SPECIAL ALERT – Board of Director Meetings and Shareholder Meetings During COVID-19
California’s Governor ordered “non-essential” businesses to close their doors to the public in March 2020 due to the Coronavirus (also known as COVID-19) pandemic. As part of the state’s order, gatherings of people in any number in the midst of the current pandemic is not advised. This may pose a problem for Board of Directors and Shareholders to approve corporate action, normally done in person and which may be required in order to weather the economic storm unleashed by the pandemic.
How can a corporation safely hold Board of Director meetings and Shareholder meetings during COVID-19? Can the corporation hold these meetings remotely?
Board and Shareholder meeting rules are governed by the corporation’s bylaws, which should be the first source to consult in regard to answering this question. However, many corporation bylaws do not contain special provisions for the conduct of meetings of directors and shareholders by means of videoconference or “virtual meeting.” California law permits such meetings subject to authorization by the Board of Directors and, in the case of meetings of Shareholders, pursuant to guidelines and procedures adopted by the Board of Directors and in compliance with the Shareholder consent requirements set forth in California Corporations Code (the “Code”).
Meeting of Directors
Section 307(a)(6) of the Code provides that unless otherwise provided in the articles of incorporation or the bylaws, members of the Board of Directors may participate in a meeting through use of conference telephone, electronic video screen communication, or electronic transmission by and to the corporation (as defined in Code Sections 20 and 21).
Under Section 307(a)(6), participation in a meeting through use of conference telephone or electronic video screen communication constitutes presence in person at that meeting as long as all members participating in the meeting are able to hear one another. Participation in a meeting through electronic transmission by and to the corporation (other than by means of conference telephone and electronic video screen communication), constitutes presence in person at that meeting if both of the following apply:
(A) Each member participating in the meeting can communicate with all of the other members concurrently; and
(B) Each member is provided the means of participating in all matters before the board, including, without limitation, the capacity to propose, or to interpose an objection to, a specific action to be taken by the corporation.
Meeting of Shareholders
Section 600 of the Code states that unless prohibited by the bylaws, Shareholder meetings may be held remotely via electronic “virtual meeting.” In order to be considered valid and legal under California law, the Board of Directors must authorize the remote meeting and inform the Shareholders regarding the method of participation, under the following conditions:
(A) The corporation implements reasonable measures to provide Shareholders a reasonable opportunity to participate in the meeting and to vote on matters submitted to the Shareholders; and
(B) The corporation records the vote(s) or action(s) taken by Shareholders at the meeting.
However, the notice must include information informing each Shareholder of his/her right to object to the “virtual meeting,” which would then force the corporate Directors to schedule a physical Shareholder meeting (but see below). The notice should be drafted by or at least reviewed by an attorney so that it complies with the strict requirements under the law.
Emergency Rules under California Law
Effective January 1, 2014, the Code was amended to provide emergency provisions, which allow some flexibility to the Directors of the corporation to run the business during emergencies. These include procedures for calling Board meetings, the designation of additional or substitute Directors, modification of succession to accommodate the incapacity of a Director, relocation of the corporation’s offices, and modification of notice provisions.
The state of emergency proclaimed by the Governor or President relating to the Coronavirus pandemic is considered an “emergency” for purposes of the Code.
COVID-19 raises a number of issues in this regard. For example, if the shareholder meeting must be held during a state of emergency (i.e. the current COVID-19 state of emergency), can a corporation argue that the above Shareholder consent requirements are not required? There are likely other issues to address.
The attorneys at VRS have significant experience with your corporate governance requirements, including bylaws, Board of Director meetings and shareholder meetings. Please contact us if you have any questions.