E-mail, Facebook, Twitter, Tumblr, Skype, WebEx . . . these and other diverse modes of electronic communication have exploded in recent years. We are now able to communicate faster, cheaper, and with more people simultaneously than ever before. At the same time, busy schedules make face-to-face board meetings a luxury directors don’t think they can afford.
A Tempting Shortcut
Responding to the difficulty of wrangling geographically diverse and busy volunteers, many nonprofit organizations are allowing directors to vote by e-mail. This seems like the perfect solution. An issue or opportunity arises that calls for a quick response before the next regular board meeting. Scheduling a special meeting seems impossible. Why not circulate an e-mail, ascertain that there is general agreement, and take action right away?
E-mail voting is seductively simple and fast, but that ease and speed is a trap: in many jurisdictions a board that relies on e-mail voting fails to comply with statutory and common law requirements for a valid meeting, thereby exposing its decisions to attack.
Most state statutes provide that board action may be taken either at a meeting (including a meeting by electronic communication) or by unanimous written consent. In theory, a court could consider an e-mail vote, which may not fit either category, nothing more than informal board action and invalidate the vote. Of course, there is almost no risk that informal action by a board of directors will be later overturned if no one objects. But, this type of dispute does tend to arise in the context of a split board of directors or a terminated employee. While neither of the following cases were ultimately decided on the issue of e-mail, or even proxy, voting, they do illustrate that courts may be asked to decide which group of warring directors is the legitimately elected board, Clemmons v. Crenshaw, 511 S.W.2d 449 (Mo. App. 1974), or whether an executive director’s contract was properly terminated, Wayne v. Capital Area Legal Services Corporation, 108 So.3d 103 (La. App. 2012), writ denied, 110 So.3d 1072 (La. 2013), appeal after remand, 2014 WL 1757587 (La. App. 2014).
Even more likely, without a vote that meets statutory requirements, an attorney representing a nonprofit organization in a loan transaction may be unwilling to issue the opinion of counsel required by the lender, thereby delaying or derailing an entire transaction.
A Hypothetical . . .
Let’s take an example.
Playball (PB) runs a youth baseball program. A local business owner offers to donate land for playing fields, and arranges for a mortgage loan to cover construction costs. As interest rates are rising, PB must lock in the rate quickly. PB’s president tries to schedule a special meeting of the board to approve the loan, but can’t find a time when a quorum of four of the seven directors can meet.
So, she sends an e-mail: “Hey do you think it is a good idea to take a loan from Local Friendly Bank to pay for the construction costs for our new ball fields.” Five directors respond, “OK by me,” while two object. With a majority vote in hand, PB’s president signs the commitment letter and pays a commitment fee.
The closing approaches. PB’s attorney prepares the opinion of counsel required by the lender, which must state, “All corporate proceedings required by law or the provisions of PB’s Certificate of Incorporation or bylaws to be taken by PB in connection with the transaction have been duly and validly taken.”
“Let me see the minutes of the meeting approving the loan,” says PB’s attorney.
“We couldn’t call a meeting, so we voted by e-mail,” responds PB’s president.
“OK,” says the attorney. “You need a unanimous written consent, or ratify the vote at a meeting. You can hold the meeting by teleconference or Skype.”
Unanimous consent is unattainable because two directors object. Meanwhile, one of the five original consenting directors has changed his vote to “No.” Of the remaining four consenting directors, two are traveling in Asia and cannot meet even by teleconference. With five of seven directors available – but only two who will vote in favor of the loan – PB’s attorney can’t deliver the opinion, the bank won’t make the loan, there is no deal, and PB forfeits its commitment fee.
While far-fetched, this scenario illustrates the danger of relying on informal board action.
The Prohibition on Voting by Proxy
In most states, the directors of nonprofit organizations may not vote by proxy, although generally members can. The theory behind this prohibition is that the robust discussion and interchange of ideas that occurs at board meetings is essential to the informed exercise of directors’ fiduciary duty to the corporation.
An e-mail vote – that is, a proposal circulated and responded to by e-mail – is essentially a proxy vote delivered electronically.
