Legal Governance Challenges for Associations During a Pandemic
May 16, 2020
The COVID-19 pandemic has not only thrown a huge monkey wrench into associations’ planned in-person meetings and conferences, but also has thrown a big curveball into association governance. From cancelled membership meetings to virtual board meetings to online elections to an inability to meet governance requirements imposed by law, bylaws or policy, associations are struggling to find answers to a host of pressing governance questions. As you navigate these issues for your own association, where do you find these answers, what are practical, workable solutions to these significant challenges, and what will constitute compliance with the law and your own governing documents?
This article will touch upon key questions that so many associations have been asking as of late, provide the legal context in which to analyze them, and offer practical ideas and possible solutions for making association governance work in these more-than-challenging times.
If our bylaws require an annual membership meeting and we have cancelled our annual conference, can this requirement be waived?
While associations understandably look first to their bylaws in attempting to answer governance questions, it is the nonprofit corporation statute of the state in which the association is incorporated (not the state in which its headquarters is located) that is the ultimate arbiter of governance-related issues. Such statutes supersede any provisions of the association’s bylaws (e.g., any bylaw provisions not consistent with the applicable statute will be null and void), and also fill in the gaps where the bylaws (or articles of incorporation) may be silent.
It is also important to note the hierarchy of association governance documents. In order of descending hierarchical order, these include the state nonprofit corporation statute, articles of incorporation, bylaws, and board-approved policies. Each must be consistent with what is “above” it or it will be without force and effect.
Most state nonprofit corporation statutes provide that the failure to hold an annual or regular membership meeting “will not affect the validity of any corporate action.” As such, while there may well be important actions to be taken at an annual membership meeting, the failure to hold one in a given year generally will not have any material adverse legal consequences. And the actions that may need to happen without delay – such as the election of officers and directors – generally can occur via electronic ballot without a meeting; more on this below. It should be noted that while there is generally no reason to delay officer and director elections if they can occur virtually, most nonprofit corporation statutes provide that, “Despite the expiration of a director’s term, the director shall continue to serve until the director’s successor is elected, appointed, or designated and until the director’s successor takes office, unless otherwise provided in the articles of incorporation or bylaws.”
It should be noted that while the American Bar Association has created and regularly updates the Model Nonprofit Corporation Act (“Model Act”) that it encourages states to adopt, every state’s nonprofit corporation statute is different, and some differ from the Model Act more significantly than others. For instance, while the District of Columbia Nonprofit Corporation Act arguably hues most closely to the Model Act, state nonprofit statutes like California’s and New York’s vary significantly from the Model Act.
If we can’t hold our annual membership meeting in person – to hold board elections or otherwise – can we hold it virtually? Alternatively, instead of a meeting, can members vote by electronic ballot?
Most state nonprofit corporation statutes permit members, in lieu of voting at a meeting, to vote by written ballot (via electronic or old-fashioned mail ballot). And generally, the quorum and approval requirements for such votes are the same as if they were occurring at a membership meeting. But this is where it gets tricky.
Where virtual membership meetings are permitted (not voting outside of a meeting but an actual virtual meeting), can an association conduct voting during such virtual membership meetings using the polling feature on the webinar/videoconference platform? Presuming the requisite notice and quorum requirements are met, and presuming the integrity of the platform is not in question, arguably this would be no different than taking a “voice vote” during an in-person membership meeting, which generally is permitted so long as there is no question that the requisite approval threshold is met (e.g., majority of those voting).
Some states allow electronic membership voting outside of a meeting so long as the association’s articles of incorporation or bylaws do not prohibit it. Similarly, some states allow virtual membership meetings – different from a mere electronic vote, but rather an actual virtual meeting (as described in the preceding paragraph) – as long as the association’s articles of incorporation or bylaws do not prohibit it, but some states (such as the District of Columbia, for instance) only permit such virtual online meetings if the articles of incorporation or bylaws expressly authorize them. And some states do the same for electronic voting (outside of a meeting) as well. To make it even more complicated, there are some state statutes that require such provisions to be contained in the articles of incorporation specifically (not just the bylaws) in order to be permissible. And there are some states – such as New York – where virtual membership meetings are not permitted at all; more on this below.
Also be sure to distinguish between statutory provisions regarding membership voting by electronic (or mail) ballot and those regarding membership voting by proxy. Almost all state nonprofit corporation statutes permit membership voting in connection with an actual (in-person or virtual) meeting to occur by proxy (which can generally be given electronically), but the state statutes differ more when it comes to membership voting by electronic (or mail) ballot outside of a meeting.
