June 8, 2015

Updates to the Nonprofit Corporation Acts; Nonprofit Corporations Should Update Their Bylaws

Written By

Thomas E. Rutledge
Member, Stoll Keenon Ogden PLLC

by Thomas E. Rutledge

The 2015 General Assembly, by means of House Bill 440, has afforded nonprofit corporations organized in Kentucky additional flexibility with respect to numerous issues involving meetings of the Board of Directors and meetings of the Members. While constituting significantly less than the desperately needed complete rewrite of the Kentucky Nonprofit Corporation Acts (the “Acts”), KRS ch. 273, a series of amendments to the existing law will address some of the logistical limitations contained therein.  The primary objective of the amendments to the nonprofit corporation acts was to afford nonprofit corporations some of the same flexibility as is already provided in the Kentucky Business Corporation Act. In considering whether and how to take advantage of this new flexibility, a nonprofit corporation should as well generally review its bylaws.

While these new statutes are not effective until June 24 of this year, new bylaws taking advantage of the new flexibility may be adopted before that date, it being provided that the new provisions are not effective until then.

Initially, a comprehensive definition of what constitutes “notice” has been added to the Acts, defining how notice is to be provided to either a director or a member. Based upon the Kentucky Business Corporation Act, this provision provides “notice by electronic transmission is written notice.” Consequently, it will now be possible for notice of board and member meetings to be distributed by e-mail. In furtherance thereof, new defined terms have been added for “deliver”/”delivery,” “effective date of notice,” “electronic transmission”/”electronically transmitted,” “notice”, “sign” and “signature.” Consistent with the rule in the Business Corporation Act, notice to a member by email or other means of electronic communication must be consented to by the member.  A member may refuse to accept electronic notices and insist upon written notice.

A mailbox rule as to communications to members is adopted.  This rule provides certainty as to how the time requirements for giving notice to members is satisfied. If, for example, ten days’ notice is required, the day the notice is mailed (or emailed) is one day.

Any notice to a domestic nonprofit corporation or to a foreign nonprofit corporation authorized to transact business in Kentucky may be addressed to the organization’s registered agent at its registered office or to the corporation or its secretary at the principal office address.   

With respect to meetings by written consent, previously the statute provided, in one section, mechanisms by which both the Board of Directors and the members could act by unanimous consent. Adopting the model employed in the Business Corporation Act, written consent of the Board of Directors and members are now separately discussed. Under a new section, patterned off the equivalent provision of the Business Corporation Act, the directors may act by written consent, it being provided that absent specification of the different date the action is effective when the last director signs the consent. It is further provided that action by written consent has the effect of a meeting vote. While the written consent must be signed by each director, pursuant to the new definition of “sign” which includes an electronic signature, unanimous consent may be executed by email. It should be noted that this provision with respect to unanimous consent applies to any “regular or special meeting” of the Board of Directors; by its terms it does not expressly extend to any meeting of a board committee.

In parallel with the adoption of a new provision uniquely addressing board action by unanimous consent, existing KRS § 273.377 has been revised in order to restrict its application to written consent of the members.  This provision has as well been supplemented in order to track the equivalent language from the Business Corporation Act.  Again, as the signature of each member is required, it may now be delivered electronically.

Language newly added to KRS § 273.217 will allow directors to participate in any regular or special meeting by “any means of communication by which all directors participating may simultaneously hear each other during the meeting.”  A director so participating is deemed present at the meeting.  By means of this provision directors may meet by conference call or Skype.

Simply confirming the law as it is always existed, it has been made express that a director may not vote by proxy.

Previously, the statute did not set forth a minimum notice for a meeting of the Board of Directors. A new provision, consistent with the Kentucky Business Corporation Act, sets that minimum notice at two days.  Language already in the statute providing, inter alia, that the notice of a regular or special board meeting need not describe the business to be transacted has been re-codified as KRS § 273.223(2). Likewise, already existing language to the effect that attendance at a meeting constitutes a waiver of any defect with respect to the notice absent an objection on that basis has been recodified as KRS § 273.223(3). Last, existing language with respect to the calling of a special meeting of the Board of Directors by court order has been recodified as such subsection (4) of KRS § 273.223.

The provisions dealing with the voluntary dissolution of a nonprofit corporation have been modified and conformed to the equivalent provision under the Business Corporation Act. Under the prior law, articles of dissolution were filed on behalf of a nonprofit corporation only after the dissolution had been completed, including at the time when “all debts, liabilities and obligations of the Corporation shall have been paid and discharged, or adequate provisions outside or adequate provisions shall have been made therefore.” Conforming the procedure to those employed in the Business Corporation Act, after dissolution is authorized, articles of dissolution are filed with Secretary of State along with a copy of the plan of distribution pursuant to which of the company’s assets will be distributed or conveyed. The corporation’s dissolution will be effective upon the filing of the articles of dissolution.  The Secretary of State is directed to forward a copy of the articles of dissolution to the Secretary of Revenue. Thereafter, in accordance with a new provision, and consistent with the provision of the equivalent provision of the Business Corporation Act, the existence of the corporation will continue after the filing of the articles of dissolution, but the purpose of the corporation is limited to winding up and liquidating its business. To that end, it is specifically provided that the dissolution of the corporation does not “abate or suspend” the rule of limited liability otherwise enjoyed by the members.

Consistent with the Business Corporation Act, the Board of Directors is empowered to hold meetings of the members, whether special or regular, exclusively by means of remote communication.

The bylaws of a nonprofit corporation are easily and all too often ignored until some limitation therein causes a problem.  Nonprofits should use the opportunity presented by these new statutes to review and update the bylaws generally.

For example, in light of the new flexibility for giving members and directors notice of meetings and other events by email, the corporation should: (i) expressly amend the bylaws to provide that notice may be given by email; and, ii) review the bylaws to delete language requiring, for example, that notice be sent by hand delivery or the United States Postal Service, postage prepaid. Likewise, language in the bylaws expressly requiring the physical presence of a director in order to be counted as present for a meeting should be deleted so as to take advantage of the flexibility allowing directors to attend meetings by telephone or electronically. Similar revisions should be made with respect to meetings of the members.

Director voting by proxy has never been permitted, although it is an all too commonly seen provision in bylaws. Now is a good time to delete any suggestion from the bylaws to the effect that directors may vote by proxy.

In addition, language in the bylaws should be scrutinized to be sure it does not conflict with the ability of the Board of Directors to hold a meeting of the members exclusively by means of remote communications.

It bears noting that the 2015 Kentucky General Assembly (a) amended the nonprofit provision of the LLC Act to increase the utility of that form and, (b) created an entirely new form, the Unincorporated Nonprofit Association.  Those developments will be separately addressed.

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