BILL ANALYSIS �
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2013-2014 Regular Session
AB 491 (Torres)
As Amended June 6, 2013
Hearing Date: June 18, 2013
Fiscal: No
Urgency: No
RD
SUBJECT
Corporations: Bylaws: Emergency Powers
DESCRIPTION
This bill would authorize California corporations, nonprofit
public benefit corporations, nonprofit mutual benefit
corporations, and nonprofit religious corporations to take
certain actions during an emergency and develop emergency
bylaws, as specified. This bill would specifically prohibit
the corporation from taking action, or adopting bylaws
authorizing the board to take any action, in anticipation of
and/or during the emergency that requires the vote of the
shareholders or otherwise is not in the corporation's ordinary
course of business, unless the required vote of the members or
shareholders was obtained prior to the emergency.
This bill would also provide that corporate action taken in good
faith in anticipation of or during an emergency pursuant to the
bill binds the corporation, and may not be used to impose
liability on a corporate director, officer, employee, or agent.
Additionally, this bill would provide that corporate action
taken in good faith in accordance with the emergency by laws
binds the corporation, and may not be used to impose liability
on a corporate director, officer, employee, or agent.
BACKGROUND
In 1984, the Committee on Corporate Laws of the Section of
Corporation, Banking and Business Law of the American Bar
Association promulgated the revised Model Business Corporations
Act (hereinafter MBCA). That act includes two relevant sections
(more)
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for the purposes of this bill covering emergency powers (Section
3.03) and emergency bylaws (Section 2.07).
The emergency powers section of the MBCA authorizes the board of
directors of a corporation to take certain specified actions in
anticipation of or during an emergency, which is determined to
exist "if a quorum of the corporation's directors cannot be
readily assembled because of some catastrophic event."
Corporate action taken in good faith during an emergency in
compliance with the section to further the ordinary business
affairs of the corporation binds the corporation and may not be
used to impose liability on a corporate director, officer,
employee or agent. The emergency bylaw section of the MBCA is
optional, but permits a corporation's board of directors to
adopt bylaws (subject to amendment or repeal by the
shareholders), including procedures for calling a meeting of the
board of directors, quorum requirements for the meeting, and
designation of additional or substitute directors. These bylaws
would be effective only in an emergency, which shares the same
definition as the emergency powers section. As with the
emergency powers section, the emergency bylaws section makes
clear that corporate action taken in good faith in accordance
with the emergency bylaws binds the corporation and may not be
used to impose liability on a corporate director, officer,
employee, or agent.
The sponsor of this bill, the Corporations Committee of the
Business Law Section of the State Bar, indicates that California
is one of 14 U.S. States that has not adopted an emergency
powers statute. Overall, 38 of the 52 states have adopted
emergency power provisions for for-profit corporations, and 28
of those 38 jurisdictions have both emergency powers provisions
and emergency bylaw provisions mirroring the MBCA.
Accordingly, this bill seeks to incorporate the emergency powers
and emergency bylaws sections of the MBCA into existing
California Corporations Code sections relating to the powers and
bylaws of corporations, nonprofit public benefit corporations,
nonprofit mutual benefit corporations, and nonprofit religious
corporations.
This bill was heard in the Senate Banking and Financial
Institutions Committee on June 5, 2013 and was passed out on a
vote of 8-0.
CHANGES TO EXISTING LAW
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Existing law regulates and grants specified powers to a
corporation, subject to any limitations contained in the
articles and to compliance with other specified provisions and
any other applicable laws. (Corp. Code Sec. 207.)
Existing law regulates and grants specified powers to nonprofit
public benefit corporations, nonprofit mutual benefit
corporations, and nonprofit religious corporations, subject to
any limitations contained in the articles or bylaws and to
compliance with other specified provisions and any other
applicable laws. (Corp. Code Secs. 5140, 7140, 9140.)
Existing law governs the adoption and contents of the bylaws of
corporations, nonprofit public benefit corporations, nonprofit
mutual benefit corporations, and nonprofit religious
corporations. (Corp. Code Secs. 212, 5151, 7151, 9151.)
