Indicates Matter Stricken
Indicates New Matter
The Senate assembled at 11:00 A.M., the hour to which it stood adjourned and was called to order by the PRESIDENT.
A quorum being present the proceedings were opened with a devotion by the Chaplain as follows:
Beloved, since tomorrow is Good Friday, we read a part of the story in the King James Version of St. Luke, Chapter 23 (32-38):
"And there were also two others, malefactors,
led with him to be put to death. And when
they were come to the place, which is called
Calvary, there they crucified him, and
the malefactors, one on the right hand,
and the other on the left."
"Then said Jesus, `Father, forgive them;
for they know not what they do.' And
they parted his raiment, and cast lots. And
the people stood beholding. And the rulers
also with them derided him, saying, `he saved
others; let him save himself, if he be
Christ, the chosen of God.' And the soldiers
also mocked him, coming to him, and offering
him vinegar, and saying, `if thou be the King
of the Jews, save thyself.' And a super-
scription also was written over him in letters
of Greek, and Latin, and Hebrew, THIS IS
THE KING OF THE JEWS."
Let us pray... a silent prayer!
(Silence)
Amen!
The PRESIDENT called for Petitions, Memorials, Presentments of Grand Juries and such like papers.
The following were received and referred to the appropriate committees for consideration:
Document No. 1747
Promulgated by Licensing Board for Contractors, Department of Labor, Licensing and Regulation
Definition of Roofing Classification
Received by Lt. Governor March 31, 1994
Referred to Senate Committee on Labor, Commerce and Industry
120 day review expiration date March 7, 1995
Document No. 1753
Promulgated by Board of Education
Basic Skills Assessment Program - Writing Test: Minimum Standards of Student Achievement; Scoring Criteria
Received by Lt. Governor March 30, 1994
Referred to Senate Committee on Education
120 day review expiration date March 6, 1995
Senator COURTNEY introduced Dr. Bert Knight of Spartanburg, S.C., Doctor of the Day.
On motion of Senator RYBERG, at 11:10 A.M., Senator RICHTER was granted a leave of absence for today.
Senator COURSON from the Committee on Invitations stated that pursuant to the provisions of Rule 36, three-fourths of the membership of the Invitations Committee have voted affirmatively and submitted a favorable report on:
Senator McGILL's written request that on Thursday, April 7, 1994, Coach John McKissick be granted the Privilege of the Chamber, to that area behind the rail, and that Coach McKissick be granted the Privilege of the Floor for the purpose of receiving a Certificate of Appreciation and Resolution.
The Report was adopted without objection.
S. 506 -- Senators Rose and Leventis: A BILL TO REPEAL SECTION 22-5-120, CODE OF LAWS OF SOUTH CAROLINA, 1976, RELATING TO ARREST FOR CRIMES COMMITTED IN MAGISTRATE'S PRESENCE.
Senator WILLIAMS asked unanimous consent to make a motion to recall the Bill from the Committee on Judiciary.
There was no objection.
On motion of Senator WILLIAMS, with unanimous consent, the Bill was ordered placed on the Calendar without reference.
The following were introduced:
S. 1317 -- Senator Courtney: A BILL TO AMEND SECTION 33-8-105, CODE OF LAWS OF SOUTH CAROLINA, 1976, RELATING TO THE TERMS OF DIRECTORS OF CORPORATIONS AND ASSOCIATIONS, SO AS TO PROVIDE THAT THIS SECTION DOES NOT APPLY TO HOMEOWNERS ASSOCIATIONS; AND TO AMEND SECTION 33-8-106, RELATING TO STAGGERED TERMS FOR DIRECTORS OF CORPORATIONS AND ASSOCIATIONS, SO AS TO PROVIDE THAT THIS SECTION DOES NOT APPLY TO HOMEOWNERS ASSOCIATIONS.
Senator COURTNEY spoke on the Bill.
Read the first time and on motion of Senator COURTNEY, with unanimous consent, ordered placed on the Calendar without reference.
S. 1318 -- Senator Bryan: A SENATE RESOLUTION TO RECOGNIZE MR. FRED STEWART STODDARD, OF OWINGS IN LAURENS COUNTY, UPON HIS ONE HUNDREDTH BIRTHDAY APRIL 5, 1994.
The Senate Resolution was adopted.
H. 4375 -- Reps. Richardson, Snow, Fulmer and Keyserling: A BILL TO AMEND SECTION 38-75-310, AS AMENDED, CODE OF LAWS OF SOUTH CAROLINA, 1976, RELATING TO WIND AND HAIL INSURANCE, SO AS TO CHANGE THE DEFINITION OF "ESSENTIAL PROPERTY INSURANCE".
Read the first time and referred to the Committee on Banking and Insurance.
H. 4482 -- Reps. Snow, Riser and Law: A BILL TO AMEND SECTION 50-17-1110, AS AMENDED, CODE OF LAWS OF SOUTH CAROLINA, 1976, RELATING TO DEFINITIONS PERTAINING TO THE POINT SYSTEM FOR VIOLATIONS OF COASTAL FISHERIES LAWS, SO AS TO INCLUDE STAMPS AS WELL AS LICENSES AND PERMITS; AND TO AMEND SECTION 50-17-1120, AS AMENDED, RELATING TO THE ESTABLISHMENT OF THE POINT SYSTEM, SO AS TO REVISE THE CONDITIONS UNDER WHICH PRIVILEGES, LICENSES, PERMITS, AND STAMPS MAY BE SUSPENDED BY THE DEPARTMENT OF NATURAL RESOURCES.
Read the first time and referred to the Committee on Fish, Game and Forestry.
H. 4552 -- Reps. Barber, Wright, McKay, Rudnick, Baxley and Neilson: A BILL TO AMEND SECTION 40-29-85, CODE OF LAWS OF SOUTH CAROLINA, 1976, RELATING TO ENERGY EFFICIENCY LABELING ON MANUFACTURED HOMES, SO AS TO PROVIDE FOR A PERMANENT LABEL AND A CONSUMER NOTICE; AND TO AMEND SECTION 12-36-2110, AS AMENDED, RELATING TO SALES TAX ON MANUFACTURED HOMES SO AS TO PROVIDE THAT AN EQUIVALENT HEAT LOSS CALCULATION MAY BE USED IN DETERMINING IF STANDARDS HAVE BEEN MET TO QUALIFY FOR THE EXEMPTION FROM THE TAX DUE ABOVE THREE HUNDRED DOLLARS; TO PROVIDE THAT THE EXEMPTION APPLIES IN MANUFACTURED HOMES WHICH HAVE BEEN PREVIOUSLY OCCUPIED BUT MEET THE STANDARDS; AND TO PROVIDE THAT THE EDITION OF THE AMERICAN SOCIETY OF HEATING, REFRIGERATING, AND AIR CONDITIONING ENGINEERS GUIDE IN EFFECT AT THE TIME IS THE SOURCE FOR THE HEAT LOSS CALCULATION.
Read the first time and referred to the Committee on Labor, Commerce and Industry.
H. 4595 -- Reps. Jennings, Baxley, Neilson, Hines and J. Harris: A BILL TO AMEND SECTION 40-79-30, AS AMENDED, CODE OF LAWS OF SOUTH CAROLINA, 1976, RELATING TO THE MEANING OF "ALARM SYSTEM BUSINESS" FOR PURPOSE OF REGULATION, SO AS TO PROVIDE THAT THIS TERM DOES NOT INCLUDE AN ELECTRIC SUPPLIER, ELECTRICAL UTILITY, OR MUNICIPALITY.
Read the first time and referred to the Committee on Labor, Commerce and Industry.
H. 4809 -- Labor, Commerce and Industry Committee: A JOINT RESOLUTION TO APPROVE REGULATIONS OF THE ATHLETIC COMMISSION, RELATING TO INVESTIGATIONS AND HEARINGS HELD BY THE COMMISSION, DESIGNATED AS REGULATION DOCUMENT NUMBER 1733, PURSUANT TO THE PROVISIONS OF ARTICLE 1, CHAPTER 23, TITLE 1 OF THE 1976 CODE.