The common law regarding proper action by a board of directors, including the prohibition on proxy voting by directors, developed in the business (or stock) corporation arena. State statutes governing business corporations and nonprofit (or nonstock) corporations both reflect the codification of this common law. While some courts have recognized the validity of informal action by directors of closely held corporations (Model Bus. Corp. Act Annotated § 8.20 cmt. (4th Edition, 2013 Revision)), particularly where the directors and stockholders are identical, the directors of a nonprofit corporation should not rely on the availability of this exception. The directors of a nonstock corporation don’t hold an economic interest in that corporation. Rather, they are stewards of charitable funds charged with managing the organization and its assets for a charitable or public purpose, and must respond to a diverse constituency, which may consist of members, donors, clients, and even the general public. Yet directors of nonprofit organizations, usually unpaid volunteers, may be particularly prone to seek governance short-cuts.
Model Nonprofit Corporation Act
Approximately half the states have adopted a version of the Model Nonprofit Corporation Act (MNCA). Because the Model Nonprofit Corporation Act (3rd Edition, 2008) sets a uniform national standard, it is the focus of this article. Notable states that have not adopted the MNCA are California, Delaware, Massachusetts, and New York. But, even states that have not adopted the MNCA, such as Massachusetts and New York, have retained the same common law and statutory principles governing proper board action.
The relevant provisions of the MNCA were patterned after the Model Business Corporation Act (MBCA), and the law is substantially the same under both model statutes.
According to the Official Comments to the MBCA (Model Bus. Corp. Act Annotated § 8.20 cmt. (2013)):
A well-established principle of corporate common law accepted by implication in the Model Act is that directors may act only at a meeting unless otherwise expressly authorized by statute. The underlying theory is that the consultation and exchange of views is an integral part of the functioning of the board. A corollary to this principle, also accepted by implication in the Model Act, is that directors may not generally vote by proxy.
The law does provide some flexibility, giving the executive director or president of a nonprofit organization frantically trying to schedule a meeting of busy, far-flung directors some options. PB’s attorney tried to implement both of the statutory exceptions to the common law “in-person” meeting rule. These exceptions respond to modern technology, can be easily adapted as technology evolves, and should be incorporated into an organization’s bylaws.
The MNCA allows meetings to be conducted “through the use of, any means of communication by which all directors participating may simultaneously hear each other during the meeting,” unless the articles of incorporation or bylaws provide otherwise. Model Nonprofit Corporation Act Annotated § 8.20 (2008). This provision allows teleconferences and web-based conferencing that combines voice and video communication.
As explained in the Official Comments to the MNCA (Model Nonprofit Corporation Act Annotated § 8.20 cmt. (2008)):
With the development of modern electronic technology, it is possible that the advantages of the traditional meeting, at which all members are present at a single place, may be obtained even though the participants are physically dispersed and no two directors are present at the same place. The advantage of the traditional meeting is the opportunity for interchange that is permitted by a meeting in a single room at which participants are physically present. If this opportunity for interchange is thought to be available by the board of directors, a meeting may be conducted by electronic means although no two directors are physically present at the same place and no specific place for the meeting is designated.
Note, however, the continued preference for in-person meetings as the best way to insure thorough debate and discussion. According to the commentary, a meeting may be conducted by electronic means only if the same opportunity for interchange is available.
A board of directors may also act by unanimous written consent, a methodology easily adapted to e-mail.
Section 8.21 of the MNCA permits a board of directors to act by unanimous written consent, if each director signs “a consent in the form of a record describing the action to be taken and delivers it to the nonprofit corporation.” Model Nonprofit Corporation Act Annotated § 8.21 cmt. (2008).
The power of the board of directors to act unanimously without a meeting is based on the pragmatic consideration that in many situations a formal meeting is not needed. . .
. . . the requirement of unanimous consent precludes the possibility of stifling or ignoring opposing argument. A director opposed to an action that is proposed to be taken by unanimous consent, or uncertain about the desirability of that action, may compel the holding of a directors’ meeting to discuss the matter simply by withholding consent.
Thus, unanimous written consent provides the vehicle through which a nonprofit corporation can take advantage of the convenience of e-mail, but comply with statutory requirements. The difficulty is in striking the appropriate balance between risk and convenience.
The most prudent and careful course of action is to circulate a formal consent as an attachment to an e-mail. The organization’s leaders must then collect all of the directors’ signatures. While issues such as the security, accuracy retention and accessibility of electronic signatures and records are beyond the scope of this article, electronic signatures are now widely accepted under state and federal laws such as the Uniform Electronic Transactions Act (UETA) and the Electronic Signatures in Global and National Commerce Act, 15 U.S.C. §§ 7001–7031.
