BILL ANALYSIS Ó SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE Senator Lou Correa, Chair 2013-2014 Regular Session AB 491 (Torres) Hearing Date: June 5, 2013 As Amended: May 9, 2013 Fiscal: No Urgency: No SUMMARY Would enact a series of provisions intended to allow general corporations, nonprofit public benefit corporations, nonprofit mutual benefit corporations, and nonprofit religious corporations to take specified actions to conduct these corporations' ordinary business operations and affairs during emergencies. DESCRIPTION 1. For purposes of the bill's provisions, would define an emergency as any of the following, when, and only for as long as, it prevents a quorum of a corporation's board of directors from being readily convened for action: a natural catastrophe; an attack on California or the United States by an enemy of the United States or receipt by California of a warning from the federal government that an enemy attack is probable or imminent; an act of terrorism or other manmade disaster that results in extraordinary levels of casualties or damage or disruption; or a state of emergency proclaimed by the Governor. 2. In advance of or during an emergency, would authorize general corporations, nonprofit public benefit corporations, nonprofit mutual benefit corporations, and nonprofit religious corporations to take any or all of the following actions necessary to conduct the corporations' ordinary business operations and affairs during the emergency, unless emergency bylaws provide otherwise: a. Modify lines of succession to accommodate the incapacity of any director, officer, employee, or agent resulting from the emergency. b. Relocate the principal office, designate alternative AB 491 (Torres), Page 2 principal offices or regional offices, or authorize the officers to do so. c. Give notice to a director or directors in any practicable manner under the circumstances, when notice of a meeting of the board cannot be given to that director or directors in the manner ordinarily required. d. Deem that one or more officers of the corporation that are present at a board meeting is a director, as necessary to achieve a quorum for that meeting. 3. Would provide that any of the actions listed immediately above, when taken in good faith during an emergency, bind the corporation, and may not be used to impose liability on a corporate director, officer, employee, or agent. 4. Would prohibit a board from taking any action during an emergency, which requires a vote of shareholders or is not in the corporation's ordinary course of business, unless the required vote of the shareholders was obtained prior to the emergency. 5. Would authorize general corporations, nonprofit public benefit corporations, nonprofit mutual benefit corporations, and nonprofit religious corporations to include emergency bylaws within their regular bylaws, as long as those emergency bylaws do not conflict with the corporations' articles of incorporation. These emergency bylaws could contain provisions intended to allow a corporation to manage and conduct its ordinary business affairs during an emergency. Would also provide the following, with respect to the emergency bylaw provisions: a. If a corporation acts pursuant to emergency bylaws during an emergency, its board would be prohibited from taking any action during that emergency, which requires a vote of shareholders or is not in the corporation's ordinary course of business, unless the required vote of the shareholders was obtained prior to the emergency. b. All provisions of the regular bylaws consistent with the emergency bylaws would remain effective during the emergency. The emergency bylaws would cease to be effective once the emergency ends. AB 491 (Torres), Page 3 c. If a corporation acts pursuant to emergency bylaws during an emergency, corporate action taken in good faith in accordance with the emergency bylaws would binds that corporation, and could not be used to impose liability on a corporate director, officer, employee, or agent. EXISTING LAW does not provide any special rules for use by corporations during emergencies. COMMENTS 1. Purpose: This bill is sponsored by the Corporations Committee of the Business Law Section of the California State Bar, to help provide corporate boards with legal certainty and relief from liability for actions they take during emergencies to further the ordinary business affairs and operations of their companies. 2. Background: In the ordinary course of their businesses, corporations regularly schedule meetings of their boards of directors. These meetings typically occur four to six times a year, and require a quorum of board members to be present, in order for business to be conducted. Existing law allows a quorum to be established via telephonic and/or electronic means; thus, a quorum of board members need not be physically present in the same room in order for a quorum to be established; the quorum may be established through a combination of board members participating in person, and/or via telephone, video conferencing, or other electronic means. This bill addresses situations in which a natural or man-made disaster or other emergency prevents a board from establishing quorum. The bill has two sets of provisions - one of which authorizes corporations to establish emergency bylaws that specify what actions a corporation may take during an emergency, and the second, which authorizes corporations that lack emergency bylaws to take certain, specified actions in advance of and/or during emergencies. The logic is that, at a minimum, all corporations will be authorized to take certain specified actions during emergencies; the boards of corporations that establish emergency bylaws will have the ability to take those actions, plus any additional actions that are authorized in their emergency bylaws. AB 491 (Torres), Page 4 Under the provisions of the bill, a corporation would be able to do any or all of the following for the purpose of conducting its ordinary business operations and affairs, in the event of an emergency that prevents it from establishing a quorum of the members of its board: modify lines of succession to accommodate the incapacity of any director, officer, employee, or agent resulting from the emergency; relocate the principal office or designate alternative principal offices or regional offices; give notice of an upcoming meeting to one or more directors in any practicable manner under the circumstances; and deem that one or more officers of the corporation that is present at a board meeting is a director, in order to establish a quorum at that meeting. Generally speaking, although the bill is silent on this point and its sponsor wishes it to remain so, the bill's focus is on two types of actions that require board approval: 1) actions that are time-critical, such as filing documents by a certain date with the Securities and Exchange Commission or consummating an acquisition that has previously been approved by shareholders, and 2) actions necessitated as the result of an emergency. For all other actions, boards can simply delay their meeting by a week or two, and conduct their affairs according to their regular bylaws. Time-critical actions and actions necessitated as the result of an emergency can require special rules, intended to help corporations establish the quorums they need to take appropriate actions to further the business of the corporation. 