New Electronic Communication Opportunities for Illinois Not-for-Profit Corporations
Tax Exempt Organizations Update 09/09/09 John P. Vail, Norah L. Jones
Governor Quinn recently signed into law a number of amendments to the Illinois General Not For Profit Corporation Act of 1986 (the "Act"). The major changes expand the opportunities of Illinois not-for-profit corporations to use e-mail and other electronic means of communication in taking corporate actions and delivering required notices, provide for different voting procedures that can be used by membership organizations, and clarify the rights of voting members of a not-for-profit corporation to review its books and records.
Following are the primary changes to the Act. Unless stated otherwise below, each change becomes effective January 1, 2010.
Notices by Electronic Means. The Act currently provides that, as may be authorized and set forth in the articles of incorporation or bylaws, notices required under the Act may be transmitted by electronic means to the address that appears on the records of the corporation. The revisions to the Act clarify that permissible delivery includes electronic transmissions to the e-mail address, facsimile number, or other contact information appearing on the records of the corporation, if authorized or approved in the articles of incorporation or bylaws.
Action and Signatures by Electronic Means. The Act currently states that, to the extent permitted by the articles of incorporation or bylaws, actions of the board of directors, board committees, or members that are required to be "written," to be "in writing," to have "written consent," or to have "written approval" can occur through communications transmitted or received by electronic means. As revised, the Act now permits actions to be taken through electronic means unless there is an express prohibition in the articles of incorporation or bylaws. Although these revisions permit written consents of directors and committee members to be transmitted electronically unless prohibited by the articles of incorporation or bylaws, the Act continues to require that these consents be signed by the directors or committee members, as the case may be. (Note that the signature requirement for informal actions by members has been eliminated.) The Illinois Electronic Commerce Security Act provides relevant background here by stating that where a rule of law requires information to be "written" or "in writing" or requires a "signature," an electronic record or electronic signature satisfies that requirement except in certain specified circumstances. A "signature" for these purposes is any symbol executed or adopted, or any security procedure employed or adopted, using electronic means or otherwise, by or on behalf of a person with intent to authenticate a record, and an "electronic signature" is a signature in electronic form attached to or logically associated with a record generated, communicated, received, or stored by electronic means for use in an information system or for transmission from one information system to another.
Election by Members Using Electronic Means. The Act currently does not permit the members of a corporation with members to elect directors, officers, or other representatives of the organization by electronic means. Illinois Public Act 96-0648 revises this by providing that, if permitted by the bylaws, the election of directors, officers, or other representatives by the members may be conducted by e-mail or other electronic means as of October 1, 2009. Illinois Public Act 96-0649 further revises this rule and provides that, as of January 1, 2010, any of these elections may be conducted by e-mail or other electronic means unless the articles of incorporation or bylaws provide otherwise.
Informal Action by Members. Under the Act currently, any action required to be taken at a meeting of members of the corporation may instead occur without a meeting if a consent in writing is signed either (i) by all members entitled to vote or (ii) by members having not less than the minimum number of votes necessary to authorize or take such action at a meeting at which all members entitled to vote thereon were present and voting, if notice is given to any member who did not consent to the proposed action. The revisions to the Act change the procedures for the taking of member action without a meeting and eliminate the signature requirement for informal member action. The Act as revised provides that actions without a meeting may occur by ballot in writing by mail, e-mail, or any other electronic means pursuant to which the members entitled to vote are given the opportunity to vote for or against the proposed action, and the action receives approval by a majority of the members casting votes, or such larger number as may be required by the Act, the articles of incorporation, or the bylaws, provided that the numbers of members casting votes would have constituted a quorum at a meeting. Voting for an action must remain open for not less than five days from the date the ballot is delivered but not less than 20 days in the case of the removal of any directors, a merger, consolidation or dissolution, or the sale, lease, or exchange of assets. The action will become effective only if a notice of the proposed action is delivered to all members entitled to vote at least five days prior to the effective date. The Act in its current form requires that notice be given after the effective date of the action to any member who did not consent to the proposed corporate action. That notice will no longer be required.
Directors' Terms. The Act currently provides that a decrease in the number of directors does not shorten an incumbent director's term. Under the revisions to the Act, a bylaw amendment that decreases the number of directors or eliminates the position of a director elected or appointed by persons or entities other than the members may shorten incumbent directors' terms. In the case of an amendment eliminating a director who was appointed by one or more persons other than the members, however, such bylaw amendment must be approved by the party who had authority to elect or appoint those directors.