This bill would define "emergency" as any of the following
events or circumstances as a result of which, and only so long
as, a quorum of the corporation's board of directors cannot be
readily convened for action:
a natural catastrophe, including, but not limited to, a
hurricane, tornado, storm, high water, wind-driven water,
tidal wave, tsunami, earthquake, volcanic eruption, landslide,
mudslide, snowstorm, or drought, or, regardless of cause, any
fire, flood, or explosion;
an attack on this state or nation by an enemy of the United
States of America, or upon receipt by this state of a warning
from the federal government indicating 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
severely affecting the infrastructure, environment, economy,
government functions, or population, including, but not
limited to, mass evacuations; or
a state of emergency proclaimed by a governor or by the
President.
This bill would provide that, unless the corporations' emergency
bylaws provide otherwise, a corporation may, in anticipation of
or during an emergency:
modify lines of succession to accommodate the incapacity of
any director, officer, employee, or agent resulting from the
emergency; and/or
relocate the principal office, designate alternative principal
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offices or regional offices, or authorize the officers to do
so.
This bill would provide that, unless the emergency bylaws
provide otherwise, the corporation may, during an emergency:
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 pursuant to specified law;
and/or
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.
This bill would authorize corporations to adopt emergency bylaws
allowing any actions not in conflict with the articles to manage
the corporation during an emergency, including, but not limited
to, procedures for calling a board meeting, quorum requirements
for a board meeting, and designation of additional or substitute
directors.
The bill would specify that all provisions of the regular bylaws
consistent with the emergency bylaws shall remain effective
during the emergency, and the emergency bylaws shall not be
effective after the emergency ends.
The bill would prohibit a board from taking any action in
anticipation of or during an emergency that requires the vote of
the members or shareholders or is not in the corporation's
ordinary course of business, unless the required vote of the
members or shareholders was obtained prior to the emergency.
This bill would provide that any actions taken in good faith in
anticipation of or during an emergency under this subdivision
bind the corporation and may not be used to impose liability on
a corporate director, officer, employee, or agent.
This bill would provide that corporate actions taken in good
faith in accordance with the emergency bylaws binds the
corporation, and may not be used to impose liability on a
corporate director, officer, employee, or agent.
This bill would make other technical changes.
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COMMENT
1. Stated need for the bill
According to the author:
Catastrophic events can disable corporate boards. Recent acts
of terrorism and natural disasters, such as earthquakes,
floods, hurricanes, and tsunamis, are clear reminders of the
disruptive impacts that natural and manmade catastrophes can
have on the ordinary course of business. Corporations are
particularly impacted when a quorum of the board cannot be
readily convened for action. However, existing California law
does not provide operational powers for a corporation's board
during an emergency. [ . . . ]
Emergency powers grant every corporation limited powers to
take specific actions and enables a company to continue to
operate during an emergency.
Emergency bylaws clarify the lines of command and
responsibility, helping to ensure continuity of
responsibility, and require specific statutory authorization
because their provisions may be at variance with conventional
standards of corporate practice. [ . . . ]
Without emergency powers and/or bylaws, a corporation may be
unable to conduct the corporation's ordinary business in times
of an emergency or catastrophe. In
more dire circumstances, it could also risk challenges to any
action take with a lesser quorum, during an emergency.
[This bill] permits California corporations to adopt emergency
bylaws allowing any actions to be taken, not conflicting with
the articles, to manage the corporation during an emergency.
Additionally, [this bill] provides California corporations
with the power to take specific actions to continue to
function during a catastrophic event (an "emergency"),
essentially making state law consistent with the Model
Business Corporations Act.
The Corporations Committee of the Business Law Section of the
State Bar, sponsor of this bill, writes that: "[t]he Model
Business Corporation Act (the "MBCA") contains emergency powers
and bylaw provisions. While the 1969 MBCA combined the two
provisions, the 1984 MBCA addresses these subjects in separate
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sections. Rather than adopt one or more new separate Code
section(s) to address emergencies, the amendments are proposed
to existing statutes that already address corporate powers and
bylaws. AB 491['s provisions] logically fit within the respect
Code sections and therefore are more likely to be easily found
by practitioners. Additionally, combining the provisions and
adding a new section or including them together in an existing
section could be confusing. Finally, AB 491 will adopt both
emergency powers and bylaw provisions. The amendment to add
emergency powers specifies those actions that can be taken
during an emergency and will provide some basic protections for
a corporation that does not adopt emergency bylaws [so that
they] will still be able to function during an emergency . . .