Read the first time and referred to the General Committee.
H. 4843 -- Reps. Tucker, P. Harris, McCraw, D. Smith, Phillips, Wilkins and Haskins: A JOINT RESOLUTION TO DIRECT THE DEPARTMENT OF TRANSPORTATION TO CONDUCT A STUDY OF THE U. S. INTERSTATE I-85 CORRIDOR IN GREENVILLE, SPARTANBURG, ANDERSON, AND CHEROKEE COUNTIES FOR THE PURPOSE OF DEVELOPING A TWENTY-YEAR PLAN FOR BETTER TRAFFIC MANAGEMENT AND TO REPORT THE FINDINGS TO THE GENERAL ASSEMBLY.
Read the first time and referred to the Committee on Transportation.
H. 4861 -- Agriculture, Natural Resources and Environmental Affairs Committee: A JOINT RESOLUTION TO APPROVE REGULATIONS OF THE LIVESTOCK-POULTRY HEALTH DIVISION, CLEMSON UNIVERSITY, RELATING TO IMPORTATION OF RATITES, DESIGNATED AS REGULATION DOCUMENT NUMBER 1734, PURSUANT TO THE PROVISIONS OF ARTICLE 1, CHAPTER 23, TITLE 1 OF THE 1976 CODE.
Read the first time and on motion of Senator PEELER, with unanimous consent, ordered placed on the Calendar without reference.
H. 4889 -- Rep. Felder: A BILL TO PROVIDE THAT THE CALHOUN COUNTY SCHOOL DISTRICT SHALL BE GOVERNED AND MANAGED BY A BOARD OF TRUSTEES, THE NUMBER OF WHICH MUST BE THE SAME AS THE NUMBER OF MEMBERS COMPRISING THE CALHOUN COUNTY COUNCIL, PROVIDE FOR THE ELECTION OF THE SCHOOL TRUSTEES FROM SINGLE-MEMBER ELECTION DISTRICTS, PROVIDE FOR THE QUALIFICATIONS AND TERMS OF THE TRUSTEES AND FOR THE REAPPORTIONMENT OF THE TRUSTEES' ELECTION DISTRICTS, PROVIDE FOR THE FILLING OF VACANCIES, AND PROVIDE FOR THE ELECTION OF TRUSTEES ON A NONPARTISAN BASIS AND FOR THE ANNUAL ELECTION OF THE SCHOOL BOARD'S CHAIRMAN; TO PROVIDE THAT MEMBERS OF THE BOARD OF TRUSTEES OF THE CALHOUN COUNTY SCHOOL DISTRICT ELECTED IN 1992 SHALL CONTINUE IN OFFICE UNTIL THE PRESCRIBED EXPIRATION OF THEIR TERMS AND THAT ALL MEMBERS OF THE BOARD WHOSE TERMS WOULD OTHERWISE COMMENCE FOLLOWING THE 1994 ELECTION MUST BE ELECTED IN 1994 ACCORDING TO THE PROVISIONS OF THIS ACT; TO PROVIDE THAT THE INCUMBENT CHAIRMAN OF THE BOARD SHALL CONTINUE AS A MEMBER AND AS CHAIRMAN OF THE BOARD FOR THE REMAINDER OF HIS TERM AS A BOARD MEMBER; AND TO REPEAL SECTION 2 OF ACT 743 OF 1976, RELATING TO THE BOARD OF TRUSTEES OF THE CALHOUN COUNTY SCHOOL DISTRICT.
Read the first time and ordered placed on the local and uncontested Calendar without reference.
H. 4967 -- Reps. Carnell, McAbee and Klauber: A BILL TO AMEND ACT 546 OF 1982, RELATING IN PART TO THE MANNER OF ELECTION OF MEMBERS OF THE BOARD OF TRUSTEES OF GREENWOOD SCHOOL DISTRICT 50, SO AS TO FURTHER PROVIDE FOR THE MANNER IN WHICH THESE TRUSTEES SHALL BE ELECTED INCLUDING THE ESTABLISHMENT OF NINE SINGLE-MEMBER ELECTION DISTRICTS FROM WHICH TRUSTEES SHALL BE ELECTED BEGINNING IN 1994, AND TO PROVIDE THAT BEGINNING IN 1994, ELECTIONS FOR THESE TRUSTEES SHALL BE HELD AT THE SAME TIME AS THE GENERAL ELECTION.
Read the first time and ordered placed on the local and uncontested Calendar without reference.
On motion of Senator DRUMMOND, with unanimous consent, H. 4967 was ordered to receive a second and third reading on the next two consecutive legislative days, and the Bill was to be amended on second reading.
Senator GIESE from the Committee on Medical Affairs submitted a favorable with amendment report on:
S. 48 -- Senator Bryan: A BILL TO AMEND THE CODE OF LAWS OF SOUTH CAROLINA, 1976, BY ADDING SECTION 44-115-15 SO AS TO ADD THE DEFINITION OF "HEALTH CARE PROVIDER"; AND TO AMEND TITLE 44, CHAPTER 115, RELATING TO THE PHYSICIANS' PATIENT RECORDS ACT, SO AS TO CHANGE THIS CHAPTER TO THE "PATIENT MEDICAL RECORDS ACT" AND TO CHANGE REFERENCES FROM "PHYSICIAN" TO "HEALTH CARE PROVIDER" THROUGHOUT THE CHAPTER.
Ordered for consideration tomorrow.
Senator BRYAN from the Committee on Medical Affairs submitted a favorable with amendment report on:
S. 722 -- Senators Elliott, Ford, Stilwell, Mitchell, Martin, Russell and O'Dell: A BILL TO AMEND THE CODE OF LAWS OF SOUTH CAROLINA, 1976, BY ADDING SECTION 40-45-260 SO AS PROVIDE THAT NO RIGHT EXISTS FOR A PHYSICAL THERAPIST TO HAVE PAID TO THEM A BENEFIT UNDER AN INSURANCE POLICY; TO AMEND SECTION 40-45-20, RELATING TO DEFINITIONS IN THE PHYSICAL THERAPY PRACTICE ACT, SO AS TO REVISE THESE DEFINITIONS AND DELETE THE DEFINITION OF "PRESCRIPTION"; AND TO AMEND SECTION 40-45-200, RELATING TO GROUNDS FOR SUSPENSION AND REVOCATION OF REGISTRATION AND SECTION 40-45-220, RELATING TO SCOPE OF PRACTICE AND PENALTIES FOR VIOLATIONS, SO AS TO DELETE THE REQUIREMENT OF PRACTICING PHYSICAL THERAPY UNDER THE PRESCRIPTION OF A LICENSED DOCTOR OF MEDICINE OR DENTISTRY AND TO REVISE PENALTIES.
Ordered for consideration tomorrow.
Senator GIESE from the Committee on Medical Affairs submitted a favorable with amendment report on:
S. 782 -- Senators Rose and Giese: A BILL TO AMEND THE CODE OF LAWS OF SOUTH CAROLINA, 1976, BY ADDING SECTIONS 43-7-60, 43-7-70, 43-7-80, AND 43-7-90 SO AS TO PROVIDE FOR THE CRIMES OF MEDICAL ASSISTANCE PROVIDER FRAUD AND MEDICAL ASSISTANCE RECIPIENT FRAUD AND TO PROVIDE CIVIL AND CRIMINAL PENALTIES FOR VIOLATIONS; TO MAKE IT UNLAWFUL FOR A PROVIDER OF MEDICAL ASSISTANCE, GOODS, OR SERVICES UNDER THE STATE'S MEDICAID PROGRAM TO FAIL TO MAINTAIN SEPARATE ACCOUNTS FOR PATIENT FUNDS AND ACCURATE RECORDS WHEN REQUIRED TO DO SO BY STATE OR FEDERAL LAW, REGULATION, OR POLICY, TO MAKE IT UNLAWFUL FOR A PROVIDER TO REMOVE, TRANSFER, OR OTHERWISE USE THESE PATIENT FUNDS FOR A PURPOSE OTHER THAN THAT WHICH IS AUTHORIZED, AND TO PROVIDE CIVIL AND CRIMINAL PENALTIES FOR VIOLATIONS; TO GRANT CERTAIN POWERS TO THE ATTORNEY GENERAL FOR THE PURPOSE OF CONDUCTING INVESTIGATIONS FOR ALLEGED OR SUSPECTED VIOLATIONS; AND TO REQUIRE A PERSON TO COMPLY WITH CERTAIN REQUESTS OR SUBPOENAS OF THE ATTORNEY GENERAL AND TO PROVIDE FOR PENALTIES FOR FAILURE TO COMPLY.
