New Bill Gives California Hospital and Corporate Boards Emergency Powers in Events of Disaster

by Davis Wright Tremaine LLP
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California hospitals and corporations will soon be able to adopt bylaws that make it possible for the governing board to make business decisions in the absence of a quorum during an emergency. Effective Jan. 1, 2014, and approved by Gov. Jerry Brown, Assembly Bill 491 allows both California nonprofit and for-profit corporations to adopt special corporate governance procedures in the event of an emergency, which is narrowly defined in the bill.

California will be among 38 states in adopting emergency powers for corporations; most of these states follow the Model Business Corporation Act or the Model Nonprofit Corporation Act. As the California State Bar Committee on Corporations concluded in its legislative proposal: “Although there is no ready example of a corporation facing managerial setbacks because of an emergency, the possibility of catastrophic events effectively disabling boards cannot be ignored. Recent acts of terrorism, earthquakes, tsunamis and nuclear disaster are timely reminders of the vulnerability of the ordinary course of business in the face of large-scale emergencies.”

Under the bill, an emergency is defined to include various events or circumstances that prevent the governing board from achieving a quorum. Actions authorized under emergency powers include:

  • Formal action (with relaxed notice and quorum provisions) on matters in the ordinary course of business.
  • Modifications of the lines of succession.
  • Relocation of the principal business office.

Emergency powers do not allow a minority of the board to take “extraordinary actions,” such as those requiring approval of a shareholder or member or reversing a prior board action. Therefore, mergers and acquisitions or liquidations will not be authorized under emergency powers, and only actions necessary to conduct the “ordinary course of business” and conducted “in good faith” will be protected from personal liability. 

While it might be difficult to imagine circumstances so disastrous that a quorum could not be achieved through telephonic or electronic means, some corporations will rely on a committee (such as the executive committee with a smaller number of members to convene) to take actions during the pendency of an emergency. However, the emergency powers authorized under the bill fall under very specific events and circumstances. An “emergency” is defined by the California Corporations Code as follows:

“Emergency” means any of the following events or circumstances as a result of which, and only so long as, a quorum of the corporation’s board of directors cannot be readily convened for action:

A. A natural catastrophe, including, but not limited to, a hurricane, tornado, storm, high water, wind-driven water, tidal wave, tsunami, earthquake, volcanic eruption, landslide, mudslide, snowstorm, or drought, or, regardless of cause, any fire, flood, or explosion.

B. An attack on this state or nation by an enemy of the United States of America, or upon receipt by this state of a warning from the federal government indicating that an enemy attack is probable or imminent.

C. An act of terrorism or other manmade disaster that results in extraordinary levels of casualties or damage or disruption severely affecting the infrastructure, environment, economy, government functions, or population, including, but not limited to, mass evacuations.

D. A state of emergency proclaimed by a governor or by the president.

Emergency provisions should appear in hospital bylaws and typically include the following:

  • A definition of “emergency” that follows the definition in the California Corporations Code (provided above) and a statement that the emergency powers are only accessible during the pendency of the emergency. Once the emergency ends, these emergency powers cease to be effective.
  • How a quorum may be achieved; a quorum can be achieved by (1) allowing the board to elect officers present to the board, or (2) reducing the quorum to a lower number of board members.
  • How to give notice of a meeting during an emergency, which can include publication or on the radio.
  • A statement that all other bylaws still remain in effect.
  • Types of emergency actions that may be taken, such as modifying lines of succession to accommodate an incapacity brought about by the emergency, or relocating the principal office or authorizing officers to do so.
  • The limitations on actions that may be taken under “emergency” conditions, such as actions that require member or shareholder approval or that are not “in the ordinary course of business.”

Hospitals will want to amend their bylaws by the end of 2013 or early in 2014 to take advantage of these new provisions.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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