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Legal Implications of Electronic Governance. (Legal).

Notwithstanding the prevalence of electronic communication in our business and personal lives, corporate or association governance remains an area in which electronic media are used comparatively little. In many cases such activity is prohibited by statute. The fundamental argument against e-governance and the wider use of electronic media stems from the belief that in-person meetings, direct face-to-face communication, and real-time deliberation and exchange of views by directors and members are vital to ensure responsible, considered, open, and representative governance. There are many, however, who believe that the introduction of electronic media, such as the use of e-mail and chat rooms, to association governance would facilitate basic governance and improve member participation and board responsiveness. Thomas Arend presents some of the evolving legal issues related to governance conducted via electronic communication.

The tension between the potential practical advantages of e-governance and the more traditional view of how a deliberative, representative corporate body should operate has caused many states to hesitate when considering amendments to their statutes affecting nonprofit organizations.

Where state nonprofit organization statutes allow the use of electronic media in association governance, the extent to which such use is permitted varies. As a general matter, use of electronic media are more circumscribed at the board level. However, some statutes are less restrictive when electronic media is used to facilitate the governance of membership and committee matters. It is also important to bear in mind that the use of electronic media in association governance must not be inconsistent with the association's articles of incorporation or bylaws.

Directors generally take action in face-to-face meetings or by videoconferences or conference calls. Because of the requirements imposed on director actions by parliamentary procedure and fiduciary duties, directors must carefully consider and deliberate before taking action on behalf of the association. Face-to-face meetings or conference calls during which all participants can simultaneously see--or at least hear--and communicate with one another, are, therefore, required by most state statutes.

Revising communication methods

A few states are loosening their director meeting requirements to allow for director participation in meetings through electronic media other than traditional conference calling. Here are a few areas of change taking place.

1. Board meetings. Illinois allows director participation in board meetings by means of communication equipment that lets all board members simply "communicate" with one another. Similarly, in California directors may participate in board meetings via communication equipment that allows all directors to "communicate... concurrently" with one another. The traditional requirement that directors be able to simultaneously hear one another, which essentially only allowed for participation via conference call, has been replaced by a broader and more flexible communication requirement. Consequently, communication via certain concurrent and simultaneous e-mail programs, rather than conventional consecutive and episodic programs, likely would be a permissible means for a director to participate in a board meeting under Illinois law. Likewise, at the membership level, some state statutes allow for participation in member meetings by means of communication equipment allowing all members of the board simply to "communica te" with one another.

2. Notice of meetings. Depending on the construction of the applicable state statute, notice for member meetings, and in some cases even board meetings, may be permissible through e-mail or other electronic means. For example, Delaware recently amended its corporate statute to allow for electronic transmission of notice to members, when the member has consented to such electronic notice. The amended statute defines electronic transmission as "any form of communication, not involving the physical transmission of paper, that creates a record that may be retained, retrieved, and reviewed by a recipient through an automated process." There are also statutory requirements concerning record keeping and verification that must be met to take advantage of this provision.

3. Written consent. Associations often act through unanimous written consent by their directors or members. For board members, action may require a written consent from each director. Under some state statutes, faxed signed consents are permissible. Therefore, it is likely that electronic signatures obtained via e-mail may qualify as a permissible written consent--particularly in light of recent federal legislation legitimizing the use of electronic signatures in many contexts.

4. Proxy voting. The use of electronic media may be permissible for proxy voting, but such voting is generally limited to members. Given the fiduciary duties that are personal to each director, and the need for directors to deliberate to ensure properly considered decisions, proxy voting by directors is usually prohibited by statute. In contrast, a number of state nonprofit corporate statutes allow for member proxy voting and may further allow members to use electronic media to grant a proxy right to another party for member voting purposes.

For example, the New York not-for-profit statute governing member proxies allows a member to authorize another person to act as proxy by granting such proxy authority via transmission of a telegram, cablegram, or other electronic means to the person who will act as proxy. Any such electronic communication, however, must reasonably reflect that the communication came from the authorizing member; in other words, the electronic proxy must be able to be verified as having been sent from a member, similar to a requirement in the Delaware statute allowing electronic transmission of notice. This provision would appear to allow for e-mail authorization of a member proxy to serve as a verifiable electronic proxy authorization for a member vote in a New York not-for-profit corporation.

5. Committee activities. Association committees, unless they are standing committees of the board, probably have more leeway in using electronic media to govern committee activities--as state statutes often do not specifically address or proscribe the conduct of such committees' activities. Of course, all committees still must follow basic parliamentary procedures such as notice and quorum requirements, and individual directors participating in such committees are not relieved of their fiduciary duties and other responsibilities imposed by applicable law.

Looking to the future

Although the use of electronic media in the governance of associations and other nonprofit organizations as a strictly statutory matter still is comparatively limited, electronic media, particularly e-mail, is already widely used for informal organization actions. Such actions, including information dissemination, member surveys, meeting and event planning, and certain grassroots member activities, often find their ultimate expression in formal board or member votes on related resolutions. To this extent, electronic media already plays an important role in facilitating efficient and informed association governance; a role that surely will only increase over time.

Thomas E. Arend is an attorney with the Nonprofit Organizations Practice and Jerald A. Jacobs is a partner at the law firm of Shaw Pittman, Washington, D.C. Jacobs edits this column and is general counsel to ASAE.
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Author:Arend, Thomas E.
Publication:Association Management
Geographic Code:1USA
Date:Jan 1, 2002
Words:1108
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