At the time of this writing, California has begun loosening the restrictions of the Safer at Home Orders issued by state, county, and city governments. These Orders have restricted the ability of individuals to meet personally in any size group outside of their families and, even with the loosened restrictions, social distancing protocols remain in effect for most gatherings. In the face of such restrictions, corporations must continue to comply with certain corporate formalities (including meetings) in order to assure that their shareholders will not become subject to personal liability if a creditor or claimant sought to pierce the corporate veil. So, how does a California corporation hold its meetings while maintaining social distancing and complying with the Orders?
Fortunately, the Corporations Code provides a number of alternatives to physical meetings. Meetings of the Board of Directors may be had using conference telephone, electronic video screen communication, or other electronic transmission. Participation in a meeting by conference telephone or electronic video screen communication constitutes “presence in person” at the meeting so long as the participants are able to hear one another. Participation by other electronic transmission constitutes presence so long as each participant can communicate with all other participants concurrently and each participant is provided the means of participating in all matters before the Board, including the capacity to propose or object to a specific action to be taken by the corporation (Corporations Code Section 307(a)(6)). In addition, a Board may take an action without meeting if all directors, individually or collectively, consent in writing to the action (Corporations Code Section 307(b)).
Meetings of the shareholders may also be conducted, in whole or in part, by electronic transmission or by electronic video screen communication, and such virtual shareholders are deemed “present in person” at the meeting, provided (i) the corporation implements reasonable measures to provide shareholders with an opportunity to participate in the meeting and to vote on matters submitted to the shareholders and (ii) if any shareholder votes or takes other action at the meeting by electronic means, the corporation maintains a record of such vote or action (Corporations Code section 600(a) and (e)). However, prior to such virtual participation, the corporation must have obtained the consent of the shareholders to such an electronic meeting and obtaining such advance consents from all shareholders may be impracticable for any corporation with a significant number of shareholders. Alternatively, shareholders may act by written consent, without meeting, by a vote of shareholders holding not less than the minimum number of votes that would be necessary to authorize the action at a meeting (Corporations Code section 603). However, directors may not be elected by written consent of the shareholders except by a unanimous written consent (except to fill a vacancy not caused by removal), and a separate notice may need to be provided to all shareholders regarding actions taken by less than a unanimous consent.
In addition to the foregoing, the Corporations Code also provides increased latitude for the Board of Directors to take certain actions in the event of an “emergency” (Corporations Code section 207(i)). In anticipation of or during an emergency, a corporation may (i) modify lines of succession to accommodate the incapacity of a director, officer, employee, or agent and/or (ii) relocate the principal office or designate alternative principal or regional offices. Further, in order to conduct ordinary business operations and affairs during an emergency, (i) when notice of a board meeting cannot be given to a director in the manner required in the bylaws, the notice may be given by any practicable means under the circumstances (including by publication or radio) and (ii) one or more officers of the corporation present at a meeting may be deemed a director as necessary to achieve a quorum. For purposes of Corporations Code section 201(i), an “emergency” includes any of the following circumstances as a result of which a quorum of the board of directors cannot be reached: (A) a natural catastrophe, (B) an attack or probable attack on the state or nation by an enemy of the United States, (C) an act of terrorism or other manmade disaster that results in extraordinary levels of casualties, damage or disruption, or (D) a state of emergency proclaimed by the Governor of California or the President of the United States (as Governor Newsom proclaimed on March 4, 2020 regarding the coronavirus).
While the Corporations Code provides this flexibility in an emergency, it is not without limitations. The flexibility only applies to the corporation’s ordinary course of business (which, given an emergency, may be far from ordinary) and does not allow any action that otherwise requires the vote of the shareholders, unless the required vote was obtained prior to the emergency.
With the current communications technologies, Boards of Directors should be easily able to conduct meetings with directors in different locations and otherwise act by written consents. The holding of a virtual meeting of shareholders is not so simple given the advance consent requirement and the logistics that may be needed to manage a meeting involving a large shareholder group. Corporations desiring to have the option to hold a virtual shareholders meeting would be well served by undertaking the shareholder consent process well in advance of their proposed meeting date.