Ordered for consideration tomorrow.
Senator HAYES from the Committee on Medical Affairs submitted a favorable report on:
S. 887 -- Senator Courson: A BILL TO AMEND SECTION 44-96-160, AS AMENDED, CODE OF LAWS OF SOUTH CAROLINA, 1976, RELATING TO REGULATION OF THE DISPOSITION OF USED MOTOR OIL AND THE SOLID WASTE EXCISE FEE IMPOSED ON SALES OF MOTOR OIL AND SIMILAR LUBRICANTS FOR PURPOSES OF THE SOUTH CAROLINA SOLID WASTE POLICY AND MANAGEMENT ACT OF 1991, SO AS TO EXEMPT SALES OF OIL TO THE FEDERAL GOVERNMENT FROM THE SOLID WASTE EXCISE FEE ON OIL.
Ordered for consideration tomorrow.
Senator CORK from the Committee on Medical Affairs submitted a favorable report on:
S. 891 -- Senators Short, Greg Smith, Washington and Mescher: A BILL TO AMEND ARTICLE 1, CHAPTER 5, TITLE 43, CODE OF LAWS OF SOUTH CAROLINA, 1976, BY ADDING A NEW SECTION 43-5-24, SO AS TO REQUIRE THE DEPARTMENT OF HEALTH AND ENVIRONMENTAL CONTROL TO PROVIDE THE DEPARTMENT OF SOCIAL SERVICES INFORMATION ON METHODS OF CONTRACEPTION AND FAMILY PLANNING TO BE DISSEMINATED TO INDIVIDUALS SEEKING ASSISTANCE.
Ordered for consideration tomorrow.
Senator GIESE from the Committee on Medical Affairs submitted a favorable report on:
S. 1138 -- Senators J. Verne Smith, Courson and Bryan: A JOINT RESOLUTION TO PROVIDE THAT THE HUMAN SERVICES COORDINATING COUNCIL SHALL APPOINT AN ADVISORY COMMITTEE ON THE FUTURE OF PUBLIC HEALTH IN SOUTH CAROLINA, TO PROVIDE THE MEMBERSHIP AND PURPOSE OF THAT ADVISORY COMMITTEE, AND TO PROVIDE FOR ITS DISSOLUTION UPON COMPLETION OF ITS WORK.
Ordered for consideration tomorrow.
Senator GIESE from the Committee on Medical Affairs submitted a favorable report on:
H. 3678 -- Reps. Houck, Cobb-Hunter, Haskins, Mattos, Scott, G. Brown, Neal, Chamblee, Elliott, Stuart, McLeod, M.O. Alexander, D. Wilder and Phillips: A BILL TO AMEND THE CODE OF LAWS OF SOUTH CAROLINA, 1976, BY ADDING SECTION 44-6-175 SO AS TO REQUIRE HOSPITALS TO PROVIDE THE DIVISION OF RESEARCH AND STATISTICAL SERVICES CERTAIN FINANCIAL INFORMATION AND TO AUTHORIZE PENALTIES PURSUANT TO REGULATION.
Ordered for consideration tomorrow.
Senator DRUMMOND from the Committee on Finance submitted a favorable with amendment report on:
H. 3907 -- Rep. Kirsh: A BILL TO AMEND SECTION 12-7-435, AS AMENDED, CODE OF LAWS OF SOUTH CAROLINA, 1976, RELATING TO DEDUCTIONS FROM SOUTH CAROLINA TAXABLE INCOME FOR PURPOSES OF THE STATE INCOME TAX, SO AS TO CLARIFY THE RETIREMENT INCOME EXCLUSION FOR SURVIVING SPOUSES; TO AMEND SECTION 12-7-437, RELATING TO THE DEDUCTION FROM TAXABLE INCOME OF A PORTION OF NET LONG-TERM CAPITAL GAIN, SO AS TO PROVIDE THAT THE DEDUCTION APPLIES TO NET CAPITAL GAIN; TO AMEND SECTION 12-7-1120, RELATING TO ALLOCATION OF INCOME, SO AS TO CLARIFY THE ALLOCATION OF DIVIDENDS OF SUBCHAPTER S CORPORATIONS; TO AMEND SECTION 12-7-1260, RELATING TO THE EMPLOYER'S CAPITAL EXPENDITURE CHILD CARE CREDIT, SO AS TO LIMIT THE CREDIT TO EMPLOYERS OF SOUTH CAROLINA RESIDENTS AND TO CAPITAL EXPENDITURES MADE IN THIS STATE; TO AMEND SECTION 12-7-1640, AS AMENDED, RELATING TO THE TIME FOR FILING INCOME TAX RETURNS, SO AS TO PROVIDE THAT ANY TAX DUE MUST BE PAID AT THE TIME THE RETURN IS FILED WITHOUT REGARD TO ANY EXTENSION; AND TO AMEND SECTION 12-7-2419, RELATING TO THE ELDERCARE TRUST FUND CHECKOFF, SO AS TO CLARIFY THAT THE CHECKOFF APPLIES ONLY TO INDIVIDUAL INCOME TAX RETURNS.
Ordered for consideration tomorrow.
Senator HAYES from the Committee on Medical Affairs submitted a favorable report on:
H. 4210 -- Reps. Sheheen and Rhoad: A JOINT RESOLUTION TO PROVIDE THAT IF THE ENVIRONMENTAL PROTECTION AGENCY OR THE UNITED STATES CONGRESS EXTENDS CERTAIN EFFECTIVE DATES IN THE RCRA SUBTITLE D MUNICIPAL SOLID WASTE LANDFILL CRITERIA, ANY EXTENSION APPLIES TO ALL MUNICIPAL SOLID WASTE LANDFILLS IN THIS STATE TO WHICH THE CRITERIA APPLY.
Ordered for consideration tomorrow.
