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Monday, January 24, 2011

New Rules for Ex Officio Board Members in California

A few clients have been calling in the past few months concerning a California legislative bill, AB 1233, which took effect more than a year ago (January 1, 2010). Most of the questions relate to whether an ex officio member of their board will have voting rights in light of the new law.  In the past, the issue of whether a director had voting rights or not was established by the corporation’s articles or bylaws. AB 1233 is a lengthy, multi-part bill that makes numerous technical changes. (Click here to see full text of AB 1233.)

Certain parts of the bill apply directly to statutes that govern public benefit corporations, mutual benefit corporations, religious corporations, or other laws. Corporations Code sections 5001 - 5080 are general provisions that pertain to all nonprofit corporations. Corporations Code sections 5110 - 6910 apply to public benefit corporations. Corporations Code sections 7110 - 8910 apply to mutual benefit corporations. Corporations Code sections 9110 - 9690 pertains to religious corporations. Of special note, sections 7110 through 8910 apply directly to 501(c)(6) organizations. Again, most of those changes are fairly minor and technical, but there are at least two exceptions.

One of the more significant changes is the code now clarifies that committees of the corporation authorized to exercise the powers of the Board of Directors must be comprised solely of directors, but that typical committees that do not exercise the powers of the Board may include non-directors (Section 7212). A typical executive committee is comprised solely of directors, and is therefore consistent with the revised statute. Other committees typically do not exercise the power of the Board, so they also appear to be consistent with the revised statute.

Another point to bear in mind is that portions of AB 1233 apply to all nonprofits. This includes revisions to Corporations Code Section 5047, which now provides the following:

5047. 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 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.

The meaning of this statute is not entirely clear at this point. For example, if it is made clear that a “director” does not have a right to vote, is it not clear under the second sentence of Section 5047 that such a director is not a director within the meaning of the statute? At the same time, many bylaws declare a person who holds a certain position, such as executive director, is an ex officio member of the board, without the right to vote. The third sentence of Section 5047 would appear to give the executive director the right to vote anyway. These results seem contradictory.

In light of the new law, it is important that nonprofits determine whether ex officio, honorary, emeritus and advisory directors have a statutory right to vote, regardless of what the bylaws provide.

How can nonprofits address this issue? Here are a few suggestions:
  • The safest approach is to avoid having ex officio, honorary, emeritus, advisory or similar director position.
  • Another approach is to use different words to describe these persons, and make it clear that these persons are not “directors.”
  • Yet another approach, as yet untested, is to give the board the power to appoint any of such “directors,” so if one of those directors insists on voting, they can be removed by the board.
  • Still another approach, also untested, would be for the bylaws to explicitly state the “director” shall not have the right to vote, and shall not be a director within the meeting of Section 5047.

Most importantly, the bylaws themselves should not designate that any person will be a member of the Board of Directors by reason of occupying any particular position, unless it is intended that they will have the right to vote.

Tuesday, January 4, 2011

SCIF "Safety Group" and "Trade Association Group" Programs Upended

This posting pertains primarily to California organizations, and particularly those with workers compensation insurance programs.

State Compensation Insurance Fund (SCIF) recently notified its trade group participants (Safety Groups and Trade Association Groups in letters dated December 20 - 31, 2010) that it is discontinuing its Safety Group programs, and tightening its Trade Association Group program requirements.   The changes will generally take effect in January 2012 or thereabouts, at which time SCIF will apparently not renew agreements with groups that cannot “… demonstrate to State Fund’s satisfaction …” that they meet the new SCIF program requirements.

The new program requirements include requirements that (1) 25% of the group’s annual membership dues are received from non-SCIF insureds and (2) no more than 75% of annual group revenues be sourced from SCIF program funds.  The requirements also include minimum “safety activities” referred to in an “Exhibit A,” which was not provided, and “communication and outreach activities” referred to in an “Exhibit B,” also not provided.

According to the notice, groups may continue under the program if they demonstrate that they meet the new program requirements at least 180 days prior to expiration of their current agreement.  Doing so will be difficult for many groups, as demonstration of compliance with new program requirements is based on prior fiscal year.  The problem will be demonstrating compliance for that initial year, because the new program requirements would not have been in place, or even known, during that period of time.

SCIF is apparently taking this action to curb payments to groups that some observers -- perhaps even regulators -- view as unduly lucrative to some groups (some of which allegedly do little or nothing for the money).  It also appears that SCIF has financial and competitive challenges at this time.  Regardless, many Safety and Trade Association Groups are concerned about their ability to conform new program requirements for the initial year, as the prior year’s program data would not have been subject to the new requirements.

If you are interested in being involved in discussion of this matter, please send me an email ( with your contact information.