BILL ANALYSIS Ó SENATE JUDICIARY COMMITTEE Senator Hannah-Beth Jackson, Chair 2015 - 2016 Regular Session SB 351 (Committee on Banking and Financial Institutions) Version: April 6, 2015 Hearing Date: April 21, 2015 Fiscal: Yes Urgency: No RD SUBJECT Corporations DESCRIPTION Existing laws authorize 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 add the same emergency powers and emergency bylaws provisions to the Consumer Cooperative Corporations Law to also allow a consumer cooperative corporation to take certain actions during an emergency and develop emergency bylaws, as specified. This bill would add a new provision to the Corporations Code to specify that a corporation shall have a chairperson of the board who may be given the title of chair of the board, chairperson of the board, chairman of the board, or chairwoman of the board, and would make conforming changes to standardize references to chairperson of the board in the Corporations Code. In specified provisions that set forth permissible titles for "chair of the board," the bill would also permit the use of "chair," "chairperson," "chairman," and "chairwoman" without reference to "of the board." This bill would expressly authorize registered dental hygienists in alternative practice (RDHAPs) to incorporate under the Corporations Code and would authorize an RDHAP to include dental assistants, licensed dentists, registered dental hygienists, and registered dental hygienists in extended functions as SB 351 (Committee on Banking and Financial Institutions) Page 2 of ? shareholders, officers, directors, or professional employees of the corporation. (This analysis includes author's amendments to be taken in Committee.) BACKGROUND In 1984, the American Bar Association's Committee on Corporate Laws promulgated the revised Model Business Corporations Act (hereinafter MBCA). That act includes two relevant sections for the purposes of this bill covering emergency powers (Section 3.03) and emergency bylaws (Section 2.07). First, the emergency powers section 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. Second, 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. In 2013, AB 491 (Torres, Ch. 255, Stats. 2013) was enacted 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, as sponsored by the Corporations Committee and the Nonprofit Associations Committee of the Business Law Section of the State Bar of California, would: (1) expand the emergency SB 351 (Committee on Banking and Financial Institutions) Page 3 of ? powers and bylaws sections to consumer cooperative corporations; and (2) enact provisions and make changes throughout the Corporations Code in relation to the use of the terms "chairperson" or "chairperson of the board" and variations thereof. The bill also would contain a provision, sponsored by the California Dental Hygienists' Association, to expressly authorize the incorporation of an RDHAP (which is already envisioned under the Business and Professions Code) and allow an RDHAP to include certain licensed dental professionals as shareholders, officers, directors, or professional employees of the professional corporation. CHANGES TO EXISTING LAW 1.Existing law , with respect to corporations, nonprofit public benefit corporations, nonprofit mutual benefit corporations, and nonprofit religious corporations, provides that unless the corporations' emergency bylaws provide otherwise, a consumer cooperative 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 offices or regional offices, or authorize the officers to do so. (Corp. Code Secs. 207(i)(1), 5140(n)(1), 7140(m)(1), 9140(n)(1).) Existing law provides 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. (Corp. Code Secs. 207(i)(2), 5140(n)(2), 7140(m)(2), 9140(n)(2).) Existing law authorizes corporations to adopt emergency bylaws allowing any actions not in conflict with the articles to manage the corporation during an emergency, including, but not SB 351 (Committee on Banking and Financial Institutions) Page 4 of ? limited to, procedures for calling a board meeting, quorum requirements for a board meeting, and designation of additional or substitute directors. (Corp. Code Secs. 212(c), 5151(g), 7151(g), 9151(g).) Existing law specifies 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. (Corp. Code Secs. 212(c)(3), 5151(g)(3), 7151(g)(3), 9151(g)(3).) Existing law prohibits a board from taking any action 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. (Corp. Code Secs. 212(c)(2), 5151(g)(2), 7151(g)(2), 9151(g)(2).) Existing law provides 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. (Corp. Code Secs. 207(i)(4), 5140(n)(4), 7140(m)(4), 9140(n)(4).) Existing law provides 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. (Corp. Code Secs. 212(c)(4), 5151(g)(4), 7151(g)(4), 9151(g)(4).) Existing law defines "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 SB 351 (Committee on Banking and Financial Institutions) Page 5 of ? 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. (Corp. Code Secs. 207(i)(5), 5140(n)(5), 7140(m)(5), 9140(n)(5).) This bill would incorporate the provisions above into the Consumer Cooperative Corporations law to similarly authorize consumer cooperative corporations to take certain actions during an emergency and develop emergency bylaws, as specified. 1.Existing law , the Nonprofit Corporation Law, and the Consumer Cooperatives Law, provide that the term "chair" includes "chairperson," "chairman," and "chairwoman" and that all references in those laws to "chairman" shall be deemed to refer to "chair." (Corp. Code Secs. 5039.5, 12228.5.) This bill would instead provide that for the purposes of these laws, all references to "chairman of the board," except as specified, shall be deemed to refer to all permissible titles for a chair of the board, as permitted under the law. This bill would add to those permissible titles (which currently include chair of the board, chairperson of the board, chairman of the board, or chairwoman of the board) the following: chair, chairperson, chairman, and chairwoman. This bill would add a provision to the Corporations Code to require that all references in the General Corporation Law to "chairperson of the board" be deemed to refer to all permissible titles for the chairperson of the board. This bill would specify that permissible titles for "chairperson of the board" include chair of the board, chairperson of the board, chairman of the board, or chairwoman of the board. This bill would replace references to "chair of the board" or "chairman of the board," with "chairperson of the board" in various provisions. 