S. 541 -- Senators Saleeby, Land, McConnell, Courtney, Rankin and Rose: A BILL TO ENACT THE "SMALL EMPLOYER HEALTH INSURANCE AVAILABILITY ACT", INCLUDING AMENDING SECTIONS 38-71-920, CODE OF LAWS OF SOUTH CAROLINA, 1976, RELATING TO DEFINITIONS FOR SMALL GROUP HEALTH INSURANCE PURPOSES, SO AS TO MAKE CERTAIN CHANGES TO THE DEFINITIONS OF "SMALL EMPLOYER" AND "HEALTH INSURANCE PLAN" OR "PLAN", AND TO PROVIDE A DEFINITION FOR "LATE ENROLLEE"; 38-71-730, AS AMENDED, RELATING TO REQUIREMENTS FOR GROUP ACCIDENT, GROUP HEALTH, AND GROUP ACCIDENT AND HEALTH INSURANCE POLICIES, SO AS TO DELETE CERTAIN LANGUAGE AND PROVISIONS, INCLUDING THE PROVISION THAT, FOR GROUPS OF TEN OR LESS PERSONS, EVIDENCE OF INDIVIDUAL INSURABILITY MAY BE REQUIRED FOR PERSONS FIRST BECOMING ELIGIBLE FOR INSURANCE AFTER THE EFFECTIVE DATE OF THE POLICY, AND ADD CERTAIN PROVISIONS; 38-70-10, RELATING TO DEFINITIONS FOR THE PROVISIONS OF LAW ON UTILIZATION REVIEWS AND PRIVATE REVIEW AGENTS IN CONNECTION WITH THE ALLOCATION OF HEALTH CARE RESOURCES AND SERVICES FOR A PATIENT OR GROUP OF PATIENTS, SO AS TO DELETE CERTAIN LANGUAGE AND PROVISIONS FROM THE DEFINITION OF "PRIVATE REVIEW AGENT"; 38-70-15, RELATING TO THE APPLICABILITY OF CHAPTER 70 OF TITLE 38 (UTILIZATION REVIEWS AND PRIVATE REVIEW AGENTS), SO AS TO PROVIDE THAT THE CHAPTER APPLIES TO INSURANCE COMPANIES, ADMINISTRATORS OF INSURANCE BENEFIT PLANS, AND HEALTH MAINTENANCE ORGANIZATIONS LICENSED AND REGULATED BY THE DEPARTMENT OF INSURANCE, AND PROVIDE THAT SUCH INSURANCE COMPANIES, ADMINISTRATORS, AND HEALTH MAINTENANCE ORGANIZATIONS ARE EXEMPT FROM CERTAIN PROVISIONS OF LAW; AND 38-71-940, RELATING TO SMALL GROUP HEALTH INSURANCE AND PREMIUM RATES, RATING FACTORS, AND THE PROHIBITION ON THE INVOLUNTARY TRANSFER OF A SMALL EMPLOYER INTO OR OUT OF A CLASS OF BUSINESS, SO AS TO DELETE CERTAIN PROVISIONS, PROVIDE THAT SMALL EMPLOYER INSURERS SHALL NOT USE CASE CHARACTERISTICS, OTHER THAN AGE, GENDER, INDUSTRY, GEOGRAPHIC AREA, FAMILY COMPOSITION, AND GROUP SIZE WITHOUT PRIOR APPROVAL OF THE CHIEF INSURANCE COMMISSIONER, AND PROVIDE THAT IF A SMALL EMPLOYER INSURER USES INDUSTRY AS A CASE CHARACTERISTIC IN ESTABLISHING PREMIUM RATES, THE HIGHEST RATE FACTOR ASSOCIATED WITH ANY INDUSTRY CLASSIFICATION SHALL NOT EXCEED THE LOWEST RATE FACTOR ASSOCIATED WITH ANY INDUSTRY CLASSIFICATION BY MORE THAN FIFTEEN PERCENT; AND TO PROVIDE FOR THE SEVERABILITY OF THE PROVISIONS OF THIS ACT.
The House returned the Bill with amendments.
On motion of Senator LEATHERMAN, the Senate concurred in the House amendments and a message was sent to the House accordingly. Ordered that the title be changed to that of an Act, and the Act enrolled for Ratification.
THE SENATE PROCEEDED TO A CALL OF THE UNCONTESTED LOCAL AND STATEWIDE CALENDAR.
The following Bills were read the third time and having received three readings in both Houses, it was ordered that the titles be changed to that of Acts and enrolled for Ratification:
H. 3416 -- Reps. Gonzales, Hutson, A. Young, Hallman, Simrill, R. Smith, Harwell, Holt, R. Young, Law, Wofford, Fulmer, Harrell, Neal, Littlejohn, Keyserling, Shissias, J. Bailey, Cooper, Huff, Corning, Breeland, Richardson, Neilson, Canty, Stone, Whipper, Davenport, Vaughn, Stille, H. Brown, M.O. Alexander, Walker, Haskins, Jaskwhich, McTeer, Inabinett, Harvin, McCraw, Phillips, Farr, Harrelson, Moody-Lawrence and J. Harris: A BILL TO AMEND THE CODE OF LAWS OF SOUTH CAROLINA, 1976, BY ADDING SECTION 5-7-32 SO AS TO AUTHORIZE A MUNICIPALITY TO APPOINT AND COMMISSION CODE ENFORCEMENT OFFICERS WITH THE POWER OF CONSTABLES AS NECESSARY FOR THE SECURITY, GENERAL WELFARE, AND CONVENIENCE OF THE MUNICIPALITY.
H. 3987 -- Reps. Riser, Snow, Rhoad, Inabinett and Witherspoon: A BILL TO AMEND SECTION 50-13-1180, AS AMENDED, CODE OF LAWS OF SOUTH CAROLINA, 1976, RELATING TO TROTLINES, SO AS TO REVISE THE REQUIREMENTS FOR TROTLINE HOOKS USED IN LAKES MARION AND MOULTRIE.
H. 4389 -- Reps. J. Wilder, Baxley, Walker, Allison, D. Wilder, Waites, Wilkes, Rudnick, Harvin and Corning: A BILL TO AMEND ACT 38 OF 1993, RELATING TO THE DEPARTMENT OF MENTAL RETARDATION FAMILY SUPPORT SERVICES, SO AS TO CHANGE THE NAME OF THE DEPARTMENT TO THE DEPARTMENT OF DISABILITIES AND SPECIAL NEEDS AND TO INCLUDE INDIVIDUALS WITH HEAD INJURIES, SPINAL CORD INJURIES, OR SIMILAR DISABILITIES AMONG THOSE FOR WHOM SERVICES ARE TO BE PROVIDED.
(By prior motion of Senator LANDER, with unanimous consent)
H. 4937 -- Reps. Fair, Vaughn, Haskins, Cato, Jaskwhich, McMahand, M.O. Alexander, Wilkins, Anderson, Baker, Mattos, Clyborne and Stoddard: A BILL TO AUTHORIZE THE MEMBERS OF THE BOARD OF TRUSTEES OF THE SCHOOL DISTRICT OF GREENVILLE COUNTY TO RECEIVE AN ANNUAL SALARY SET BY THE BOARD BY RESOLUTION AND TO PROVIDE THAT ANY INCREASE MAY NOT TAKE EFFECT UNTIL AFTER THE NEXT REGULARLY SCHEDULED ELECTION FOR TRUSTEES.
The Senate proceeded to a consideration of the Bill. The question being the third reading of the Bill.
Senator THOMAS proposed the following Amendment No. 1 (4937R001.DLT), which was not adopted:
Amend the bill, as and if amended, page 1, line 27, by adding the following:
/Any trustee salary increase approved in the current 1993-94 school year shall be returned to the salary level applicable in the preceding school year./
Amend title to conform.
Senator THOMAS explained the amendment.
Senator STILWELL spoke on the amendment.
The amendment was not adopted.
Senators STILWELL, J. VERNE SMITH and BRYAN desired to be recorded as voting against the adoption of the amendment.
There being no further amendments, the Bill was read the third time and having received three readings in both Houses it was ordered that the title be changed to that of an Act and the Act enrolled for Ratification.
The following House Bill was read the third time and ordered returned to the House with amendments:
H. 3742 -- Reps. McLeod, Baxley, Simrill, Scott, Rudnick, Holt, J. Brown, Moody-Lawrence, Byrd, Shissias, Davenport, Cooper, Littlejohn, Stille, Cato, Vaughn, D. Wilder and J. Bailey: A BILL TO AMEND THE CODE OF LAWS OF SOUTH CAROLINA, 1976, BY ADDING SECTION 40-59-85 SO AS TO REQUIRE THE SOUTH CAROLINA RESIDENTIAL BUILDERS COMMISSION TO ASCERTAIN WHETHER OR NOT THE PAST PERFORMANCE RECORD OF ANY APPLICANT FOR LICENSING AS A RESIDENTIAL BUILDER OR FOR REGISTRATION OR CERTIFICATION AS A RESIDENTIAL SPECIALTY CONTRACTOR IS GOOD AND TO ASCERTAIN CERTAIN OTHER INFORMATION ABOUT SUCH APPLICANT, AND PROVIDE THAT THE APPLICATION AND RENEWAL FORMS FOR ALL LICENSES, CERTIFICATIONS, AND REGISTRATIONS ISSUED BY THE COMMISSION SHALL REQUIRE THE APPLICANT TO LIST ANY OUTSTANDING JUDGMENTS AGAINST HIM.
