• Delaware and New York Now Allow Use of New Technologies in Corporate Governance
  • October 23, 2003 | Author: Rose A. Kob
  • Law Firm: Patterson Belknap Webb & Tyler LLP - New York Office
  • Delaware and New York now allow not-for-profit corporations to take advantage of new electronic communications technology in certain areas of corporate governance. Delaware has enacted sweeping changes to its General Corporation Law (the "GCL"), giving corporations the ability to take many corporate actions electronically. The New York Not-for-Profit Corporation Law (the "N-PCL") has not been amended as dramatically, but a slight change to the law regarding member proxies can significantly increase the efficiency of membership corporations.

    These amendments are part of a larger trend of the law following the lead of the business world in embracing new technologies. Other examples include recently passed laws in New York, New Jersey, Pennsylvania, and Connecticut and by the federal government permitting the use of "electronic signatures" for contracts.

    Delaware Law Embraces New Technologies

    In the past two years, Delaware has amended the GCL to allow corporations to use new electronic technologies in certain aspects of corporate governance, including membership meetings and written consents of members and directors in lieu of a meeting. In many cases, a corporation will not need to amend its bylaws or certificate of incorporation to take advantage of these provisions, but interested corporations should review their governing documents to make sure the language is flexible enough.

    What is an "Electronic Transmission"?

    The definition of an electronic transmission in GCL Section 232(c) has been written broadly to accommodate future advances in technology. An "electronic transmission" includes "any form of communication, not directly involving the physical transmission of paper, that creates a record that may be retained, retrieved, and reviewed by a recipient, and may be directly reproduced in paper form." At present, an electronic transmission generally refers to an e-mail message.

    Members' Meetings by Remote Communication

    The most dramatic amendment to the GCL is found in Section 211(a), which now allows meetings of members of a not-for-profit corporation to be held by means of "remote communication." A corporation may now hold a meeting at a certain location and broadcast the meeting via the Internet to members in other places, or a corporation may conduct an entire meeting using new communication technology, without having any physical location at all. The members who access the meeting through the remote communication technology are considered to have participated in the meeting for purposes of quorum and their votes are counted as if they were physically present.

    The law does not define what is meant by remote communication, and the exact process for holding a meeting of members by remote communication is left to the discretion of a corporation's board of directors. GCL Section 211(a)(2) provides that the board of directors must create procedures to verify that the people participating in the meeting are actually members of the corporation. The members must also have a reasonable opportunity to participate and vote, including "an opportunity to read or hear the proceedings of the meeting substantially concurrently with such proceedings."

    This language is significant because, unlike GCL Section 141(i) governing meetings of a board of directors held using communications equipment, which specifies that directors must be able to hear each other, GCL Section 211(a)(2)(B)(ii) provides that members may hear or read the proceedings of a members' meeting. Under the new provisions, members may hold a meeting using new technology such as Internet instant messaging systems or "chat rooms." The Delaware Secretary of State's Office has informed us that the law is intentionally vague about the specific types of permissible technology to allow for technological advances and to give corporations flexibility to make their operations more efficient through the use of those advances.

    The new provisions require that the corporation keep accurate records of members' votes and other actions taken at a meeting held by remote communication.

    It is important for a board of directors to compare the costs and benefits of holding "remote meetings" with traditional meetings before electing to use these new procedures.

    Although "remote meetings" theoretically provide greater flexibility to corporations, they also may increase the risk of miscommunication among parties. This is of special concern when the issue to be discussed is complicated or controversial. Furthermore, the documentation requirements for remote communications are just as, if not more, onerous than for traditional meeting procedures. Thus, boards should give pause before availing themselves of remote communication technologies.

    Written Consent in Lieu of a Meeting of Directors or Members

    It is often inconvenient or impossible for directors or members of a corporation to hold a meeting each time they wish to take action. At such times, the directors or members may act by means of a written consent. Delaware law has been amended to make the process of taking action by written consent in lieu of a meeting much easier and more convenient. An amendment to GCL Section 141(f) allows a board of directors to take action by unanimous written consent in lieu of a meeting by means of electronic transmission. Thus, an e-mail describing a board action may be sent to all directors of a not-for-profit corporation, and if each director replies to the e-mail with an affirmative answer, the board action is authorized. Unless the minutes of board proceedings are maintained in electronic form, the corporation must print the e-mails from the directors and file them with the board minutes.