."
In support of the bill, the California Association of Nonprofits
notes that "[b]ecause nonprofit corporations may play crucial
roles in emergency response, both immediately and over time,
following a catastrophic event, we feel it is of 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 to remain in compliance with state laws while
continuing to operate."
2. Practical application of the bill during a covered
emergency
This bill would authorize corporations, nonprofit public benefit
corporations, nonprofit mutual benefit corporations, and
nonprofit religious corporations (hereinafter corporation or
corporations) to take certain actions in anticipation of or
during an emergency to conduct the corporations' ordinary
business operations and affairs, unless the emergency bylaws
provide otherwise. These emergency powers include modifying
lines of succession to accommodate the incapacity of directors,
officers, employees or agents; changing the location of the
principal office or regional office; altering the manner of
notice of meetings to directors; allowing officers present at
the board meeting, in order of rank, to be deemed as directors
to establish quorum. Under this bill, the corporation could
take these actions even if the corporation does not elect to
adopt emergency bylaws, but if emergency bylaws are adopted
pursuant to this bill, the emergency powers would apply unless
they conflict with the emergency bylaws.
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Additionally, the bill would permit corporations to adopt
emergency bylaws that allow the corporation to take any actions
not in conflict with the articles to manage the corporation
during an emergency, including, but not limited to: procedures
for calling a board meeting, quorum requirements for a board
meeting, and designation of additional or substitute directors.
All provisions of the regular bylaws consistent with the
emergency bylaws would remain effective during the emergency
and, as a matter of law, the emergency bylaws could not be used
after the emergency ends.
While it is unclear whether, historically, there are any
examples demonstrating corporations were unable to perform vital
functions in emergencies due to the absence of specific
corporate emergency power laws, as noted in Comment 1 above, the
proponents of this bill assert that this bill will aid
corporations who could not otherwise conduct their ordinary
course of business in the face of emergencies. The sponsor of
this bill, the Corporations Committee of the Business Law
Section of the State Bar offers the following examples of how
this bill would operate during emergencies: "The recent tornado
in Moore Oklahoma, which wiped out phone and cell coverage as
well as most infrastructure is a good example. A portion of the
remaining directors of a corporation, if they could get
together, would be authorized to take action, even though less
than a quorum."
In support of the bill, the Southern California Edison (SCE)
writes that, "[i]n times of an emergency, when SCE is
responsible for restoring power, it is paramount that emergency
powers and/or bylaws be clearly delineated to allow a
corporation to continue its business and be well prepared to
respond to such circumstances. [ . . . ] In the interest of
safety of employees, customers and the general public, it is
important that SCE be allowed to enact corporate bylaws in times
of emergency to facilitate the effectiveness of emergency
response and to enable the company to adapt in the event of
extreme circumstances."
To the extent that this bill would provide clarity as to the
powers of corporations in emergency situations, given that the
emergency powers and bylaws are in effect only as long as the
emergency is hindering the ability of a specific corporation
from conducting their ordinary course of business, as a matter
of public policy, this bill would appear to reasonably allow
corporations directly impacted by emergencies to conduct their
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business-which, as noted by SCE, may at times be of benefit to
the public.
3. Nexus must exist between the emergency circumstance and the
corporation before emergency powers or bylaws can be triggered
This bill would grant corporations specified powers in
anticipation of or during an emergency, and would allow
corporations to adopt emergency bylaws, as specified. It is
critical to note, however, that the emergency powers cannot be
exercised, and the emergency bylaws do not take effect, simply
because there is an emergency somewhere in the world. The bill
would require that there be a nexus between a covered type of
emergency and the corporation before actions pursuant to the
statutory emergency powers or the corporation's emergency bylaws
can be lawfully executed.
Specifically, that nexus is reflected in bill's definition of
emergency, which states that an emergency is "any of the
following events or circumstances as a result of which, and only
so long as, a quorum of the corporation's board of directors
cannot be readily convened for action:"
catastrophic events (such as a hurricane, tornado, storm,
tidal wave, tsunami, earthquake, volcanic eruption, mudslide,
drought, or, regardless of cause, any fire, flood, or
explosion, among other things);
an attack on this state or nation by an enemy of the U.S., or
upon receipt by this state of a warning from the federal
government indicating 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
severely affecting the infrastructure, environment, economy,
government functions, or population, including, but not
limited to, mass evacuations; or
a state of emergency proclaimed by a governor or by the
President.