The following Bills and Joint Resolutions were read the third time and ordered sent to the House of Representatives:
S. 1156 -- Senator Reese: A BILL TO AMEND THE CODE OF LAWS OF SOUTH CAROLINA, 1976, BY ADDING SECTION 56-3-2331 TO ARTICLE 25, CHAPTER 3, TITLE 56 SO AS TO PROVIDE FOR THE ISSUANCE OF MANUFACTURER LICENSE PLATES; AND BY ADDING SECTION 12-37-2722 SO AS TO PROVIDE A PROPERTY TAX EXEMPTION FOR VEHICLES ON WHICH A MANUFACTURER LICENSE PLATE IS USED.
S. 1212 -- Senators Setzler and Giese: A BILL TO AMEND SECTION 8-17-320, AS AMENDED, CODE OF LAWS OF SOUTH CAROLINA, 1976, RELATING TO DEFINITIONS IN REGARD TO STATE EMPLOYEE GRIEVANCE PROCEDURES, SO AS TO REVISE THE DEFINITION OF A "PROBATIONARY EMPLOYEE", AS IT RELATES TO FACULTY AT STATE TECHNICAL COLLEGES, AND TO CLARIFY THIS DEFINITION'S EFFECTIVE DATE.
Senator WILLIAMS spoke on the Bill.
S. 1180 -- Senators Bryan, Elliott, Washington, Hayes, Jackson and Thomas: A JOINT RESOLUTION TO ESTABLISH A PILOT PROJECT FOR SCHOOL-BASED COUNSELING SERVICES.
S. 1297 -- Education Committee: A JOINT RESOLUTION TO APPROVE REGULATIONS OF THE COMMISSION ON HIGHER EDUCATION, RELATING TO DETERMINATION OF RATES OF TUITION AND FEES, DESIGNATED AS REGULATION DOCUMENT NUMBER 1650, PURSUANT TO THE PROVISIONS OF ARTICLE 1, CHAPTER 23, TITLE 1 OF THE 1976 CODE.
S. 1307 -- Labor, Commerce and Industry Committee: A BILL TO AMEND SECTION 41-3-610, CODE OF LAWS OF SOUTH CAROLINA, 1976, RELATING TO CHANGES IN NOMENCLATURE FOR "COMMISSIONER OF LABOR" AND OTHER TERMS UNDER THE GOVERNMENTAL RESTRUCTURING ACT OF 1993, SO AS TO PROVIDE THAT ANY CONTESTED MATTER HEARD BY THE FORMER COMMISSIONER OF LABOR MAY BE APPEALED TO AN ADMINISTRATIVE LAW JUDGE RATHER THAN TO THE OSHA REVIEW BOARD.
S. 1308 -- Labor, Commerce and Industry Committee: A JOINT RESOLUTION TO APPROVE REGULATIONS OF THE DEPARTMENT OF LABOR, LICENSING AND REGULATION, RELATING TO FAILURE TO APPEAR AT HEARINGS BEFORE THE OCCUPATIONAL HEALTH AND SAFETY REVIEW BOARD, DESIGNATED AS REGULATION DOCUMENT NUMBER 1743, PURSUANT TO THE PROVISIONS OF ARTICLE 1, CHAPTER 23, TITLE 1 OF THE 1976 CODE.
S. 1309 -- Labor, Commerce and Industry Committee: A JOINT RESOLUTION TO APPROVE REGULATIONS OF THE BOARD OF COSMETOLOGY, DEPARTMENT OF LABOR, LICENSING AND REGULATION, RELATING TO SANITARY AND SAFETY RULES FOR SALONS AND SCHOOLS, DESIGNATED AS REGULATION DOCUMENT NUMBER 1732, PURSUANT TO THE PROVISIONS OF ARTICLE 1, CHAPTER 23, TITLE 1 OF THE 1976 CODE.
S. 1154 -- Senators Lander, Matthews and Setzler: A BILL TO AMEND CHAPTER 5, TITLE 10, CODE OF LAWS OF SOUTH CAROLINA, 1976, RELATING TO CONSTRUCTION OF PUBLIC BUILDINGS FOR ACCESS BY HANDICAPPED PERSONS, SO AS TO ADOPT THE REQUIREMENTS FOR ACCESSIBILITY FOR PEOPLE WITH PHYSICAL DISABILITIES IN THE STANDARD BUILDING CODE AND TO REVISE VARIOUS PROVISIONS IN THIS ARTICLE TO CONFORM; TO REVISE THE EX OFFICIO MEMBERS OF THE SOUTH CAROLINA BOARD FOR BARRIER-FREE DESIGN; TO PROVIDE THAT THE BOARD IS EXEMPT FROM REVIEW UNDER CHAPTER 20, TITLE 1; TO PROVIDE THAT THE BOARD IS ADMINISTERED BY THE DEPARTMENT OF LABOR, LICENSING AND REGULATION WHICH MUST PROVIDE CERTAIN SERVICES AND FACILITIES; TO AUTHORIZE THE BOARD TO DELEGATE ENFORCEMENT TO COUNTY BUILDING OFFICIALS OR TO THE DEPARTMENT OF LABOR, LICENSING AND REGULATION; TO AUTHORIZE A PERSON WHO IS DEPRIVED OF RIGHTS UNDER THIS CHAPTER TO SEEK AN INJUNCTION; AND TO AMEND SECTION 1-20-50, AS AMENDED, RELATING TO DATES FOR TERMINATION OF CERTAIN BOARDS UNDER REVIEW BY THE REORGANIZATION COMMISSION, SO AS TO DELETE THE BOARD FOR BARRIER-FREE DESIGN.
S. 1154 -- Senators Lander, Matthews and Setzler: A BILL TO AMEND CHAPTER 5, TITLE 10, CODE OF LAWS OF SOUTH CAROLINA, 1976, RELATING TO CONSTRUCTION OF PUBLIC BUILDINGS FOR ACCESS BY HANDICAPPED PERSONS, SO AS TO ADOPT THE REQUIREMENTS FOR ACCESSIBILITY FOR PEOPLE WITH PHYSICAL DISABILITIES IN THE STANDARD BUILDING CODE AND TO REVISE VARIOUS PROVISIONS IN THIS ARTICLE TO CONFORM; TO REVISE THE EX OFFICIO MEMBERS OF THE SOUTH CAROLINA BOARD FOR BARRIER-FREE DESIGN; TO PROVIDE THAT THE BOARD IS EXEMPT FROM REVIEW UNDER CHAPTER 20, TITLE 1; TO PROVIDE THAT THE BOARD IS ADMINISTERED BY THE DEPARTMENT OF LABOR, LICENSING AND REGULATION WHICH MUST PROVIDE CERTAIN SERVICES AND FACILITIES; TO AUTHORIZE THE BOARD TO DELEGATE ENFORCEMENT TO COUNTY BUILDING OFFICIALS OR TO THE DEPARTMENT OF LABOR, LICENSING AND REGULATION; TO AUTHORIZE A PERSON WHO IS DEPRIVED OF RIGHTS UNDER THIS CHAPTER TO SEEK AN INJUNCTION; AND TO AMEND SECTION 1-20-50, AS AMENDED, RELATING TO DATES FOR TERMINATION OF CERTAIN BOARDS UNDER REVIEW BY THE REORGANIZATION COMMISSION, SO AS TO DELETE THE BOARD FOR BARRIER-FREE DESIGN.
Having voted on the prevailing side, Senator O'DELL asked unanimous consent to make a motion to reconsider the vote whereby the Senate gave third reading to S. 1154.
There was no objection.
The Senate proceeded to a consideration of the Bill. The question being the third reading of the Bill.
Senator O'DELL explained the Bill.
On motion of Senator O'DELL, the Bill was carried over.
S. 1251 -- Senators Giese and Wilson: A BILL TO AMEND SECTION 12-45-70, AS AMENDED, CODE OF LAWS OF SOUTH CAROLINA, 1976, RELATING TO THE TIME FOR PAYING PROPERTY TAXES AND THE MANNER OF COLLECTION OF THESE TAXES, SO AS TO AUTHORIZE THE GOVERNING BODY OF A COUNTY BY ORDINANCE TO ALLOW THE PAYMENT OF PROPERTY TAXES ON AN INSTALLMENT BASIS IN HARDSHIP CASES, TO DEFINE HARDSHIP CASES, AND TO PROVIDE THAT THE COUNTY TREASURER SHALL DETERMINE ELIGIBILITY ON A CASE-BY-CASE BASIS.