For example, under Section 1.40(53) of the MNCA:
“Sign” means, with present intent to authenticate or adopt a record:
(i) to execute or adopt a tangible symbol; or
(ii) to attach to or logically associate with the record an electronic sound, symbol, or process.
According to the Official Comments to the MNCA, the definition of “sign” is patterned after the definition of that term in the UETA and other uniform statutes. (Model Nonprofit Corporation Act Annotated § 1.40.16cmt. (2008).)
Those definitions, in turn, were based on the definition of “electronic signature” in section 106(5) of the Electronic Signatures in Global and National Commerce Act, 15 U.S.C. § 7006(5). The term includes manual, facsimile, conformed or electronic signatures. In this regard, it is intended that any manifestation of an intention to execute or authenticate a record will be accepted. Electronic signatures are expected to encompass any methodology approved by the secretary of state for purposes of verification of the authenticity of the record. This could include a typewritten conformed signature or other electronic entry in the form of a computer data compilation of any characters or series of characters comprising a name intended to evidence authorization and execution of a record.
There is also a growing consensus among practitioners that a proposal or resolution circulated by e-mail that is unanimously approved, constitutes a valid unanimous written consent, even if it lacks the formality of a written consent attached to an e-mail.
This is true under the MNCA, which defines a “record” as “information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form.” MNCA § 1.40(43).
According to the commentary (Model Nonprofit Corporation Act Annotated § 1.40.14 cmt. (2008)),
The term includes both communication systems that in the normal course produce paper, such as telegrams and facsimiles, as well as communication systems that transmit and permit the retention of data that is then subject to subsequent retrieval and reproduction in perceivable form. The term is intended to be broadly construed and include the evolving methods of electronic delivery, such as email, the Internet and electronic transmissions between computers.
Therefore, under the MNCA a resolution circulated, signed, and returned electronically constitutes “a consent in the form of a record describing the action to be taken.” MNCA, § 8.21.
Even if valid under local law, this type of board action can cause a host of practical problems. First, in most jurisdictions, all of the directors must respond affirmatively. Obtaining unanimous consent from even the most responsive directors of very small board can take weeks of communication. Without the discipline of a written consent with signature lines, the busy staff member responsible for “chasing” signatures might overlook a missing name.
Second, e-mail is an informal means of communication. Informality leads to ambiguity. Sometimes it’s hard to know when “yes” means “yes,” or if a director has “signed” the electronic record. Consider the e-mail exchange that might have followed the initial e-mail missive from PB’s president:
Director: “OK by me”
President: “Is that a ‘yes’ vote?”
Director: “I guess?”
President: “I hate to be a pain, but could you please just e-mail me saying ‘yes’ and sign your name electronically?”
Furthermore, the e-mail “record” must be properly retained with the organization’s minutes.
Finally, the most likely problem in the context of informal communication is confusion over content. Even if the PB vote had been unanimous, it is hard to know exactly what the directors approved. The president’s e-mail leaves a lot of questions unanswered. What are the terms of the loan? When and how must it be repaid? What is the interest rate? Is it secured by a mortgage on the property? Would all the directors have voted in favor of the loan if they knew the terms? Perhaps some directors would have preferred to raise the funds to cover construction costs, rather than mortgage the newly acquired property.
Clearly, a practitioner advising a nonprofit organization must insist on the discipline of a formal resolution, even if the resolution is communicated in an e-mail. If the e-mail sent by PB’s president had included the complete text of a properly drafted borrowing resolution describing the terms of the transaction in detail, the other directors and PB’s attorney would have known exactly what action the board approved.
Of course, it is critical to verify the law in the organization’s state of incorporation – as many variations exist. For example, in Texas directors may vote by proxy if authorized by the certificate of formation or bylaws, Texas Business Organizations Code §§ 22.214; 22.215. Colorado, Georgia, Minnesota, Texas, Utah, and Wisconsin all permit board action by less than unanimous written consent, although the specific statutory requirements differ. Colo. Rev. Stat. § 7-128-202; Ga. Code. Ann. § 14-3-821; Minn. Stat. § 317A.239; Texas Business Organizations Code § 22.220; Utah Code Ann. § 16-6a-813; Wis. Stat. § 181.0821.
Regardless of the form of board action, e-mail is undoubtedly a useful tool for taking the pulse of a board of directors. An organization may informally poll its directors and then ratify the decision at an in-person or electronic meeting, or by unanimous written consent.