    A new GCL Section 228(d)(1) allows a member to consent to a corporate action by electronic transmission, as well as by the previously permitted telegram and cablegram. As under previous law, electronic member consents must be signed by the same number of members as would be necessary to authorize the action at a meeting at which all members were present and voted. The electronic communication must allow the corporation to determine the date that it was transmitted and that it was transmitted by a person with authority to act.

    The law deems these communications to be signed on the date transmitted and to be delivered when reproduced on paper and delivered to the corporation, its registered office, or its agent, unless the board of directors authorizes electronic delivery. The date of delivery is significant because GCL Section 228(c) provides that, for a written consent to be effective, a sufficient number of signed written consents must be delivered to the corporation within 60 days of the date that the first signed written consent was delivered.

    Members' Proxies

    GCL Section 215 has been amended to make the proxy guidelines for stock corporations in Section 212(c) applicable to non-stock corporations, which include most Delaware not-for-profit corporations. Thus, members of non-stock corporations may now grant proxies by electronic transmission.

    Members' Written Ballots

    Delaware has added a new subsection (e) to GCL Section 215 to provide that any requirement of a written ballot by members may be satisfied by a ballot submitted by electronic transmission, if the board of directors has authorized submission by such means and it is possible to verify that the members authorized their transmissions.

    Notice to Members

    An amendment to GCL Section 232(a) allows corporations to give notices to members, such as notices of meetings, by electronic transmission. A member may also waive the notice requirement by electronic transmission. The amendment is qualified by the caveat that a member must consent to receive notice by electronic transmission. Although the method of granting consent is not specified in the statute, according to a newsletter from the Delaware Division of Corporations, the consent to electronic notice may be given by e-mail.

    Members may revoke their consent to notice by electronic transmission by providing written notice. In addition, the consent must be considered revoked if (i) two notices given by electronic transmission are returned as undeliverable and (ii) the inability to deliver the notice becomes known to the secretary, assistant secretary, transfer agent, or other person responsible for giving notice. However, inadvertently not treating the inability to deliver notice as a revocation of consent will not invalidate a meeting or action.

    The GCL specifies when a corporation may treat a notice as having been given, and the amendments clarify when notice has been given if the notice involved electronic technology. A notice by fax is deemed given when it is sent to a fax number at which a member has consented to receive notice. If notice is sent by e-mail, it is deemed given when sent to an e-mail address at which a member has consented to receive notice. If a corporation posts a notice on an electronic network, and then provides notice to members of the posting, the notice is deemed given at the later date of the posting or the giving of notice.

    Under the general rule of GCL Section 230(b)(1), if notice to a particular person has been returned as undeliverable, depending on certain circumstances, notice may no longer be required to that person. A new Section 230(c), however, provides that this exception to the notice requirement is not applicable to electronic notices. If an e-mail notice is returned as undeliverable, the corporation must try a different method of delivery.

    Director Resignations
    Under GCL Section 141(b), directors may now resign by electronic transmission.

    Change to Membership Proxy Law in New York

    New York law governing not-for-profit corporations has not embraced electronic communications technology to the same extent as Delaware law, but a small change to the N-PCL proxy provisions should have a positive impact on New York not-for-profit corporations with voting members. Section 609 of the N-PCL has been amended to change the manner by which a member of a not-for-profit corporation may authorize another person to act as her proxy.

    Under the previous law, proxies had to be set forth in a "writing" (i.e., a written document) manually signed by the member or her attorney-in-fact. This requirement has been amended to allow a member to authorize another person to act as her proxy by additional means. For example, signatures on proxies may be facsimile signatures and the proxy will be effective even if only a copy or fax is sent.

    More important, particularly for New York corporations with large voting memberships, members may grant and transmit proxies by telegram, cablegram, or other means of electronic transmission, including e-mail. The communication must, however, state or be submitted with information from which it can be reasonably determined that the member authorized the telegram, cablegram, or e-mail.

    Hopefully, this modest change to the N-PCL will be the first of other amendments that will permit greater use of new electronic communications technologies by New York not-for-profit corporations similar to those now permitted by Delaware not-for-profit corporations.