Examination of Books and Records. The Act currently provides that a voting member may inspect all corporate books and records for any proper purpose at any reasonable time. The amendments to the Act elaborate upon the procedures that a voting member must use in order to exercise that right and limit the right to "the corporation's books and records of account and minutes." In order to exercise this right, a voting member must make written demand upon the corporation, stating with particularity the records sought and the purpose therefore. If the corporation refuses examination, the voting member is entitled to file suit in circuit court of the county in which either the registered agent or the principal office of the corporation is located to compel examination. The burden of proof as to a proper purpose in reviewing books or records of account is upon the voting member. With respect to minutes, however, the corporation will have the burden to prove that the voting member does not have a proper purpose. Non-voting members do not have the right to inspect a corporation's books and records either currently or under the Act as amended.
Conflict of Interest. Section 108.60 of the Act addresses director conflicts of interest and includes a description of the circumstances in which a transaction of the corporation to which a director is directly or indirectly a party will not be voidable if it is fair to the corporation. Generally this means that the corporation must receive at least fair market value for what it gives. The amendments to the Act state that this Section does not apply to situations where a director of a corporation is, directly or indirectly, a party to a transaction involving a grant or contribution by one organization to another without consideration. The revisions do not seem to require that both organizations must be not-for-profit organizations in order to be covered by this provision.
Limitation of Liability. Under the Act currently, directors and officers of not-for-profit corporations who serve without compensation are not liable for damages resulting from the exercise of their judgment or discretion in most circumstances. There is an exception to this provision that allows a director of a certain type of cooperative, an agricultural not-for-profit corporation, or a corporation organized for professional, commercial, industrial, or trade association purposes to be protected from liability despite his or her receipt of compensation that does not exceed $5,000. Under the revisions to the Act, this amount is raised to $25,000 per year.
Quarles & Brady Comments
The amendments to the Act are attempts to make its provisions more modern, recognizing the preference of many not-for-profit corporations to use e-mail and other electronic communication methods to conduct necessary corporate business more efficiently. The amendments should be welcome updates to the Act. Not-for-profit corporations should, however, remember that their directors and committee members must continue to satisfy their fiduciary duties when making decisions. Face-to-face and telephonic meetings may continue to provide a better forum for conversation, deliberation, and the satisfaction of fiduciary duties. Although boards and committees may take some final actions by e-mail, in many cases it will be best that these actions be preceded by an opportunity for board or committee members to discuss the proposed actions. Further, boards and committees (as opposed to members) may take action by e-mail only if all directors or committee members consent to the action in writing.
Although the interplay between the Illinois Electronic Commerce Security Act and the Act is not entirely clear, we believe the result of the revisions to the Act is that directors and committee members may both use electronic signatures in adopting unanimous written consent actions and send the consents electronically unless specifically prohibited in the articles of incorporation or bylaws. While some may interpret the electronic signature requirements differently, we think an appropriate practice is to permit directors and committee members to take action by written consent using electronic signatures if each electronic transmission approving the action includes the signatory's full name in a form intended by the signatory (a) to serve as his or her signature and (b) to authenticate the consent. Further, we believe it is appropriate that each electronic signature be affixed to an e-mail message or other electronic communication that (i) contains or attaches the written consent action; (ii) includes an affirmative statement (such as "Yes," "I agree," or "I consent"); and (iii) contains a clear reference to the written consent action in the subject line.
The revisions to the Act provide that the section addressing director conflicts of interest does not apply to a situation where a director of an organization is directly or indirectly a party to a transaction involving a grant or contribution by one organization to another. We do not interpret this provision as meaning that a grant by an organization to another organization with which one of its directors is also affiliated does not involve a conflict of interest. Instead, although not entirely clear, we believe it is intended to mean that the fairness requirement in the conflict of interest section of the Act does not apply. This requirement has caused some confusion in the past. Under best practices, directors should continue to disclose these relationships and boards of directors and committees should continue to address these conflicts pursuant to their organizations' conflict of interest policies. General fiduciary duties will also require them to determine that any such transactions are in the best interest of the corporation.
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This update is intended as a general summary of legal matters and not as specific advice to any particular client. If you have any questions concerning the subject matter of this update, please contact Kristen Danyluk at 312-715-5222 / firstname.lastname@example.org, John Vail at 312-715-5042 / email@example.com, Norah Jones at 312-715-5052 / firstname.lastname@example.org, or your Quarles & Brady attorney.