Nonprofit Quarterly Addresses Issues with E-mail Votes

For any board taking votes by e-mail, this is an essential article, offered by the Nonprofit Quarterly:

Email, texting, Facebook, Twitter . . . these diverse modes of electronic communication and others have exploded over recent years. We are now able to communicate faster, cheaper, and with more people simultaneously than we ever have been able to before.

To busy nonprofit board members, whose schedules make face-to-face board meetings seem like a luxury, a new trend in nonprofit governance has surfaced that may run afoul of the law – the “vote” by e-mail option.

Responding to the difficulty in wrangling a geographically diverse and time-crunched board, many nonprofit organizations are now allowing directors to “vote” by e-mail. This seems like the perfect solution. An issue or opportunity arises that calls for quick response. Directors are reluctant to attend an extra meeting. Why not circulate an e-mail, ascertain that there is general agreement and take action?

The ease and speed of email voting is seductively simple. But, this practice is a trap, because a board that relies on e-mail voting fails to comply with legal requirements for a proper vote, and exposes its decisions to attack. Nonprofit corporate statutes typically provide for board action to be taken either at a meeting (including a meeting by phone or video conference) or by unanimous written consent. Since an e-mail vote technically does not fit either category, it is quite possible that a court would consider an e-mail vote nothing more than an informal action, which is not legally valid. Even more likely, an attorney representing a nonprofit organization in a loan transaction might not be able to issue the “opinion of counsel” typically required by a lender, and this could delay or derail the entire deal.

Let’s take an example.

Playball (PB) runs a youth baseball program. A local businessman offers to donate land for fields, and arranges for a loan to cover construction costs. As interest rates are rising, PB needs to lock in the rate quickly. PB’s president tries to schedule a special meeting of the board to approve the loan, but can’t find a time when a quorum of four of the seven directors can meet.

So, she sends an e-mail seeking approval for the loan. Five directors respond, “Sure,” while two object. With a majority vote in hand, PB’s president signs the commitment letter and pays a commitment fee.

The closing approaches. PB’s attorney prepares the required opinion, which must state that: “All corporate proceedings required by law or the provisions of PB’s Certificate of Incorporation or bylaws to be taken by PB in connection with the transaction have been duly and validly taken.”

“Let me see the minutes of the meeting approving the loan,” says PB’s attorney.

“We couldn’t call a meeting, so we voted by e-mail,” responds PB’s president.

“Ok,” says the attorney. “You need a unanimous written consent, or to ratify the vote at a meeting or by teleconference.”

Unanimous consent is unattainable because two directors object. And, one of the five original consenting directors changes his vote. And of the remaining consenting directors, two are traveling in Asia, and cannot even meet by teleconference. With five of seven directors available, but only two who will vote in favor of the loan, PB’s attorney can’t deliver the opinion, the bank won’t make the loan, there is no deal, and PB forfeits its commitment fee.

While far-fetched, this scenario illustrates the danger of relying on informal board action.

Prohibition on Proxy Voting

In most states, directors may not vote by proxy. The theory behind this prohibition is that the discussion and interchange of ideas that occurs at board meetings is essential to the informed exercise of the directors’ fiduciary duty to the corporation.

An e-mail vote – that is, a proposal circulated and responded to by e-mail – is essentially a proxy vote delivered electronically.

The prohibition on proxy voting by directors has its roots in case law developed over many decades, known as “common law,” and eventually codified in statutes. The law regarding proper board action is substantially the same under the common law and under statutes governing business corporations and nonprofit corporations. In fact, most of the law developed in the business (or stock) corporation arena, but is applicable to nonprofit (or nonstock) organizations as well. But nonprofit organizations, whose directors are usually uncompensated volunteers, may be particularly prone to allowing their directors to vote by email.

The principal case in Connecticut on the issue of proxy voting by directors is a fairly typical one. In the 1956 business corporation case called Greenberg v. Harrison, the court invalidated the repayment of a loan by a corporation to its lender. The loan was to continue for one year unless earlier repayment was approved by unanimous consent of the directors. Finding that there was no unanimous consent because one director gave a proxy to another director but did not attend the board meeting, the court explained:

The affairs of a corporation are in the hands of its board of directors, whose duty it is to give deliberative control to the corporate business. This requires the physical presence of a director at directors’ meetings, and he cannot act by proxy.

Alternatives

In our example, PB’s attorney tired to implement the statutory exceptions to the requirement that directors meet in person. These exceptions can be easily adapted as modern technology progresses, and should be incorporated into an organization’s bylaws.

Teleconference

The statute allows meetings to be conducted by “any means of communication by which all directors participating may simultaneously hear each other during the meeting.” This provision allows teleconferences, and should permit web conferencing that combines voice or video communication with document sharing.

Unanimous Consent

Closer to the concept of e-mail voting, the statute also permits a board to act by unanimous written consent, if each director signs “a consent describing the action taken or to be taken.” This protects a director’s right to question the action or insist that the board discuss the matter, as a director may compel a meeting simply by withholding consent.

Combining the formality of unanimous written consent with the simplicity of e-mail, an organization’s staff member or officer may circulate the proposed resolution as a formal consent attached to an email. The organization must then collect all of the directors’ signatures. The consent may be signed electronically – \\John H. Smith\\ – for example, and delivered electronically – as a PDF attached to an e-mail.

E-mailed Resolution

An organization might also send an e-mail containing the full text of the resolution and ask each director to specifically respond and sign electronically. However, this procedure increases the risk that a technicality will be overlooked, and it is no simpler than attaching a formal consent to an e-mail.

The distinction between a formal consent circulated as an attachment to an e-mail, and an e-mailed poll of the board may seem inconsequential. But, note three important differences. Most important, all directors must vote unanimously. The directors must also receive a complete description of the proposed resolution and they must “sign” the consent.

E-mail is a useful tool for taking the pulse of a board. An organization may informally poll its directors and then ratify the decision with a formal in-person or teleconference meeting or by unanimous written consent.

The risk that an informal e-mail vote will prove problematic is small if the decision is unanimous, if no one litigates to pursue an objection or if no opinion of counsel is required. Nonetheless, directors should protect the integrity of their decisions by adhering to the statutory procedures and ensuring that through active and meaningful participation they stay informed and comply with their fiduciary duty of care.

Leah Cohen Chatinover is of counsel at Stanger & Arnold, LLP in West Hartford, Connecticut. She is a business lawyer for nonprofit organizations of all types, and can be reached at lchatinover@stangerlaw.com