Our Guest Blogger, Leah Cohen Chatinover, is of counsel at Stanger & Arnold, LLP in West Hartford, Connecticut.  She represents nonprofit organizations of all types and can be reached at lchatinover@stangerlaw.com or through her website ct-nonprofitlaw.com. This article is not a substitute for legal advice, and you should contact your attorney with specific questions.

Part One of Two

E-mail, Facebook, Twitter . . .  the diverse modes of electronic communication have exploded over recent years. We are now able to communicate faster, cheaper and with more people simultaneously than ever before.

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

This seems like the perfect solution. An issue or opportunity arises that calls for quick response. Directors are reluctant to attend extra meetings. Why not circulate an e-mail, ascertain that there is general agreement and take action?

The ease and speed of e-mail 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, a court could consider an e-mail vote nothing more than 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. This could delay or derail an 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 she 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.”

Imagine this conversation. . .

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

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

PB’s attorney: “Ok, 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. 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 informed exercise of directors’ fiduciary duty requires the discussion and interchange of ideas that occurs at board meetings.

Think about the movie 12 Angry Men: one man – played by Henry Fonda – used logic and persistence to reverse the vote of 11 others. An e-mail vote – that is, a proposal circulated and responded to by e-mail – eliminates the opportunity for discussion and is essentially a proxy vote delivered electronically.

The prohibition on proxy voting by directors has its roots in case law developed over many decades, eventually codified in statutes. Most of the law developed in the business (or stock) corporation arena, but is applicable to nonprofit (or nonstock) organizations as well. And, nonprofit organizations, whose directors are often uncompensated volunteers, may be particularly prone to allowing e-mail voting.

The principal case in Connecticut on the issue of proxy voting by directors is fairly typical. 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.

Coming Thursday: Statutory Alternatives…

© 2011 Leah Cohen Chatinover