March 27, 2020
The COVID-19 pandemic has significantly impacted the way we all conduct our daily lives and the way all businesses carry on their operations, to the extent they can. This impact is felt by nonprofit organizations just as it is by for-profit organizations, and in some ways even more. Many local nonprofit organizations are structured as nonstock corporations under the laws of the Commonwealth of Virginia, specifically under the Virginia Nonstock Corporation Act (the Act). This article is intended to discuss options available to Virginia nonstock corporations to continue corporate governance best practices while complying with all federal, state and local orders and guidelines relating to COVID-19, including social distancing guidelines and/or state and local restrictions on gatherings and nonessential businesses.
A pressing concern for Virginia nonstock corporations with annual meetings scheduled for late March, April, May or even June is how to conduct these annual meetings remotely, if at all. Annual meetings are governed by Section 13.1-838 of the Act. Virginia nonstock corporations should take some comfort in the fact that failure to hold an annual meeting in accordance with the corporation’s bylaws during a given year does not change the validity of any past, present or future corporate action. However, the Act provides great flexibility for these corporations to still hold these meetings remotely, and it is our recommendation that nonstock corporations attempt to hold an annual meeting if one would have occurred absent the COVID-19 pandemic.
The Act provides that annual meetings may be held inside or outside Virginia, as provided by the bylaws of the nonstock corporation or as otherwise determined by the board of directors. The Act specifically authorizes the board of directors of nonstock corporations to elect to hold annual meetings remotely, subject to compliance with Section 13.1-844.2 of the Act, which is discussed in greater detail below. The Act’s explicit authorization of remote meetings is a relatively new addition to the Act (effective in 2018) and can be used as a tool by nonstock corporations to maintain a sense of continuity and to ensure communication among leadership is maintained during the COVID-19 pandemic.
Nonstock corporations should review their bylaws to ensure that there are no provisions that require meetings to be in-person or that would otherwise limit a corporation’s ability to hold remote meetings. If the corporation’s bylaws do require in-person meetings or otherwise limit the corporation’s ability to hold the meeting remotely, the board of directors should consider amending such bylaws immediately to take advantage of the flexibility afforded by the Act.
Remote Meetings (Annual or Special)
Section 13.1-844.2 of the Act governs the holding of remote meetings. As noted above, the Act allows for meetings of the board of directors or members of nonstock corporations to be held remotely absent any prohibition or contrary terms in the corporation’s articles of incorporation or bylaws. If the bylaws and/or articles of incorporation of a nonstock corporation are “silent’ or state that meetings may be held at “a time and place chosen by the board of directors” (or language to similar effect), and do not expressly require in-person participation, then participation remotely by electronic (audio or video) conferencing is allowed under the Act.
Once a nonstock corporation has determined that a remote meeting is permissible under its organizational documents, the directors and members will need to ensure that the meeting complies with Section 13.1-844.2 of the Act in preparing for and conducting the remote meeting. Notice requirements for remote meetings are the same as for in-person meetings and can similarly be waived if all attendees consent to such waiver. Section 13.1-844.2 requires two key actions in a corporation’s execution of a remote meeting: (1) ensuring that each person participating remotely is such member or such member’s proxy; and (2) each person participating remotely has a reasonable opportunity to participate in the meeting and to vote on matters submitted to the members, including an opportunity to read and/or hear the proceedings of the meeting, substantially concurrent with such proceedings. In the following paragraph, we will discuss suggestions for best practices in order to comply with these provisions.
In order to ensure that each person participating remotely in a meeting of members is in fact the correct member, nonstock corporations can take a number of steps depending on the technology available to them. Video conferencing provides the most comfort to nonstock corporations in verifying the identity of all participants. Understandably, video conferencing may not be a possibility for all nonstock corporations or all participants in a remote meeting. If a remote meeting is held by phone, or if certain participants in a remote meeting are participating by phone, it is important that the meeting organizers keep the distribution of the “dial-in” or log-in information limited to only authorized participants and take a clear roll call both at the beginning and the end of the meeting to ensure that all expected participants were in attendance.
Further, the Act requires that each participant in a remote meeting be afforded a reasonable opportunity to participate in such a meeting, vote on matters presented in a meeting and read and/or hear the proceedings. In addition to taking roll calls at both the beginning and end of meetings, organizers of remote meetings should consider, depending on the number of participants, taking a roll call at the end of the discussion of each discrete matter in order to ensure that all participants have an opportunity to be heard or raise any questions or clarifications about the prior discussion. If written materials are expected to be a part of a meeting, it is recommended that the materials be shared prior to a meeting and that confirmation be received from each participant, either prior to the meeting or as a part of the meeting, that they can access such materials.
