BILL ANALYSIS Ó
SENATE JUDICIARY COMMITTEE
Senator Hannah-Beth Jackson, Chair
2013-2014 Regular Session
AB 2755 (Bocanegra)
As Amended May 13, 2014
Hearing Date: June 17, 2014
Fiscal: No
Urgency: No
RD
SUBJECT
Nonprofit Corporations: Directors
DESCRIPTION
This bill modifies the current definition of "directors" for the
purposes of the Nonprofit Corporation Law to clarify that: (1)
if the articles or bylaws designate that a natural person is a
director or a member of the governing body of the corporation by
reason of occupying a specified position within the corporation
or outside the corporation (i.e. "ex officio directors"),
without limiting that person's right to vote as a member of the
governing body, that person shall be a director for all purposes
and shall have the same rights and obligations, including voting
rights, as the other directors; and (2) that the term "director"
does not include a person who does not have authority to vote as
a member of the governing body of the corporation, regardless of
title.
BACKGROUND
California Nonprofit Corporation Law defines the term "director"
for the purposes of various laws governing nonprofit public
benefit corporations, mutual benefit corporations, religious
corporations, and unincorporated nonprofit associations. The
current definition is the result of 2009 legislation that sought
to clarify the former definition with respect to use of that
term for persons who are not necessarily given the same rights
and obligations as directors - chief among them, voting rights.
(AB 1233 (Silva, Ch. 631, Stats. 2009).) Specifically, AB 1233
added language to the definitions of "directors" for both
nonprofit corporations and consumer cooperative associations in
(more)
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an effort 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. (See Sen.
Judiciary Com., analysis of AB 1233 (2009-2010 Reg. Session),
Jul. 7, 2009, p. 2.)
This bill, sponsored by the Nonprofit Organizations Committee of
the Business Law Section of the State Bar of California, seeks
to further clarify the definition of a director with respect to
nonprofit corporations to emphasize that the position of
director, as a matter of law, requires that the person have
voting rights in the governing board.
CHANGES TO EXISTING LAW
Existing law , the Nonprofit Corporation Law, provides generally
that, except where otherwise expressly provided, "directors"
means 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. A person who does not have authority to act as a
member of the governing body of the corporation, including
through voting rights as a member of the governing body, is not
a director, regardless of title. However, if the articles or
bylaws designate that a natural person is a director or a member
of the governing body of the corporation by reason of occupying
a specified position within or outside the corporation, that
person shall be a director for all purposes and shall have the
same rights and obligations, including voting rights, as the
other directors. (Corp. Code Sec. 5047.)
This bill would retain the general definition of "directors" but
would, instead, provide that if the articles or bylaws designate
that a natural person is a director or a member of the governing
body of the corporation by reason of occupying a specified
position within the corporation or outside the corporation,
without limiting that person's right to vote as a member of the
governing body, that person shall be a director for all purposes
and shall have the same rights and obligations, including voting
rights, as the other directors. A person who does not have
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authority to vote as a member of the governing body of the
corporation, is not a director as that term is used in this
division regardless of title.
COMMENT
1. Stated need for the bill
According to the author:
AB 2755 clarifies 1) that a person is only a director if the
person has the right to vote as a member of the governing body
and 2) that a person who is a director by virtue of occupying
a special position, in or outside of the corporation, can only
be a director if that person has the right to vote as a member
of the governing body.
There have been issues among non-profits arising from the
current language of Corps Code Section 5047. Despite changes
that were made effective January 1, 2010, many nonprofit
practitioners, members of the Nonprofit Organizations
Committee of the State Bar and constituents of the Committee,
have reported that nonprofit clients, and those advising
nonprofit clients, are still misinterpreting the law.
Specifically, the Nonprofit Organization Committee members and
constituents have reported that many nonprofit clients and
their advisers believe that if someone is an ex officio
director, one who is designated a director by reason of
occupying a specified position or office, that person does not
have a vote.
This misinterpretation of the law is due, in part, to the fact
that old habits die hard. Many in the nonprofit world still
believe that an organization can have a non-voting director.
