Complying with formal notice requirements is an important piece of any organization’s governance. In businesses where legal formalities are given little or no consideration, It can be easy to forget about technical obligations to provide certain people with notice about planned actions or important changes. But failing to comply with notice requirements opens the door to adverse actions by regulators, tax authorities, and even counterparties in litigation.
In California a 501(c)(4) social welfare organization is typically organized as a California nonprofit public benefit corporation. State law allows such corporations to structure their management in a number of ways. One of the options that founders must consider is whether to provide for the corporation to have statutory voting members. Members are not required, but in some cases founders prefer to name themselves or important founding donors as members for governance reasons.
By definition the member of a nonprofit public benefit corporation has the right to vote on one or more of the following things:
- The election of one or more directors on the corporate board.
- The sale of all or substantially all of the organization’s assets.
- The corporation’s merger with another entity.
- The corporation’s dissolution.
- Changes to the corporations’ articles or bylaws (provided the person is also designated as a “member”).
These rights are determined by the corporation’s articles of incorporation and bylaws. In organizations faced with competing interests among founders or startup donors, these documents can become a focus of negotiation in large part to define the scope of a member’s rights. This often includes a range of notice rights.
A member is entitled to receive advanced notices with respect to the following things:
- Meetings of the board or members.
- Any proposed action that would affect their rights as members.
- Any action to which they are entitled to vote.
- Any other matters to which they are entitled, such as obligatory financial reports.
The timing of these notices varies depending on the corporation’s governance documents and applicable law. Managers need to pay attention to the permitted methods of delivery, and whether the number of days of notice is counted in calendar days or business days. A well-crafted governance regime ensures that members have the option to sign a waiver of notice requirements, but waivers should be tools of last resort, not the default approach.
Failing to provide the required notice before taking a formal action can have serious consequences. A corporate action may be rendered invalid because a member wasn’t given notice. A director may not be validly elected. Management or members of the board may not be fulfilling their fiduciary obligations to the members. These are not issues one wishes to see raised in a crisis. Better by far to take notice requirements seriously.
The Church Law Center of California assists social welfare organizations with all aspects of their corporate governance. We can help your organization evaluate the benefits of having voting members and develop a compliance plan that accounts for things like notice requirements. To find out how we can help your organization, call us today at (949) 689-0437 or reach out to us through our contact page.