3. Discussion: According to this bill's sponsor, California is one of a minority of states that have failed to enact emergency powers provisions authorizing its for-profit corporations to take specified actions during emergencies. Although the language of these statutes vary, many are based, at least in part, on a Model Business Corporation Act (Model Act). There is little evidence to support a contention that the lack of rules within California's Corporations Code for use by corporations during emergencies has hampered corporations' abilities to operate during emergencies. California has experienced dozens of natural and manmade emergencies during the past several decades, and corporations have managed to operate through them all. However, information provided by the sponsor does support an assertion that the ability of AB 491 (Torres), Page 5 corporations to take necessary actions in good faith during emergencies, without incurring liability for those actions, will be improved, if AB 491 is allowed to become law. In response to concerns that this bill would give corporate boards too many powers during emergencies, the sponsor observes that the bill contains safeguards to prevent abuse. The broad emergency powers provision authorizes boards to take only those limited actions that are authorized, and only those actions which are conducted in good faith and are necessary to conduct the corporation's ordinary business operations and affairs. Boards would not be authorized to take extraordinary actions, including those actions requiring a shareholder vote, or to thwart actions for which the required vote has already been obtained. 4. Summary of Arguments in Support: a. The Corporations Committee of the Business Law Section of the California State Bar is sponsoring this bill to "promote efficiency and effectiveness in practice by improving and modernizing relevant provisions of the Code." The sponsor points to the fact that 38 of 52 United States jurisdictions have adopted an emergency powers statute. The sponsor states, "without emergency powers and/or bylaws, a corporation may be unable to continue its business or risk a challenge to any actions taken with a lesser quorum, during an emergency. Additionally, an emergency could prevent the officers from conducting the corporation's ordinary business operations. Providing the board with the necessary powers to act in lieu of the officers or to elect temporary officers to act would be critical." b. The Civil Justice Association of California (CJAC) writes, "AB 491 would give corporations certainty that the actions taken in good faith [in anticipation of or during an emergency] would be binding and not subject to legal challenge." c. The California Association of Nonprofits states, "Because nonprofit corporations may play crucial roles in emergency response, both immediately and over time, following a catastrophic event, we feel it is of AB 491 (Torres), Page 6 particular importance to California's nonprofit sector to have the authority to adopt emergency bylaws and take specific action during an emergency to ensure the ability to operate effectively and also remain in compliance with state laws while continuing to operate." d. "As an operator of critical infrastructure and provider of a service essential for the well-being of millions of Californians," Southern California Edison believes that, "in times of an emergency, when Southern California Edison is responsible for restoring power, it is paramount that emergency powers and/or bylaws be clearly delineated." 5. Summary of Arguments in Opposition: None received. AB 491 (Torres), Page 7 6. Amendments: a. The emergency powers provision of this bill differs significantly from the Model Act on which it is based. Some of the deviations relative to the Model Act are intentional and justifiable; others result in language that is less precise and more confusing than the Model Act. The author and sponsor have agreed to the following amendments to more closely track the Model Act: Emergency Powers Provision (the following language reflects the amendments that would be made to Corporations Code Section 207; similar amendments would also be required to Sections 5140, 7140, and 9140): (i)(1) Inadvanceanticipation of or during an emergency, takeany or alleither or both of the following actions necessary to conduct the corporation's ordinary business operations and affairsduring an emergency, unless emergency bylaws provide otherwise pursuant to subdivision (c) of Section 212: (A) Modify lines of succession to accommodate the incapacity of any director, officer, employee, or agent resulting from the emergency; and (B) Relocate the principal office, designate alternative principal offices or regional offices, or authorize the officers to do so. (2) During an emergency, take either or both of the following actions necessary to conduct the corporation's ordinary business operations and affairs, unless emergency bylaws provide otherwise pursuant to subdivision (c) of Section 212:(C)(A) Give notice to a director or directors in any practicable manner under the circumstances, including, but not limited to, by publication and radio, when notice of a meeting of the board cannot be given to that director or directors in the manner prescribed by the bylaws or Section 307.(D)(B) Deem that one or more officers of the corporation present at a board meeting is a director, in order of rank and within the same rank in order of seniority, as necessary to achieve a quorum for that meeting.(2)(3)DuringIn anticipation of or during an emergency, the board may not take any action that requires the vote of the shareholders or is not in the corporation's ordinary course of business, unless the required vote of the shareholders was obtained prior to the emergency. AB 491 (Torres), Page 8(3)(4) Any actions taken in good faith in anticipation of or during an emergency under this subdivisionbindsbind the corporation and may not be used to impose liability on a corporate director, officer, employee, or agent. b. An amendment is also suggested to expand the definition of an emergency, to include a state of emergency proclaimed by a (rather than the) Governor or by the President . This amendment will be required to Sections 207, 5140, 7140, and 9140. AB 491 (Torres), Page 9 LIST OF REGISTERED SUPPORT/OPPOSITION Support Corporations Committee of the Business Law Section of the California State Bar (sponsor) California Association of Nonprofits Civil Justice Association of California Southern California Edison Opposition None received Consultant: Eileen Newhall (916) 651-4102