That is not the case[,] but remains an issue. Although
existing law provides that a director must be able to act of
the governing body, it does not state, with enough clarity,
that a person must have voting rights in order to be a
director. Instead, it explains that a person who does not
have the right to act as a member of the governing body is not
a director. The language in AB 2755 makes that clarification
by specifically referencing the right to vote as a requirement
to the position of a director. Specifically, AB 2755 provides
that "a person who does not have authority to vote as a member
of the governing body of the corporation, is not a director as
that term is used in this division regardless of title."
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2. The proposed definition of "directors" reworks the current
definition to provide additional clarity
Under the Nonprofit Corporation Law, the term "directors" is
generally defined 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. Existing law further specifies that a
person who does not have authority to act as a member of the
governing body of the corporation, including through voting
rights as a member of the governing body, is not a director as
that term is used in this division, regardless of title.
However, if the articles or bylaws designate that a natural
person is a director or a member of the governing body of the
corporation by reason of occupying a specified position within
or outside the corporation, that person shall be a director for
all purposes and shall have the same rights and obligations,
including voting rights, as the other directors. (Corp. Code
Sec. 5047.)
The current definition is the result of AB 1233 (Silva, Ch. 631,
Stats. 2009), sponsored by the Nonprofit and Unincorporated
Organizations Committee of the Business Law Section of the State
Bar of California, which sought to modernize and clarify the
laws governing nonprofit public benefit corporations, mutual
benefit corporations, consumer cooperative corporations,
religious corporations, and unincorporated nonprofit
associations. As reflected in this Committee's analysis of AB
1233, that bill sought to "distinguish 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 "directors" and "ex officio" directors for the
purposes of the nonprofit corporation law. (See Sen. Judiciary
Com., analysis of AB 1233 (2009-2010 Reg. Session), Jul. 7,
2009, p. 8.)
Accordingly, under existing law, voting rights would necessarily
make the person a director, whereas the lack of voting rights
would necessarily fail to make a person a director as a matter
of law, regardless of whether or not that person has the word
"director" in their title or not-except, in the instance of "ex
officio directors." In the case of "ex officio directors" (i.e.
where the articles or bylaws as director or a member of the
governing body of the corporation by reason of occupying a
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specified position within or outside the corporation), the
person would be a director for all purposes and shall have the
same rights and obligations, including voting rights, as the
other directors.
In similar regard, the sponsor of this bill, the Nonprofit
Organizations Committee of the Business Law Section of the State
Bar of California, asserts that the intent of AB 1233 was to
clarify that a person is only a director if the person has the
right to vote as a member of the governing party, and that a
person who is a director by virtue of occupying a specific
position within or outside the corporation (i.e. an "ex officio"
director) can only be a director as defined in the statute if
that person has the right to vote as a member of the governing
body.
Nonetheless, according to the author, the problem that existed
prior to AB 1233 still persists today, thus necessitating
further clarification. The author asserts that many nonprofit
clients and their advisers believe that persons who are "ex
officio directors," (again, persons who are designated a
director by reason of occupying a specified position or office,
such as a CEO), do not have a vote. In other words, they still
believe that a person can be a "director" for the purposes of
nonprofit corporation law, without having any voting rights.
Seeking to remove any possible remaining doubt or confusion
about the intended effect of the language enacted by AB 1233,
the sponsor asserts that this bill would clarify both of these
points by reversing the order of the second and third sentences
of existing Section 5047, and adding language to make it clear
that an ex officio director, whose voting rights were not
limited, "is a director with all attendant rights and
obligations (presumably a reference to the fiduciary duties of
care and loyalty). From a practical standpoint, a reference to
an ex officio board position means that person has the right to
vote, unless specified to the contrary." Additionally, this bill
"makes it clear that someone without voting rights on the board
is not a director. Such person could be an invitee to board
meetings, but would not be bound by all of a director's
fiduciary duties. Previously the language turned on a person's
ability to 'act' as a director. The [Nonprofit Organizations]
Committee considers such language to be confusing, and proposes
to revise it by limiting it to the act of voting."
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Support : None Known
Opposition : None Known
HISTORY
Source : Nonprofit Organizations Committee of the Business Law
Section of the State Bar of California
Related Pending Legislation : None Known
Prior Legislation : AB 1233 (Silva, Ch. 631, Stats. 2009) See
Background and Comment 2.
Prior Vote :
Assembly Floor (Ayes 62, Noes 7)
Assembly Banking & Finance Committee (Ayes 7, Noes 1)
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