s) otherwise
authorized to appoint or designate that director does not
prevent the corporation from transacting business in the
normal course of events.
This bill also clarifies that (1) the number of directors
that must be present to constitute a quorum of the board
for 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.
Existing law restricts the authority of board committees,
including the approval of actions that require approval of
members or a majority of all members. (Sections 5212(a),
7212(a), 9212(a), and 12352(a) of the Corporations Code)
This bill clarifies 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.
(Sections 5212(b), 7212(b), 9212(b), and 12352(b) of the
Corporations Code)
This bill clarifies that board committees may only have
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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.
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." (Sections 5213, 7213, 9213, and
12353 of the Corporations Code)
This bill allows 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 allows 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 or bylaws, the treasurer will fulfill the role of
"chief financial officer" if there is no separate chief
financial officer.
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.
(Sections 5220(b), 7220(b), 9220(c), and 12360(b) of the
Corporations Code) 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. (Sections 5222(c), 7222(c),
9222(c), and 12362(d) of the Corporations Code)
This bill clarifies 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
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one or more specified directors.
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 clarifies 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.
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. (Sections 6610, 8610, 9680, and
12630 of the Corporations Code)
This bill provides 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.
Existing law allows a nonprofit public benefit corporation
that is a private foundation to satisfy the Internal
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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 Section 501(c)(3) of the
Internal Revenue Code (IRC), without the governing
instrument actually containing these provisions, by
obligating the corporation to those provisions under
Section 5260. (Section 5260 of the Corporations Code)
This bill creates 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 Section 9260)
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/her policymaking judgment. (Section 5047.5
of the Corporations Code)
Existing law also requires a nonprofit tax-exempt
corporation to maintain a general liability insurance
policy with a 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 provides 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
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the time of the injury and at the time the claim against
the corporation is made, is applicable to the claim.
This bill changes the requirement for a general liability
insurance policy to a liability insurance policy applicable
to the claim.
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.
FISCAL EFFECT : Appropriation: No Fiscal Com.: No
Local: No
SUPPORT : (Verified 8/18/09)
Nonprofit and Unincorporated Organizations Committee of the
Business Law Section of the State Bar of California
(source)
California Association of Nonprofits
California Society of Association Executives
ARGUMENTS IN SUPPORT : The bill's sponsor, the Nonprofit
and Unincorporated Organizations Committee of the Business
Law Section of the State Bar of California, 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 specifically authorizes a
nonprofit corporation or nonprofit consumer cooperative
corporation to do just this.
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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, this bill will 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 bill's 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. This
bill makes it amply clear that each director present gets
only one vote and that no proxy vote will be permitted.
Finally, this bill distinguishes 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 within or outside
the corporation ("ex officio director").
The California Society of Association Executives states it
supports this bill "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
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authority has been delegated."
The California Association of Nonprofits 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."
ASSEMBLY FLOOR :
AYES: Adams, Ammiano, Anderson, Arambula, Beall, Bill
Berryhill, Tom Berryhill, Blakeslee, Block, Blumenfield,
Brownley, Buchanan, Caballero, Charles Calderon, Carter,
Chesbro, Conway, Cook, Coto, Davis, De La Torre, De Leon,
DeVore, Duvall, Emmerson, Evans, Feuer, Fletcher, Fong,
Fuentes, Fuller, Furutani, Gaines, Galgiani, Garrick,
Gilmore, Hagman, Hall, Harkey, Hayashi, Hernandez, Hill,
Huber, Huffman, Jeffries, Jones, Knight, Krekorian, Lieu,
Logue, Bonnie Lowenthal, Ma, Mendoza, Miller, Monning,
Nava, Nestande, Niello, Nielsen, John A. Perez, V. Manuel
Perez, Portantino, Ruskin, Salas, Silva, Skinner, Smyth,
Solorio, Audra Strickland, Swanson, Torlakson, Torres,
Torrico, Tran, Villines, Yamada, Bass
NO VOTE RECORDED: Eng, Price, Saldana
RJG:mw 8/18/09 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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