In other words, in order for an emergency situation to trigger
the authorized-use of emergency powers and bylaws, both: (1) an
event or circumstance would have to occur that meets one of the
four descriptions of emergencies above, and (2) such event or
circumstance would have to cause a quorum of the corporation's
board of directors to not be readily convened for action.
Moreover, once that nexus no longer exists (again, the bill
states "and only so long as"), the authorization for the
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corporation to exercise their emergency powers or take action in
accordance with their emergency bylaws, ends. In doing so, this
bill appears to appropriately limit the application of these
powers and bylaws so that corporate boards do not misuse these
provisions.
4. Limited liability for certain good faith corporate actions
in emergency situations
In addition to granting corporations specific emergency powers
and authorizing the adoption of certain emergency bylaws, this
bill would provide that any actions taken in good faith in
anticipation of or during an emergency pursuant to the emergency
powers authorized by this bill, as well as any actions taken in
good faith during an emergency in accordance with the bylaws,
binds the corporation and may not be used to impose liability on
a corporate director, officer, employee, or agent.
As noted in Comment 2 above, it is unclear how corporations have
historically been affected in prior emergencies due to the
absence of any California law specific to their emergency powers
or bylaws. As a practical matter, the qualified immunity
provisions of the bill would arguably have the most impact by
providing corporation boards, and their employees or agents, the
assurance that they can take certain good faith actions in an
emergency for which the requisite nexus exists (see Comment 3),
without fear of liability to the corporation, so long as those
actions are taken pursuant to their emergency powers under law
or are in accordance with their emergency bylaws, if any.
While immunity provisions are rarely preferable because they, by
their nature, prevent an injured party (here, the corporate
shareholders or members) from seeking a particular type of
recovery, the Legislature has in limited scenarios approved
measured immunity from liability to promote other policy goals
that could benefit the public. This bill arguably would be a
measured immunity insofar as it only applies if the action(s)
taken by the board director, officer, employee or agent, meets
all of following elements: (1) they were taken in good faith;
(2) either pursuant to the emergency powers authorized by the
bill, or in accordance with the emergency bylaws adopted by the
corporation in compliance with this bill; and (3) in
anticipation of or during a qualifying emergency, as specified.
And as noted by the SCE (see Comment 2), the continued
operation of the corporation could ultimately benefit the
community.
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Again, the bill does not grant corporations the ability to take
broad actions in any circumstance that could be described as an
emergency, somewhere in the world. In terms of the statutory
emergency powers, the bill only grants certain limited powers
such as modifying lines of succession to accommodate the
incapacity of directors, officers, employees or agents; changing
the location of the principal office or regional office;
altering the manner of notice of meetings to directors; and
allowing officers present at the board meeting, in order of
rank, to be deemed as directors to establish quorum. The bill
also limits the bylaws that can be adopted, in that they can
only authorize actions that are not otherwise in conflict with
the articles, to manage the corporation during an emergency,
such as procedures for calling a board meeting, quorum
requirements for a board meeting, and designation of additional
or substitute directors. The bill also generally prohibits
actions that would otherwise require the vote of the
shareholders or members or is not in the corporation's ordinary
course of business. Thus, any actions taken outside of such
parameters, or otherwise taken in bad faith or in a circumstance
that does not meet qualify as an "emergency" as defined in the
bill, would not be shielded from liability.
Support : California Association of Nonprofits; Civil Justice
Association of California; Homeowners Association; Southern
California Edison
Opposition : None Known
HISTORY
Source : Corporations Committee of the Business Law Section of
the State Bar
Related Pending Legislation : None Known
Prior Legislation : None Known
Prior Vote :
Senate Banking & Financial Institutions Committee (Ayes 8, Noes
0)
Assembly Floor (Ayes 70, Noes 0)
Assembly Judiciary Committee (Ayes 10, Noes 0)
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Assembly Banking & Finance Committee (Ayes 12, Noes 0)
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