The Senate proceeded to a consideration of the Bill. The question being the third reading of the Bill.
Senator GIESE proposed the following amendment (JIC\5323HTC.94), which was adopted:
Amend the bill, as and if amended, by striking the paragraph added in Section 12-45-70 of the 1976 Code as added by SECTION 1 and inserting:
/The governing body of a county may by ordinance allow payment of property taxes in installments in hardship cases. For purposes of this paragraph, hardship is defined as:
(1) a medical emergency;
(2) financial hardship which, if unresolved, makes it impossible for the taxpayer to provide the basic requirements of living for the taxpayer or the taxpayer's family;
(3) imminent eviction;
(4) possible loss of employment;
(5) severe financial hardship; or
(6) hardship associated with military service./
Amend title to conform.
Senator GIESE explained the amendment.
There being no further amendments, the Bill was read the third time and ordered sent to the House of Representatives.
At 12:00 Noon, Senator PATTERSON assumed the Chair.
The following Bill and Joint Resolution having been read the second time with notice of general amendments were ordered placed on the third reading Calendar:
S. 1113 -- Senators Mescher and Rose: A JOINT RESOLUTION TO GRANT THE DEPARTMENT OF REVENUE AND TAXATION THE DISCRETIONARY AUTHORITY TO DELAY IMPLEMENTATION OF SECTION 22 OF ACT 164 OF 1993 IF REQUESTED BY A COUNTY GOVERNING BODY AND TO PROVIDE THAT THE DELAY AND IMPLEMENTATION MAY NOT EXTEND BEYOND JANUARY 1, 1995.
Senator MESCHER explained the Resolution.
H. 3919 -- Rep. Simrill: A BILL TO AMEND SECTION 12-36-510, CODE OF LAWS OF SOUTH CAROLINA, 1976, RELATING TO THE REQUIREMENTS FOR RETAILERS TO OBTAIN A RETAIL LICENSE BEFORE ENGAGING IN BUSINESS, SO AS TO INCLUDE FESTIVALS AMONG THOSE SPECIAL EVENTS FOR WHICH A RETAILER FILES A SPECIAL EVENTS SALES TAX RETURN AND IS NOT REQUIRED TO HAVE A RETAIL LICENSE AND TO DEFINE "FESTIVAL".
Senator LEATHERMAN explained the Bill.
At 12:05 P.M., the PRESIDENT assumed the Chair.
S. 768 -- Senators Passailaigue, J. Verne Smith, Bryan, Wilson, Drummond, Waldrep, Thomas and Giese: A BILL TO AMEND CHAPTER 31, TITLE 33, CODE OF LAWS OF SOUTH CAROLINA, 1976, RELATING TO NONPROFIT CORPORATIONS, SO AS TO ENACT THE SOUTH CAROLINA NONPROFIT CORPORATION ACT OF 1993 SO AS TO FURTHER PROVIDE FOR THE MANNER IN WHICH NONPROFIT CORPORATIONS OPERATE AND TRANSACT BUSINESS IN THIS STATE; TO AMEND SECTION 33-11-101, RELATING TO MERGERS OF BUSINESS CORPORATIONS, SO AS TO MAKE THE PROVISIONS OF THE SECTION APPLICABLE TO NONPROFIT CORPORATIONS; TO AMEND THE 1976 CODE BY ADDING SECTION 62-7-507 SO AS TO PROVIDE THAT CERTAIN STATUTORY PROVISIONS OF LAW SHALL NOT BE CONSTRUED TO CAUSE FORFEITURE OR REVERSION OF TRUST PROPERTY; AND TO REPEAL SECTION 33-20-103 RELATING TO NONPROFIT CORPORATIONS AND CHAPTER 33 OF TITLE 33 RELATING TO CHURCH CORPORATIONS.
The Senate proceeded to a consideration of the Bill. The question being the adoption of the amendment proposed by the Committee on Judiciary.
The Judiciary Committee proposed the following amendment (GJK\20439SD.94), which was adopted:
Amend the bill, as and if amended, by striking all after the enacting words and inserting:
/SECTION 1. Chapter 31, Title 33 of the 1976 Code is amended to read:
Section 33-31-101. Short title.
This chapter may be cited as the South Carolina Nonprofit Corporation Act of 1994.
OFFICIAL COMMENT
The short title provides a common name for use in referring to the state's nonprofit corporation act.
The Introduction to the Model Act provides a general background and description of the Act, its basic approach, and significant additions and changes from the last revision of the Model Act.
SOUTH CAROLINA REPORTERS' COMMENTS
This act is derived from the Revised Model Nonprofit Corporation Act adopted in 1987 by the Subcommittee on the Model Nonprofit Corporation Law of the Business Law Section of the American Bar Association. The Official Comments following each section were prepared by the Subcommittee on the Model Nonprofit Corporation Law of the Business Law Section of the American Bar Association. They are reproduced with permission. These Official Comments describe the substantive decisions made in the drafting process and in many cases explain the meaning and purpose of the section.
This act was prepared for introduction in South Carolina by a committee of the South Carolina Law Institute. This drafting committee was chaired by Theodore J. Hopkins. The drafting committee members included: Rudolph C. Barnes, Sr., Arthur M. Bjontegard, C. C. Burgess, James R. Burkhard, Preston H. Callison, Shawn M. Flanagan, William L. Ivey, R. Bentz Kirby, E. Crosby Lewis, Andrew B. Marion, Burnett R. Maybank, III, William S. McMaster, Martin C. McWilliams, Jr., C. Pinckney Roberts, Edward C. Roberts, Lester S. Schwartz, Paul J. Ward, Roger A. Way, Jr., David Wheeler, and Mitchell M. Willoughby. References in the South Carolina Reporters' Comments to `the committee' refer to this committee. The South Carolina Reporters' Comments which follow each section were drafted as part of the preparation of this act by Professors Martin C. McWilliams, Jr., and James R. Burkhard of the University of South Carolina School of Law. These South Carolina Reporters' Comments are primarily intended to explain the differences, if any, between the section and the former law, and any differences between the section and the official text of the Revised Model Nonprofit Corporation Act (`Revised Model Nonprofit Corporation Act').
The Official and South Carolina Reporters' Comments are intended to assist those who use and interpret this act to determine the intention of the drafters and the interrelationship between the various sections. As such, the comments serve the same function and purposes as the comments to the Uniform Commercial Code, Title 36, of the 1976 Code. They can be useful particularly in a state like South Carolina because the State does not have a large body of nonprofit corporation case law. The comments are not, however, part of the statutory law and, therefore, are not binding on any court or other adjudicatory body.
Section 33-31-102. Reservation of power of amend or repeal.
The General Assembly of South Carolina has power to amend or repeal all or any part of Chapter 31, Title 33 at any time, and all domestic and foreign corporations subject to Chapter 31 of this title are governed by the amendment or repeal.
OFFICIAL COMMENT
States may amend the Model Act from time to time without violating any rights a corporation has as a result of the Act's statutory provisions. While section 1.02 may not be necessary, it lays to rest concern that cases like Trustees of Dartmouth College v. Woodward, 17 U.S. (4 Wheat) 518 (1819) may have vitality today. That case held that a state could not apply a new statute to an existing corporation and suggested that a reservation of power provision might have allowed the court to uphold the new statute. By setting forth a reservation of power provision might have allowed the court to uphold the new statute. By setting forth a reservation of power provision section 1.02 allows the legislature to amend the Model Act's provisions without concern for the vested rights argument.
SOUTH CAROLINA REPORTERS' COMMENTS
Exhaustive commentary regarding the power of the State to modify its corporate laws is contained in the Reporters' Comments to Section 33-1-102. Those comments are generally applicable to the authority of South Carolina to modify the charter of any nonprofit corporation. However, the South Carolina Business Corporation Act grants to the legislature the specific authority to promulgate regulations. It was the consensus that any regulations for this South Carolina Nonprofit Corporation Act should be proposed by the appropriate state agency and then submitted to the legislature for its approval, all in accordance with the procedures established in Title 1, Chapter 23 of the 1976 Code.
