BILL ANALYSIS Ó SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE Senator Juan Vargas, Chair SB 918 (Anderson) Hearing Date: April 6, 2011 As Introduced: February 18, 2011 Fiscal: No Urgency: No SUMMARY Would authorize mutual water companies to elect directors to serve staggered four-year terms, if authorized in their articles of incorporation or bylaws. DESCRIPTION 1. Would provide that, notwithstanding Section 301 of the Corporations Code, a mutual water company organized under provisions of the General Corporation Law may elect directors to serve staggered four-year terms, if authorized in the corporation's articles of incorporation or bylaws. 2. Would provide that, upon the initial election of directors to staggered terms, the elected directors shall determine by lot who among them shall serve initial two-year terms, and who among them shall serve four-year terms. EXISTING LAW 3. Authorizes the formation of mutual water companies under the General Corporation Law, as specified (Corporations Code Section 100 et seq.), and under the Nonprofit Mutual Benefit Corporation Law, as specified (Corporations Code Section 7110 et seq.). 4. Like other corporations organized under the General Corporation Law, mutual water companies organized under the General Corporation Law must elect their directors annually, at their annual shareholder meeting, unless the company's articles of incorporation specify a shorter term (Corporations Code Section 301). The General Corporation Law also provides that each director shall hold office until the expiration of the term for which he or she is elected, and until a successor has been elected and qualified SB 918 (Anderson), Page 2 (Corporations Code Section 301). 5. Like other nonprofits authorized under the Nonprofit Mutual Benefit Corporation Law, mutual water companies organized under the Nonprofit Mutual Benefit Corporation Law are required to elect their directors to terms not exceeding four years, as specified in the corporation's articles of incorporation or bylaws. The articles or bylaws may provide for staggering the terms by dividing the total number of directors into groups of one or more directors (Corporations Code Section 7220). 6. Existing law regarding municipal water districts also authorizes four-year terms for directors. Water Code Section 71000 et seq. authorizes the formation of municipal water districts, and provides that each director of a municipal water district shall hold office for a term of four years (Water Code Section 71252). The Water Code establishes a procedure to be followed by municipal water districts upon their formation, in which the elected directors classify themselves by lot; two of them serve until the next general district election, and three serve until the second succeeding general district election (Water Code Section 71251). COMMENTS 1. Background and Discussion: This bill is sponsored by the Farm Mutual Water Company, and is intended to provide administrative flexibility for private mutual water companies that are organized under the General Corporation Law. Under existing law, any corporation formed under the General Corporation Law must hold annual elections for their boards of directors. The Farm Mutual Water Company, sponsor of this bill, states that compulsory annual elections have created confusion and inconsistency among some mutual water companies. Electing all five members of their boards of directors at each annual shareholder meeting has created high turnover and instability among boards, staff, and shareholders. SB 918 would give California mutual water companies organized under the General Corporation Law the flexibility to elect the members of their boards of directors to staggered four-year terms every two years, in lieu of the annual SB 918 (Anderson), Page 3 elections currently required of these companies. The sponsor states that the proposal for staggered four-year terms is consistent with election practices for public water agencies throughout California. 2. Summary of Arguments in Support: Farm Mutual Water Company is sponsoring SB 918 for the reasons stated immediately above. 3. Summary of Arguments in Opposition: None received. 4. Amendments: a. This bill would provide that, upon the initial election of directors of a mutual water company to staggered terms, the elected directors shall determine by lot who among them shall serve initial two-year terms, and who among them shall serve four-year terms. Staff suggests an amendment requiring voters in a mutual water company election in which the term length of elected directors will be determined by lot to be informed of this fact prior to the election. Absent this notification, voters could be misled into thinking they were voting an individual into office for four years, only to learn after the election that the individual would only be serving for two years. This prior notice is unlikely to impact the results of any elections, but it would serve to better educate voters about the rules of the election. LIST OF REGISTERED SUPPORT/OPPOSITION Support Farm Mutual Water Company (sponsor) Opposition None received Consultant: Eileen Newhall (916) 651-4102 SB 918 (Anderson), Page 4