We note that remote meetings of the board of directors are governed by Section 13.1-864 of the Act. The requirements of Section 13.1-864 are more relaxed than the remote meeting requirements for members but the best practices set out above are still recommended for meetings of directors.
Alternatives to Meetings
If a board cannot assemble or cannot satisfy quorum, even remotely, in order to hold a meeting, an alternative way to approve action for the corporation is to act by written consent. Action by written consent of directors is allowed under Section 13.1-865 of the Act and is typically allowed in the bylaws of the corporation. Traditionally, action by written consent must be unanimous in order to avoid a 10-day notice period, so all directors then in office and allowed to vote on a particular matter must agree in writing in order for the action to be effective immediately. If all of the directors of a corporation are unable or unwilling to agree to an action, a 10-day notice period is required prior to the action becoming effective. Note, the writing can also be an email under the Act, see Section 13.1-865(E), and each director can respond with his or her approval to satisfy this requirement.
Similarly, corporate actions taken by the members of a corporation can occur by written consent under Section 13.1-841 of the Act. If the articles of incorporation of a corporation allow it, a written consent can approve an action with just the affirmative consent of the number of votes required to approve such action by normal voting procedures. If a corporation’s articles of incorporation do not contain such a provision then unanimous consent is required. Just as with director consents, email is an acceptable means to communicate consent under Section 13.1-841(C) of the Act.
Consequences of Missed Meetings, Elections and other Actions
While we strongly encourage nonstock corporations to use their best efforts to maintain normal corporate governance practices during the COVID-19 pandemic, it is understandable that some nonstock corporations will face difficulties in fulfilling what would be, in normal circumstances, routine corporate governance obligations. As with the failure to hold annual meetings not invalidating any corporate act, the Act provides a number of mechanisms that nonstock corporations should be aware of if they are unable to fulfill certain routine corporate governance actions.
One concern for nonstock corporations may be the election or re-election of directors during the COVID-19 pandemic. If a nonstock corporation is unable to hold a meeting (annual or otherwise) where it normally elects directors, is the nonstock corporation than “director-less”? The short answer is no. As with all analysis contained in this piece, nonstock corporations should review their bylaws and articles of incorporation for any unique provisions, but Subsection (F) of Section 13.1- 857 of Act provides that except in the case of ex-officio directors, a director’s term continues even after the stated expiration of their term, until a successor is elected and qualified or until a corporation decreases its number of directors, thus eliminating such director’s board seat. The implications of this provision for nonstock corporations that may not be able to hold an annual meeting (or any other meeting where directors would be elected) is that the current serving directors can remain in place for longer than their originally planned terms and until a successor is appointed or they are re-elected. It is important to note that this does not serve as a “re-election” of directors whose term expires without a named replacement. Such directors can be replaced or re-elected at whatever time the nonstock corporation is able to hold its next meeting.
State Corporation Commission Filing Issues
Just as most workplaces in the Commonwealth of Virginia have transitioned to teleworking over the past few weeks, so has the State Corporation Commission (the SCC). The SCC is responsible for filing and maintaining corporate records for all Virginia business entities, including nonstock corporations. During the COVID-19 pandemic, the SCC has transitioned to a strong preference for electronic filings and has stated that it is possible that the processing of filings will be delayed. Our understanding, as of the date of publication, is that all filings will be given the same effective date as they would have received prior to the COVID-19 pandemic, even if the processing of a given filing is delayed (assuming there are no errors in the filing that cause it not to be accepted). Additionally, in the interest of streamlining submissions, the SCC has removed the requirement that filings with the Clerk’s Information System (the CIS) require a personal identification number (PIN) which had previously been required to change information that was on file with the CIS. This change will remain in place through May 15, 2020.
As of the publication, the SCC is still requiring all Virginia corporations (both stock and nonstock) to file annual reports. A nonstock corporation’s annual report is due on or before the last day of the month in which the nonstock corporation was incorporated. It is recommended that for the duration of the COVID-19 pandemic, nonstock corporations file their annual reports electronically through the CIS.
Attorneys at Hunton Andrews Kurth LLP continue to monitor the COVID-19 impacts on corporations and review new laws, regulations and legislation being enacted to address COVID-19 issues. Please let us know if you have any specific questions that we can answer or please check our firm’s COVID-19 resource center, available here, for more information.
Stay safe and well.