There is at least one case dealing with the state's reserved power. Epworth Orphanage v. Wilson, County Treas., 185 S.C. 243, 253, 193 S.E. 644 (1937), contains the clear statement, "It cannot be denied that the Legislature has constitutional power to amend and alter charter rights and privileges." In this case, the court indicated that the orphanage's charter, which was granted by an act of the legislature in 1896 was later impliedly amended by additional statutes dealing generally with the taxation of property owned by certain public charities.
However, if the legislature has granted a specific power to a specific corporation by action taken before 1900, nothing in this Chapter 31, Title 33 will specifically modify that power. See Section 33-31-305. There is, of course, a significant difference between a power and the manner in which members act, the board is elected, or other mechanics of the operations of the corporation.
Section 33-31-120. Filing requirements.
(a) A document must satisfy the requirements of this section, and of any other section that adds to or varies these requirements, to be entitled to filing by the Secretary of State.
(b) This chapter must require or permit filing the document in the office of the Secretary of State.
(c) The document must contain the information required by this chapter. It may contain other information as well.
(d) The document must be typewritten or printed.
(e) The document must be in the English language. However, a corporate name need not be in English if written in English letters or Arabic or Roman numerals, and the certificate of existence required of foreign corporations need not be in English if accompanied by a reasonably authenticated English translation.
(f) The document must be executed:
(1) by the presiding officer of its board of directors of a domestic or foreign corporation, its president, or by another of its officers;
(2) if directors have not been selected or the corporation has not been formed, by an incorporator; or
(3) if the corporation is in the hands of a receiver, trustee, or other court-appointed fiduciary, by that fiduciary.
(g) The person executing a document shall sign it and state beneath or opposite the signature his or her name and the capacity in which he or she signs. The document may, but need not, contain:
(1) the corporate seal;
(2) an attestation by the Secretary or an assistant secretary; or
(3) an acknowledgement, verification, or proof.
(h) If the Secretary of State has prescribed a mandatory form for a document under Section 33-31-121, the document must be in or on the prescribed form.
(i) The document must be delivered to the office of the Secretary of State for filing and must be accompanied by one exact or conformed copy, except as provided in Sections 33-31-503 and 33-31-1509, the correct filing fee, and any franchise tax, license fee, or penalty required by this chapter or other law.
OFFICIAL COMMENT
Section 1.20 standardizes the filling requirements for all documents required or permitted by the Model Act to be filed with the secretary of state. In a few instances, other sections of the Act impose additional requirements which must also be complied with if the document in question is to be filed. Section 1.20 relates only to documents which the Model Act expressly requires or permits to be filed with the secretary of state; it does not authorize or direct the secretary of state to accept or reject for filing other documents relating to corporations and does not treat documents required or permitted to be filed under other statues.
The purpose of the filing requirements of chapter 1 are:
(1) to simplify the filing requirements by the elimination of formal or technical requirements that serve little purpose,
(2) to minimize the number of pieces of paper to be processed by the secretary of state, and
(3) to eliminate all possible disputes between persons seeking to file documents and the secretary of state as to the legal efficacy of documents.
The requirements of section 1.20 may be summarized as follows:
1. Form
To be eligible for filing, a document must be typed or printed and in the English language (except to the limited extent permitted by section 1.20 (e)). The secretary of state is not authorized to prescribe forms (except to the extent permitted by section 1.21) and as a result may not reject documents on the basis of form (see section 1.25)if they contain the information called for by the specific statutory requirement and meet the minimal formal requirements of this section.
2. Execution
To be filed a document must simply be executed by a corporate officer. . . . No specific corporate officer is designated as the appropriate officer to sign though the signing officer must designate his office or the capacity in which he signs the document. Among the officers who are expressly authorized to sign a document is the . . . [presiding officer] of the board of directors, a choice that may be appropriate if the corporation has a board of directors but not appointed officers. If a corporation has not been formed or has neither officers nor a board of directors, an incorporator may execute the document.
The requirement in earlier versions of the Model Act and in many state statues that documents must be acknowledged or verified as a condition for filing has been eliminated. These requirements serve little purpose in connection with documents filed under corporation statutes. (See in this connection section 1.29, which makes it a criminal offense for any person to sign a document for filing with knowledge that it contains false information.) On the other hand, many organizations, like lenders or title companies, may desire that specific documents include acknowledgements, verifications, or seals; section 1.20(g) therefore provides that the addition of these forms of execution does not affect the eligibility of the document for filing.
3. Contents
A document must be filed by the secretary of state if it contains the information required by the Model Act. The document may contain additional information or statements and their presence is not ground for the secretary of state to reject the document for filing. These documents must be accepted for filing even though the secretary of state believes that the language is illegal or unenforceable. In view of this very limited discretion granted o secretaries of state under this section, section 1.25(d) defines the secretary of state's role as `ministerial' and provides that no inference or presumption arises from the fact that the secretary of state accepted a document for filing. See the Official Comments to sections 1.25 and 1.30.
4. Number of Copies
Section 1.20(i) requires that a document filed with the secretary of state must be accompanied by `one exact or conformed copy.' The requirement in early versions of the Model Act and in many state statutes that `duplicate originals' (each being executed as an original document) be submitted has been eliminated. Under section 1.20(i) an `exact' copy is a reproduction of the executed original document by photographic or xerographic process; a `conformed' copy is a copy on which the existence of signatures is entered or noted on the copy. The substitution of exact or conformed copies for duplicate originals reflects advances in the art of office copying machines that permit the routine reproduction of exact copies of executed documents. However, a person submitting `duplicate originals' meets the requirement of this section since the secretary of state may treat the duplicate original as a `conformed copy.' The reasons for requiring an exact or conformed copy of a filed document to accompany the signed original, and the processing of these documents by the secretary of state, are discussed in the Official Comment to Section 1.25.
Official Comment to section 1.20 of the Model Business Corporation Act.
SOUTH CAROLINA REPORTERS' COMMENTS
This provision contains the mechanical requirements for preparing various documents. It is similar to the formerly applicable statute, Section 33-1-200 of the South Carolina Business Corporation Act.
1. Content of forms
This section does not specify the content of any forms. For the substantive requirements of the more commonly used forms please see:
Section 33-31-128 Certificate of existence
Section 33-31-202 Articles of incorporation
Section 33-31-402 Reserved name
Section 33-31-403 Registered name of a foreign corporation
Section 33-31-404 Notice of name change
Section 33-31-502 Change of registered office or registered agent
Section 33-31-505 Notice of change of principal office
Section 33-31-1005 Articles of amendment
Section 33-31-1104 Articles of merger
Section 33-31-1404 Articles of dissolution
Section 33-31-1503 Application for certificate of authority (foreign nonprofit corporation)
Section 33-31-1504 Amended certificate of authority
Section 33-31-1508 Change of registered office or registered agent of foreign corporation
Section 33-31-1515 Notice of change of principal office
Section 33-31-1520 Application for certificate of withdrawal
A more comprehensive listing of forms filed with the Secretary of State is found in Section 33-31-122.:
2. Who may execute documents
The prior law had almost no direction as to who should execute documents that were to be filed for public record. However, prior Section 33-31-20 required the signature of two or more officers or agents to file the "declaration" that a nonprofit corporation was being formed. This new Section 33-31-120 combined with Section 33-31-202(c) modifies this former procedure. Now the articles of incorporation are signed by the incorporators and directors named in the articles.
3. Verification
Although not previously required by statute, the former form "declaration" of incorporation provided for a verification. The verification is now an optional provision. A verification, following former procedure, could specify that each signer:
a. has read and understands the meaning and purport of the statements contained in the document;
b. asserts that the statements are true or he is informed or believes that the statements are true;
c. has signed the document, and, in the case of one signing in a representative capacity, that he has the authority so to sign.
