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
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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.
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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
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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
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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) In advance anticipation of or during an emergency,
take any or all either or both of the following actions
necessary to conduct the corporation's ordinary business
operations and affairs during 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) During In 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 subdivision binds bind
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