Be sure to distinguish this type of membership voting from board of director voting by electronic ballot or by proxy; board voting by electronic ballot or proxy is prohibited under most state nonprofit statutes unless the action is taken by unanimous written consent. There are some exceptions, such as Texas, which do permit board voting by electronic ballot outside of a meeting.
Finally, be sure to focus on statutory provisions that require the “unanimous written consent” of all members versus those that just require a quorum of voting members; this is a critical distinction, as obtaining unanimous written consent of all members is practically impossible in most every association.
This is a very nuanced analysis that requires a focus not only on the specific provisions in an organization’s articles of incorporation and bylaws, but also on the applicable state nonprofit corporation statute. And be sure to distinguish between the statute’s provisions regarding meetings and those regarding voting outside of a meeting.
I heard that New York’s Governor recently signed an executive order to allow membership meetings for New York not-for-profit corporations to be held “remotely or by electronic means.” Have other states’ Governors signed similar orders and are they necessary?
Developments like this are occurring on a regular basis during this pandemic at the federal, state and local levels. Be sure to look carefully at any executive actions regarding the nonprofit corporation statute in your association’s state of incorporation.
For instance, in California, the Attorney General recently issued guidance applicable to California nonprofit corporations providing that unless prohibited by the nonprofit’s “emergency bylaws,” the following actions can be taken to conduct the nonprofit’s ordinary business operations and affairs during an emergency: (i) notice of director meetings can be given in any practicable manner; and (ii) for quorum requirements, one or more of the officers present at a board meeting can be deemed a director, in order of rank and within the same rank in order of seniority, as necessary to achieve a quorum.
Governor Cuomo’s executive order in New York is a good reminder of the fact that not all state nonprofit corporation statutes allow for virtual membership meetings.
I heard that some states’ nonprofit corporation statutes only allow more permissive electronic or virtual meeting structures if codified in your articles of incorporation. If that is not the case already, how can we make such a change?
As described above, some state nonprofit corporation statutes require that certain, more-permissive provisions be contained in the organization’s articles of incorporation – and not merely its bylaws – in order to have legal effect. Other statutory provisions refer to the articles of incorporation or bylaws. If your state’s statute requires a provision to be contained in the articles of incorporation specifically, this can be a challenge to effectuate, as virtually all state nonprofit corporation statutes require that amendments to the articles of incorporation be approved by the voting members of the organization. If your association decides that it wants to amend its articles of incorporation for a purpose like this, then the issues described above regarding member meetings and voting may come into play.
What happens if we don’t follow a mandate or procedure dictated by state law or our own bylaws? What are the potential consequences?
If something is mandated or prohibited by state law or your association’s own bylaws, any action taken in contravention of such a mandate or prohibition will have no legal force or effect. It could later be challenged by an aggrieved board member, member or even the state attorney general in the state of incorporation. That being said, note the discussion above about most state nonprofit corporation statutes’ provisions regarding the legal effect of failing to hold an annual membership meeting, and the recent action of the New York Governor providing emergency relief in connection with virtual membership meetings for New York nonprofit corporations. It also may be possible for the membership or board, as the case may be, to ratify the action at a future meeting held in compliance with the association’s governing documents in order to legitimize further reliance on the actions.
I know that our board can meet by audio- or videoconference with the same legal effect as an in-person meeting, but can board members vote by proxy or by electronic ballot, particularly during the current pandemic?
Much of the discussion above revolves around membership meetings and voting in associations. But it is very important to note that, in general, state nonprofit corporation statutes treat board of director meeting and voting issues much differently than membership meeting and voting issues. While most state nonprofit statutes allow both boards and members to meet virtually – with the caveats and nuances described above in many states for membership meetings and votes – most such statutes do not permit either board voting by electronic or mail ballot outside of a meeting (with the exception, in some statutes, of action taken by unanimous written consent), and most do not permit board voting by proxy at a meeting. This stems from the fiduciary duties that board members owe to the nonprofit corporation, including a duty to carefully consider and deliberate about actions – duties that don’t exist in the membership context.
This being said, unless prohibited by the organization’s own articles of incorporation or bylaws, most state nonprofit corporation statutes do permit boards of directors to hold meetings virtually so long as all directors can hear each other at the same time. Such meetings are subject to the same notice, quorum and voting approval requirements as in-person meetings, can be combined with in-person meetings, and have the same legal force and effect as in-person meetings.
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While membership and board governance issues may not be the most pressing challenges facing associations in these trying times, they are critical to the healthy functioning of every association. This is a very complex area of the law, and one that varies from state to state – and from one set of association articles of incorporation and bylaws to the other. Understanding and properly interpreting the nuances in this area can be extremely important in helping your association survive the governance hurdles posed by this pandemic.
For more information, contact the author at jtenenbaum@TenenbaumLegal.com.