3. Existing law , the Moscone-Knox Professional Corporation Act, provides for the organization of a corporation under specified law for the purposes of qualifying as a professional corporation under that act and rendering professional services. (Corp. Code Sec. 13401 et seq.; see Corp. Code Sec. 13404.) Existing law authorizes specified healing arts SB 351 (Committee on Banking and Financial Institutions) Page 6 of ? practitioners to be shareholders, officers, directors, or professional employees of a designated professional corporation, subject to certain limitations relating to ownership of shares. (Corp. Code Sec. 13401.5.) This bill would authorize registered dental hygienists in alternative practice (RDHAPs) to incorporate and would add dental assistants, licensed dentists, registered dental hygienists, and registered dental hygienists in extended functions to the list of healing arts practitioners who may be shareholders, officers, or directors of a registered dental hygienist in alternative practice corporation. COMMENT 1. Stated need for the bill According to the author, "SB 351 includes three separate Corporations Code cleanup proposals, all three of which are intended to be technical and noncontroversial. The first two proposals are sponsored by the Nonprofit Organizations Committee and the Corporations Committee of the Business Law Section of the California State Bar. The third proposal is sponsored by the California Dental Hygienists' Association." The California Dental Hygienists' Association, the sponsor of the section of the bill relating to registered dental hygienists in alternative practices (RDHAPs), writes in support of the bill that: RDHAPs take dental hygiene care to the patient. RDHAPs work in skilled nursing facilities, homes of the disabled or elderly homebound, in schools or in Dental Health Professional Shortage Areas (DHPSAs). RDHAPs can have offices or mobile units. RDHAPs are recognized dental providers and have their own National Provider Identification (NPI) number. DentiCal recognizes RDHAPs as billable providers. The Legislature passed SB 853 (Perata, Ch. 31, Stats. 2008) that created the Dental Hygiene Committee of California and B&P Code Section 1962 allowing RDHAPs to incorporate. However, when the provisions were added to the [Business and Professions] Code that allow RDHAPs to incorporate, corresponding changes were not made to the Corporations Code. Without correcting this oversight by amending the Corporations SB 351 (Committee on Banking and Financial Institutions) Page 7 of ? Code, RDHAPs cannot establish a corporation. Co-sponsors Nonprofit Corporations Committee and the Corporations Committee of the Business Law Section of the State Bar of California (which do not take a position on the RDHAP section of the bill) write that the proposed statutory amendments in reference to "chairperson of the board" would "clean up inconsistencies in the General Corporation Law, provide more flexibility to corporations in their choice of titles that are acceptable for filings, and allow for gender neutral terms." Relatedly, the committees argue that the changes "[w]hile the current Nonprofit Corporation Law and Consumer Cooperative Corporation Law allow for the use of a 'chair of the board' title and others, they do not allow for use of the term 'chair,' which many nonprofit organizations use to refer to their chairperson. [As such, f]ilings with the California Secretary of State are returned to the filer if the term 'chair' is used for a signatory for the filing." 2. Bill suggests cleanup proposal that would extend existing emergency powers to consumer cooperative corporations and would make other technical and nonsubstantive changes relating to specific terminology in the Corporations Code As noted above, this bill seeks to make technical and noncontroversial changes to the Corporations Code to bring consistency to terminology used in reference to corporations' chairpersons and to bring added conformity with respect to the powers of corporations during emergencies. First, with respect to the use of terminology relating to "chairperson," or variations thereof (i.e. chair, chairman, chairwoman), the bill would amend the Corporations Code to specify that a corporation must have a "chairperson of the board" who may be given any of the following titles: chair of the board, chairperson of the board, chairman of the board or chairwoman of the board. Relatedly, the bill would replace references to "chair of the board" or "chairman of the board" with "chairperson of the board" throughout the Corporations Code and make other conforming changes, thereby bringing consistency throughout the Code in its use of this terminology. In certain specified provisions, however, the bill also recognizes the term "chair," "chairperson," "chairman" and "chairwoman" without reference to the modifier "of the board." As described by the author, there is a need to expressly authorize the terms SB 351 (Committee on Banking and Financial Institutions) Page 8 of ? "chair," "chairperson," "chairman," or "chairwoman" in statute to avoid issues in corporate filings. Specifically, the author asserts that "[b]ecause these titles are not expressly authorized in statute, corporate filings submitted to the California Secretary of State's office are returned to the filer if the term "chair" (rather than "chair of the board") or "chairman" (rather than "chairman of the board") is used for a signatory for the filing. Updating and clarifying the Corporations Code to allow chairs to be referenced in multiple ways will eliminate these sorts of returned filings." Second, the bill would extend to consumer cooperative corporations the emergency powers and emergency bylaws provisions that already apply to corporations, nonprofit public benefit corporations, nonprofit mutual benefit corporations, and nonprofit religious corporations. These provisions were added by AB 491 (Torres, Ch. 255, Stats. 