Corporations, LLCs and Electronic Communication
Stuart L. Pachman
CORPORATIONS, LLCs, AND ELECTRONIC COMMUNICATION
By: Stuart L. Pachman
A natural person may do whatever is not forbidden by law, but a corporation may do only what is authorized by law and its charter. To what extent may corporations, the rules for which were developed in the 17th Century, and limited liability companies (LLCs) authorized in the 20th Century, avail themselves of modern communication methods made available through technological advances?
When the governing body, or the “owners,” or both, of an artificial entity consist of multiple individuals, and decisions must be made collectively, consensus must be reached among the several directors, shareholders, members, or managers. Traditional corporate law required the directors to meet face to face, on due notice, and to vote on a proposal after discussion and debate. The face to face requirement was similar for shareholders’ meetings except that unlike a director, a shareholder was permitted to give a proxy to someone else, whether or not a shareholder, to attend the meeting and cast the proxy giver’s vote. By the mid 20th century, when corporations had become a vehicle through which not only large enterprises, but also individuals and small “partnerships” did business, Legislatures (New Jersey’s in the 1960s) modified the requirement for face to face corporate meetings. Both directors and shareholders were authorized to “act” by unanimous written consent. Shareholders were also authorized to act by non-unanimous written consent on notice to all others. Directors “meetings” were authorized to be held by means of conference telephone so long as everyone could hear each other.
About twenty years ago (coincidentally when legislatures across the nation authorized the formation of LLCs), the use of computers, the internet, and e-mail began to envelope the world with dazzling speed that revolutionized communication. As virtually every large and small business, professional practice, and government function came to utilize (some might say become enslaved by) the computer, clients began to ask their lawyers if business or nonprofit corporations or LLC’s could make use of the speed and convenience of electronic communication.
Statutes are attempting to keep pace with the developments in technology. In 1988, the New Jersey Business Corporation Act (BCA) was amended at N.J.S. 14A:5-8 to permit the list of shareholders entitled to vote at a shareholders’ meeting to be displayed on “any equipment which permits the visual display of the information required by this section.”
The Committee on Corporate Laws of the ABA Section of Business Law has proposed an amendment to Section 7.5 of the Model Business Corporation Act that would authorize shareholders to participate in any meeting by means of remote communication subject to guidelines and procedures developed by the board of directors. The corporation must implement reasonable measures to verify that the remote participants are shareholders who have the opportunity to communicate and read or hear the proceedings. Recognizing that all features of a face to face (whether across the table or seated in an auditorium) meeting cannot be duplicated, the official comment to the proposed amendment states:
“While this provision is aimed at approximating as much as possible shareholder participation in person or by proxy, including interacting with management during the meeting, it does not require that all can so participate and interact.”
More relevant to New Jersey lawyers and New Jersey corporations is that in January, 2010, former Governor Corzine signed A‑2879 (L.2009, ch. 176) into law. It amends N.J.S. 14A:1-8 to allow required or permitted notices be given by electronic transmission in addition to the traditional methods of mail and personal delivery. The new statute also adds a new section to the BCA, N.J.S. 14A:1-8.1, which prescribes the circumstances and requirements pursuant to which notices may be given electronically.
“Electronic transmission” is defined as “any form of communication, not directly involving the physical transmission of paper, that creates a record that may be retained, retrieved and reviewed by a recipient, and that may be directly reproduced in paper form by that recipient through an automated process.” In other words if the intended recipient is able to receive e-mail and print it out, the definition of electronic transmission is met.
The statute requires that the form of electronic transmission must be consented to by the shareholder to whom the notice is given. The shareholder can subsequently revoke that consent. If the corporation is unable to deliver the notice by electronic transmission two consecutive times, the consent is deemed revoked.
The statute expressly authorizes notices to be given by facsimile when directed to a number at which the shareholder has consented to receive notice, or by electronic mail when directed to an electronic mail address at which the shareholder has consented to receive notice, or by a posting on an electronic network together with a separate notice to the shareholder of that specific posting, or “by any other form of electronic transmission, when directed to the shareholder.” Absent fraud, an affidavit by the corporate secretary or assistant secretary or other agent of the corporation that notice has been given in electronic form is prima facie evidence that the notice was given. The new law expressly excludes certain notices (e.g. a notice by a shareholder for a special meeting to elect directors where there are none), from electronic transmission capability.
In the foregoing paragraph the words “shareholder” and “notice” are emphasized. The statute deals with giving notice, not voting. Although the amendment to N.J.S. 14A:1-8 appears to contemplate notices to directors as well as shareholders, new Section 1-8.1 can be read to be limited to shareholders.
If a corporation determines that the authority to give notices electronically should be utilized, in addition to obtaining the consents required by the statute, it would be advisable to amend the by-laws (which are part of the contract between the corporation and its shareholders and between and among the shareholders) to add an express provision referring to the statute and authorizing notices to be given electronically. The by-law might also provide that notices to directors may be sent electronically and require that for one to be qualified to be a director he or she must have and maintain an address to which notices may be sent electronically.
Failure to provide for share transfers could prove a trap for the unwary, particularly in closely held family corporations when, whether for estate planning or other purposes, there are transfers within the family without consideration and without thought given to obtaining the new shareholder’s consent to receive notices electronically. Thus it would also be advisable to provide in a shareholders agreement, as distinguished from inclusion in the Certificate of Incorporation or by-laws, a consent by all shareholders to receive notices from the corporation by electronic means and to attach to the agreement a schedule listing an electronic address for each shareholder. A new shareholder should be required to consent to the shareholders agreement and the schedule could then be revised to include the new shareholder’s electronic address or, if that is too cumbersome, some other record can be made showing the new shareholder’s consent and address.
L.2009, ch. 176 amends only the BCA. It as yet has no counterpart in Title 15A, the New Jersey Nonprofit Corporation Act. Because Title 15A was modeled on the BCA, the Legislature should amend the Nonprofit Corporation Act to permit nonprofit corporations to give notices electronically.
Whether or not the new statute is read to authorize electronic notices to directors, directors should be able to act electronically when unanimous written consent is sought. It would be advisable for the corporation’s by-laws to authorize expressly a procedure (i) requiring each director to consent to receive communications from the corporation and from other directors electronically at a specified address, and (ii) authorizing the President, or the Secretary, or any director to send written proposals electronically to all directors in the form of a resolution seeking unanimous consent and containing a provision that consent may be manifested in counterparts. Each director could then indicate his or her assent electronically. For traditionalists, the several affirmative responses could be collected and placed in the corporate minute book with the resolution. If one or more directors vote against the proposal or abstain or fail to respond, the resolution would fail. (Subsequently the proposal might be adopted in the traditional manner at a duly called meeting at which a quorum is present.)
The New Jersey Limited Liability Company Act, based on freedom of contract through operating agreements, allows substantial flexibility in management. An LLC operating agreement could provide that managers or members may act by electronic consents, even without unanimity.
Of course, before any use of electronic communication is authorized in any entity, the principals must consider privacy generally and the risk of discovery in litigation specifically.