The California Legislature recently passed AB 491, giving corporations, including nonprofits, flexibility to conduct ordinary business during an emergency such as a natural catastrophe, an enemy attack, an act of terrorism, or a state of emergency declared by the Governor. The new Bill provides certainty to nonprofits that actions taken in good faith during an emergency will be binding and will not give rise to liability. Additionally, the Bill allows California nonprofits to adopt emergency bylaws in advance to manage the ordinary business of the nonprofit during an emergency. This is a good time and opportunity for California nonprofits of all types (public benefit, mutual benefit, and religious corporations) to take a fresh look at their governance provisions and what might happen in an emergency, whether the default provisions of the new law are desirable or helpful, and whether any other emergency provisions are more appropriate for their circumstances.
Even without the adoption of emergency bylaws, the Bill provides protections for a nonprofit to permit it to continue its ordinary business during an emergency. Previously, during an emergency, a nonprofit board might be unable to act, or would risk a challenge if it acted during an emergency without the approval of the minimum number of required directors. Under AB 491, the board of directors may:
Relax notice requirements for a board meeting,
Permit officers to serve as directors to achieve a quorum,
Modify lines of succession, and
Relocate the nonprofit’s principal business office.
Importantly, AB 491 provides that actions taken by the board in good faith during an emergency are binding and may not be used to impose liability on a director, officer, employee, or agent.
However, the Bill does not allow a nonprofit to take any action that would require a vote of members, or that would thwart actions for which the required vote has already been taken. The nonprofit also cannot take any action not in its ordinary course of business, or exercise emergency powers after the emergency has ended, though, interestingly, the Bill does not specify how to determine when the emergency has ended.
Adoption of Bylaws
AB 491 authorizes a nonprofit to adopt bylaws to manage its ordinary business during an emergency, so long as they do not conflict with its Articles of Incorporation. These bylaws can specify procedures for calling a board meeting, quorum requirements for a board meeting, and designation of additional or substitute directors. Corporate action taken in good faith in accordance with the emergency bylaws will bind the nonprofit, and may not be used to impose liability. Alternatively, a nonprofit may choose to adopt emergency bylaws that require it to conform to the same procedures in effect in the absence of an emergency. In other words, some organizations may want to override the new default emergency powers.
AB 491 raises interesting questions about how these provisions interact with existing provisions directed specifically at nonprofits. For example:
Does this supersede the requirement that no more than 49% of directors may be interested persons?
How does this interact with IRS requirements relating to board composition for certain types of organizations?
Do the emergency bylaws supersede existing bylaws regarding qualifications for directors? Should they?
Would actions taken under emergency bylaws be effective if an insider transaction is approved in a manner that does not meet the Treasury Regulations governing compensation of insiders?
Nonprofits should pay careful attention to these issues when drafting emergency bylaws to ensure that actions taken during an emergency will be binding.