JMBM Corporate Update: SB1306 and Corporate Communications

California has adopted legislation which changes how companies can use electronic communications in their “corporate communications.” The changes broaden the options available to corporations for conducting many of their required communications, such as meetings of boards of directors, shareholder meetings, delivering notices of meetings, taking actions without a meeting and annual reports. In most cases, corporations will have to take affirmative action to take advantage of these new rules. While these new rules may provide some advantages, companies should consider carefully the nature of these new methods of corporate communications before adopting them, since it may not always be in their best interests.

SB1306 was signed into law in August of 2004 and amends a variety of provisions in the California Corporations Code. The Bill added two new defined terms to the Corporations Code: electronic transmission to the corporation and electronic transmission by the corporation. The bill also amended the definition of “writing” to now include these two terms which, due to the extensive use of the word “writing” elsewhere, made their application nearly universal to the code.

Electronic Transmission by/to the Corporation

“Electronic transmissions by the corporation” allow a corporation to communicate with shareholders, directors and other recipients by: (a) fax or electronic mail directed to the fax or e-mail address on record with the corporation for that recipient; (b) posting on an electronic message board or network that the corporation has designated for those communications, with separate notice to the recipient of the posting; or (c) other means of electronic communication. There are, however, key additional requirements to effect a communication by these methods: (1) the recipient must have provided an unrevoked consent to the use of such communications; (2) if the recipient is a shareholder and an individual the transmission must also meet the “E-Sign requirements;” and (3) the communication must create a record that is capable of retention, retrieval and review. “Electronic transmissions to the corporation” are defined almost identically to transmissions by the corporation, except that in the instance where an electronic message board is used, no separate notice is required and the corporation must have reasonable measures in effect to verify that the sender of such a transmission is the shareholder or director that they purport to be.

Meetings and Notice, Board of Directors

SB 1306 makes clear that meetings of directors can be noticed by electronic transmission by the corporation, and is ultimately more restrictive than the previous version of AB 699, since the previous statute did not have the E-sign requirements attached. The Corporations Code permits a corporation to vary a number of statutory provisions, including requirements for notice of meetings, but not to eliminate the requirement that special meetings of the directors must be preceded by minimum notice. As a result, existing bylaw provisions for notice by electronic means remain effective, but will not allow the corporation to automatically avail themselves of the provisions of SB 1306 without specific amendment thereto.

With regard to directors’ meetings, California law has allowed directors to meet via “electronic video screen communication” since 1995, and has allowed directors to meet by conference telephone for more than thirty years, and SB 1306 continues to relax the requirements surrounding video-conference and conference telephone. SB 1306 explicitly allows for Board meetings to take place via electronic transmission by and to the corporation, but adds that: each director must be able to communicate with the other members concurrently, including (i) the means to participate in all matters before the Board and (ii) the capacity to propose, or interpose an objection to, a specific action to be taken by the corporation. In the case of meetings of the Board, a failure to specifically amend the bylaws to allow the corporation to avail themselves of the new changes will nonetheless leave both the pre SB 1306 and the SB 1306 restrictions in place; this can result in a set of rules which are too stringent and also prevent the corporation and the Board to take advantage of new methods of communication, which would be available under the new definitions.

Meetings and Notice of Shareholders

SB 1306 amends Section 601(a) of the Corporations Code so that notice of a shareholder meeting must specify the means of electronic transmission if shareholders are to participate by such means. Under SB 1306, notice can also be given by electronic transmission by the corporation, provided that the corporation has delivered notice by that method on two consecutive attempts, unless the corporate secretary, or other person designated to give notice, becomes aware that notice has not been given.

A key change made by SB 1306 is the ability to hold shareholder meetings both via “electronic video screen communication” and electronic transmission by and to the corporation. That authority is subject to a number of cautionary restrictions. First, the corporation must implement reasonable measures to provide shareholders (in person or by proxy) an opportunity to participate in the meeting and to vote on matters submitted to them, including an opportunity to read or hear the proceedings of the meeting concurrently with the those proceedings. Second, if any shareholder votes or takes other action at the meeting by means of electronic transmission to the corporation or electronic video screen communication, a record of that vote or action must be maintained.

