March 30, 2020

Corporate Governance in California During the COVID-19 Pandemic

This e-Bulletin from the California Lawyers Association was prepared by William Ross, of counsel to Hirschfeld Kraemer LLP. Mr. Ross is a member and past co-chair of the Corporations Committee of the Business Law Section of the California Lawyers Association.

A Reminder that the California Corporations Code Provides Flexibility in Corporate Governance During A State of Emergency

Corporate practitioners are confronting many legal issues arising from the COVID-19 coronavirus pandemic. It is worth remembering that the California Corporations Code (“Code”) provides some flexibility in corporate governance during a state of emergency. As a result of legislation that was spearheaded by the Corporations Committee, effective January 1, 2014 the Corporations Code was amended in three important ways.

First, section 212 (c)(1) was added to the Code to specifically acknowledge that bylaws may contain any provision, not in conflict with the articles of incorporation, to manage and conduct the ordinary business affairs of a corporation during an “emergency,” including but not limited to procedures for calling, and quorum requirements for, board meetings and designation of additional or substitute directors.

Second, pursuant to section 207(i)(1), in anticipation of or during an emergency, corporations may take either or both of the following actions, unless otherwise provided by emergency bylaws: (i) modify lines of succession to accommodate the incapacity of a director, officer, employee or agent of the corporation resulting from the emergency, or (ii) relocate the principal office, designate alternative principal offices or regional offices, or authorize the officers to do so.

Third, pursuant to section 207(i)(2), during an emergency, corporations may take either or both of the following actions, unless otherwise provided by emergency bylaws: (i) give notice to directors of board meetings in any practicable manner under the circumstances, when notice as prescribed by the bylaws or the Code cannot be given, and (ii) if necessary to achieve a quorum at a board meeting, deem that one or more officers present at the meeting is a director, in order of rank and within the same rank in order of seniority.

Section 207(i)(5) provides that an “emergency” includes a variety of events and circumstances, including a state of emergency proclaimed by the Governor of California or President of the United States. As to the coronavirus, Governor Newsom declared a state of emergency on March 4, 2020 and President Trump has declared various emergencies under federal law, including one on March 13, 2020.

Per the Code, corporate action taken in good faith in accordance with emergency bylaws or in anticipation of or during an emergency under section 207(i) is binding on a corporation and may not be used to impose liability on a director, officer, employee or agent of the corporation.

Although the Code provides flexibility during an emergency, there are some significant limitations. Sections 207(i)(3) and 212(c)(2) provide that during an emergency the board may not take any action that requires the vote of shareholders or is not in the corporation’s ordinary course of business, unless the required vote of shareholders was obtained prior to the emergency. Since it is likely that an emergency would give rise to circumstances that are highly unusual, the limitation as to the corporation’s ordinary course of business is unfortunate.

Neither section 207 nor section 212 eliminates the requirement of shareholder approval when it is otherwise required by law or the articles of incorporation. If shareholder approval is required for some other reason (e.g., in a loan agreement or pursuant to a stock exchange listing rule), it may be possible to obtain a waiver or postponement of the requirement.

While the Code does provide for actions by shareholders using electronic means of communication, those include conditions that a corporation may not be able to meet in the context of an emergency. For example, the ability to hold a virtual annual meeting via electronic means is realistically impossible for any corporation with a significant number of shareholders, since the consent of every shareholder is required to do so. Even before the current emergency arose, the Corporations Committee had been exploring possible revisions to Code section 600 that would be more flexible than currently required. As it became clear that the Governor’s declaration of emergency might be imminent, some consideration was given to navigating the hurdles for “urgency” legislation, but that did not reach fruition before the legislature adjourned until at least April 13, 2020. While the Governor does have broad powers under the Emergency Services Act (Government Code section 8550, et seq.) to suspend regulatory statutes it is unclear whether Corporations Code section 600, 601, 20, or 21 qualify as “regulatory statutes”. See here.

© 2020 Corporations Committee e-Bulletin of the Business Law Section of the California Lawyers Association. Reprinted with permission.