2013) which arguably should have added those same provisions to the consumer cooperatives law. As a matter of public policy, to the extent there is a need for a corporation to have specific authority to be able to adopt emergency bylaws and take action in emergencies (such as catastrophic events like earthquakes, hurricanes, etc.), that same need arguably would exist for consumer cooperative corporations as well. In other words, there does not appear to be anything specific to the nature and operation of consumer cooperative corporations that would suggest a reason to deny them the same authority given to other types of corporations. To this end, the author asserts that the exclusion of consumer cooperatives from the original legislation authorizing emergency powers and bylaws was a "drafting oversight" and accordingly, this bill "would correct that drafting oversight by adding the language contained in AB 491 to the Consumer Cooperative Law." 3. Bill includes a cleanup proposal that would authorize registered dental hygienists in alternative practice to incorporate As noted above, this bill also includes another "clean up proposal" that would expressly authorize certain dental professionals to incorporate. Specifically, the bill would expressly authorize the incorporation of a registered dental hygienist in alternative practice (RDHAP) and authorize an RDHAP to include certain licensed persons (dental assistants, licensed dentist, registered dental hygienists, and registered dental hygienist in extended function) as shareholders, officer, SB 351 (Committee on Banking and Financial Institutions) Page 9 of ? directors, or professional employees of the professional corporation. In 2008, the Legislature enacted SB 853 (Perata, Ch. 31, Stats. 2008), which the proponents assert were intended to allow RDHAPs to incorporate. According to the author, RDHAPs are registered dental hygienists who practice independently throughout California in order to "provide care to patients who lack access to a dental office, either because there is not an office in their area or because they have health conditions that limit their ability to travel to a dental office or cope with dental treatment in a dental office setting. RDHAP patients are typically the homebound elderly, developmentally disabled, and those in skilled nursing facilities. RDHAPs also establish mobile dental hygiene clinics as a way to reach populations in underserved areas." Because of the "physical and emotional fragility of many of their patients" the author writes that the liability associated with RDHAP practice is quite high and incorporation would help RDHAPs to "avoid incurring personal liability for their professional actions." According to the author, while SB 853 was intended to allow RDHAPs to incorporate, the authority for incorporation was only added to the Business and Professions Code (Section 1962), and not the Corporations Code, leaving the Dental Hygiene Committee of California unable to allow RDHAPs to incorporate. As a matter of public policy, it is important to ensure that parties who are injured are able to seek redress for the injuries they suffered from the party who negligently caused them injury. That being said, it is also an important policy objective to allow these populations to receive services provided by RDHAPs, without which these populations may otherwise not be able to receive dental hygiene services at all. It should be noted that limiting personal liability of the RDHAPs corporation's shareholders, officers, directors, or professional employees, would not limit liability of the corporation itself, to the extent that there are assets available against which to recover for damages suffered. Moreover, staff notes that existing law already allows for dental groups to incorporate, thereby limiting the personal liability exposure of their shareholders, officers, directors and professional employees-which can include RDHAPs. (See Corp. Code Sec. 13401.5(n)(7).) Accordingly, to allow RDHAPs to incorporate would appear consistent with the policy decision made to allow dental groups to incorporate. SB 351 (Committee on Banking and Financial Institutions) Page 10 of ? 4. Author's technical amendments This analysis reflects the following technical author's amendments to address drafting errors. Author's amendments : On page 6, lines 31-32, strike "chair, chairperson, chairman, chairwoman," Support : None Known Opposition : None Known HISTORY Source : California Dental Hygienists' Association (proposals relating to specified licensed dental professionals); Corporations Committee and Nonprofit Organizations Committee of the Business Law Section of the California State Bar (proposals relating to the use of the term chairperson and emergency bylaws) Related Pending Legislation : AB 502 (Chau, 2015) would, among other things, clarify that RDHAPs are authorized to establish corporations but, in contrast to this bill, would only allow for dental assistants and licensed dentists to be included as shareholders, officer, directors, or professional employees of the professional corporation. That bill is scheduled to be heard in the Assembly Health Committee on April 28, 2015. Prior Legislation : AB 491 (Torres, Ch. 255, Stats. 2013) See Background. SB 853 (Perata, Ch. 31, Stats. 2008) See Comment 3. Prior Vote : Senate Banking and Financial Institutions Committee (Ayes 7, Noes 0) ************** SB 351 (Committee on Banking and Financial Institutions) Page 11 of ?