In adopting SB 1306, the legislature also addressed the concern that some shareholders would not have the requisite technology to participate in such meetings, and included in the statute a requirement that the corporation hold the meeting at a physical location if any individual shareholder does not consent to meet by electronic means. Any request for consent must notify the shareholders of this option. SB 1306 also imposes specific limitations on shareholder presence that is other than in person or by proxy (i.e., by video conference, including: (i) the Board, in their sole discretion, authorizing such a presence, and (ii) that presence being subject to the guidelines and procedures, if any, adopted by the Board.

Unlike Cal. Corp C. § 307, the requirements of Corporations Code 600, as now amended, cannot generally be varied by articles and bylaws. A corporation’s bylaws can however, prohibit shareholder attendance other than in person or by proxy. Ultimately, corporations should consider conforming their bylaws to the new provisions of SB 1306 if the corporation anticipates shareholder participation by electronic transmission by and to the corporation.

Actions Without a Meeting

SB 1306 did not directly amend Cal. Corp C. § 307(b), which authorizes corporate action by unanimous written consent. However, by expanding the definition of “writing,” the bill effectively authorizes directors to take such action by electronic communications to the corporation. For shareholders, the same general scheme applies.

Annual Reports and Other Forms

SB 1306 now permits the delivery of annual reports by electronic transmission if approved by the Board of Directors, but articles or bylaws can still require physical delivery. It is important to note that while this summary addresses corporate forms, California concurrently made similar amendments to laws governing partnerships and limited liability companies that are nearly identical in form and function.

Actions Going Forward

While the changes made by SB 1306 are relatively simple, taking advantage of the legislation will require that an entity reconsider its articles of incorporation and bylaws. Before making those changes, corporations, whether publicly traded or privately held, have to consider some of the unanswered questions in the statute.

For one, while it is not clear exactly what sort of “communications” were envisioned by lawmakers, the modern-day instant messenger or chat room type applications could certainly qualify. Because these forms of communication are difficult, if not impossible, to secure, many entities may choose to avoid electronic communications. In addition, as differentiated from corporate “minutes,” an electronic record will be verbatim and does not lend itself to the brevity and directness of a written record—statements made at a meeting will automatically become part of a record, whether they are completely considered or not. It may prove functionally impossible to eliminate anything from such a record, even with the requisite consent from the present members. If the sensitivity of discussion normally involved in the directors’ meetings would necessarily chill discussion if such a system were introduced, it may be in the company’s best interest to avoid updating its bylaws.

The omission of a mandatory inclusion of the new provisions in formation documents of California corporations (and other business entities) should not be presumed to be accidental. It is meant to be elective. While there are clearly logistical advantages to allowing directors and shareholders to participate in meetings and be notified of them electronically (namely saving costs on travel, mailings, etc.), implementation of such a system is likely to have a high entry cost, and the disadvantages provided may ultimately outweigh any convenience gained. It would appear that the best approach with new and existing clients would be to, based on knowledge of the entity and their operations and goals, inform them of the costs and benefits of implementing the new provisions and allow them to make an intelligent decision on whether or not to avail themselves of SB 1306.

1 The Electronic Signatures in Global and National Commerce Act (15 U.S.C. §§ 7001-7006) requires the shareholder be provided with a "clear and conspicuous statement" informing the shareholder: (i) the right to receive the transmission in non-electronic form; (2) the right to withdraw consent (3) whether the consent applies only to the individual transaction or to categories of transactions; (4) the procedures to withdraw consent; and (5) how, after consent, the shareholder may request a paper copy. In addition, before consenting the shareholder must be provided with a statement of the hardware and software requirements to access the electronic trans-mission and the shareholder must consent (or confirm consent) in a manner that reasonably demonstrates the shareholder can access the information in electronic form.

For more information concerning SB 1306, contact Robert Braun at 310.785.5331or RBraun@jmbm.com.