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Tuesday, June 3, 2014

New Emergency Action Rules for California Nonprofits

As you may have heard, new provisions were recently added to the California Corporations Code, at Sections 7140 and 7151.  These new provisions permit nonprofit entities (including mutual benefit and public benefit corporations; See Corporations Code Sections 5140 and 5151 for provisions applicable to public benefit corporations) to bypass key fundamental standard corporate requirements in the event of an emergency.

The new provisions allow nonprofits to, in the event of an emergency:
(1) modify lines of succession in the event of incapacity of an officer or director
(2) relocate offices
(3) give notice of meetings in alternative ways, such as publication or radio
(4) modify quorum requirements for a board meeting
(5) designate additional or substitute directors
(6) continue to operate the nonprofit to the greatest extent possible

The new provisions limit the liability of nonprofit leaders acting in good faith, but also limit the length of duration of emergency powers, and prohibit actions that would normally require the approval of the members (such as amending the bylaws).

Is it necessary to amend bylaws in order to employ emergency authority in the event of a disaster?  The answer to that question is probably “yes.”  Section 7140(m) appears to authorize emergency action unless the organization’s “emergency bylaws provide otherwise.”    Section 7151(g) permits the bylaws to contain emergency provisions.  Taken together, it appears that these Corporations Code sections require emergency provisions in the bylaws to trigger the powers set forth in the Code.  Further, the organization may tailor its emergency bylaws provisions to meet its needs.  This could be particularly beneficial to nonprofits that must operate efficiently even in emergency situations.

The following is suggested as a draft amendment to bylaws of a nonprofit entity.   It could be placed at the end of the bylaws, or just about anywhere in the Bylaws that makes sense.  This is just a draft form, and it should be reviewed carefully by the organization and its legal counsel prior to adoption.

Article __.           Emergency Action

The Board of Directors or Executive Committee of this Association may, to the full extent of and in the manner permitted by Corporations Code Sections 7140 and 7151, take actions and conduct business as may be necessary to protect the interests of the Association and its membership in the event of an emergency.    A written record of all actions taken will be maintained during the emergency period, and all such actions shall be subject to review by the Association, in its sole discretion, upon conclusion of the emergency.