4. Seal
Former Section 33-31-100(7) granted authority for nonprofit corporations to adopt seals. The new law clearly permits a nonprofit corporation to adopt a seal, but its use is purely ceremonial. The use of the seal in no way enhances the efficacy of the document. It has been suggested that out-of-state parties might require that various corporate documents be sealed, but since this is not required by statute, the absence of the seal should cause no problems.
Section 33-31-121. Forms.
(a) The Secretary of State may prescribe and furnish on request forms for:
(1) an application for a certificate of existence;
(2) a foreign corporation's application for a certificate of authority to transact business in South Carolina;
(3) a foreign corporation's application for a certificate of withdrawal; and
(4) the notice of change of principal office. If the Secretary of State so requires, use of these forms is mandatory.
The Secretary of State through regulation may prescribe a mandatory form with regard to any other forms required or permitted by Chapter 31, Title 33 to be filed in his office. All mandatory forms must comply with the statutory requirements contained in Chapter 31.
(b) The Secretary of State may prescribe and furnish on request forms for other documents required or permitted to be filed by this chapter, but their use is not mandatory.
OFFICIAL COMMENT
As described in the Official Comment to section 1.20, documents are entitled to filing under the Model Act if they meet the substantive and formal requirements of the Act; they may also contain additional information if the person submitting the document so elects. See the Official Comments to sections 1.20 and 1.25. In these circumstances it is not appropriate to vest the secretary of state with general authority to establish mandatory forms for use under the Model Act. Certain types of reports and requests for documents may be processed efficiently only if uniform forms are prescribed by the secretary of state. Certificates of existence, for example, should require specific information located at specific places on the form; similarly, processing of large-volume, largely routine filings is expedited if standardized forms are required. Also, the disclosure requirements of the annual report may be administered on a systematic basis if a standardized form is mandated. Section 1.21(a) recognizes that these considerations for which the secretary of state is authorized to establish mandatory forms.
Section 1.21(b) authorizes (but does not require) the secretary of state to prepare forms suitable for use for other documents required or permitted to be filed under the Act. However, the use of these forms is permissive and cannot be required by the secretary of state. Official Comment to Section 1.21 of the Model Business Corporation Act.
SOUTH CAROLINA REPORTERS' COMMENTS
1. Secretary of State to provide forms
This section provides that the Secretary of State may prescribe certain forms. If he prescribes a form he shall furnish a copy of the form. However, nothing in this section imposes a duty upon the Secretary of State to furnish more than one copy (or a nominal number) upon request therefor.
2. Former law
Although under the prior law of former Chapter 31, Title 33 there was little explicit authority for the Secretary of State to promulgate required or optional forms, the Secretary has developed various forms. Prior law, Section 33-31-20(6) "Written declaration," specifically gave the Secretary of State the authority to require any information he desired to be included in the "declaration" ("articles"). It has been customary to use the forms promulgated by the Secretary of State which formerly included:
a. Declaration and Petition for Incorporation
b. Initial Annual Report of Corporations (Tax Form CL-1)
c. Application for Amendment of Eleemosynary Charter
d. Statement of Dissolution
3. Non-Model Act provision
Different form the Model Act, this Section 33-31-121 permits the Secretary of State to adopt by regulation other mandatory forms. Any such additional form, such as a required articles of incorporation format, will be valid only if it meets all the requirements of this act. The need for standardization is important primarily in regard to simplifying the review process and facilitating the clerical process in of the various applications. The Secretary of State's office will be able to review more quickly and then file documents if standard forms are used. This will save time for South Carolina nonprofit corporations and make the Secretary of State's office more efficient. There is little risk that any additional forms might not be sufficiently flexible to meet a particularly unique need, since Section 33-31-200(c) says that any document to be filed with the Secretary of State may contain any information so desired by the client. By requiring that any future mandatory forms be promulgated through the regulation process, lawyers and affected nonprofit corporations will have an opportunity to raise any concern that the proposed forms might either not meet statutory requirements or might cause practical problems.
Section 33-31-122. Filing, service, and copying fees.
(a) The Secretary of State shall collect the following fees when the documents described in this subsection are delivered for filing:
(1) Articles of incorporation $25.00
(2) Application for use of indistinguishable name $10.00
(3) Application for reserved name $10.00
(4) Notice of transfer of reversed name $ 3.00
(5) Application for registered name $10.00
(6) Application for renewal of registered name $10.00
(7) Corporation's statement of change of registered agent or registered office or both $10.00
(9) Agent's statement of resignation $ 3.00
(10) Amendment of articles of incorporation $10.00
(11) Restatement of articles of incorporation with amendments $10.00
(12) Articles of merger $10.00
(13) Articles of dissolution $10.00
(14) Articles of revocation of dissolution $10.00
(15) Certificate of administrative dissolution No fee
(16) Application for reinstatement following administrative dissolution $25.00
(17) Certificate of reinstatement No fee
(18) Certificate of judicial dissolution No fee
(19) Application for certificate of authority $10.00
(20) Application for amended certificate of authority $10.00
(21) Application for certificate of withdrawal $10.00
(22) Certificate of revocation of authority to transact business No fee
(23) Notice of change of principal office $10.00
(24) Articles of correction $10.00
(25) Application for certificate of existence or authorization $10.00
(26) Notification by existing corporation $10.00
(27) Irrevocable election to be governed $25.00
(28) Any other document required or permitted to be filed by this chapter $10.00
(b) The Secretary of State shall collect a fee of ten dollars each time process is served on him under Chapter 31 of this title. The party to a proceeding causing service of process is entitled to recover this fee as costs if he prevails in the proceeding.
(c) The Secretary of State shall collect the following fees for copying and certifying the copy of any filed document relating to a domestic or foreign corporation:
(1) for copying, one dollar for the first page and fifty cents for each additional page; and
(2) two dollars for the certificate.
OFFICIAL COMMENT
Section 1.22 establishes in a single section the filing fees for all documents that may be filed under the Model Act. The dollar amounts for each document should be inserted by each state as it adopts the Act.
The list of documents in section 1.22 includes all documents that are authorized to be filed with the secretary of state under the Model Act. The catch-all in subdivision (26) will apply to any document for which a state does not establish a specific filing fee plus any document that later amendments to the statute may authorize or direct be filed with the secretary of state without establishing a specific filing fee.
Subdivision (9) states that no fee is applicable to filing the resignation of a registered agent. this provision permits a person who is named as a registered agent without his consent, or who agrees to serve as registered agent for a fee and the fee is not paid, to eliminate any reference to himself in the records of the secretary of state without expense.
Subdivision (8) contains a maximum fee for filing a change of address of a registered agent. Since corporation service companies serve as registered agents for thousands of corporations in many jurisdictions, their change of address may require a very large number of filings. Hence, the fee is broadly based on the number of corporations affected but a maximum fee is specified to reflect that as the number of changes increases the cost per change should decrease. Official Comment to Section 1.22 of the Model Business Corporation Act.
SOUTH CAROLINA REPORTERS' COMMENTS
1. Similar to business corporation fees
The new fee schedule is essentially the same as for business corporations. However, the fee for filing the articles, which is the most common fee, has been increased and is a uniform $25.00 charge regardless of the type of corporation. In the past, religious entities paid $3.00 and all others $15.00. Many of these fees are new because there previously had been no statutory authority in the nonprofit laws for the procedures to which the new fees relate.
2. Non-Model Act provisions
South Carolina did not adopt the 1987 Model Act Official Text which recommends a total dollar limit on the fee when an agent who represents multiple corporations changes his office.
Section 33-31-123. Effective date of document.
(a) Except as provided in subsection (b), a document is effective:
(1) at the time of filing on the date it is filed, as evidenced by the Secretary of State's endorsement on the original document; or
(2) at the time specified in the document as its effective time on the date it is filed.
(b) A document may specify a delayed effective time and date and if it does so the document becomes effective at the time and date specified. If a delayed effective date but no time is specified, the document is effective at the close of business on that date. A delayed effective date for a document may not be later than the ninetieth day after the date filed.
OFFICIAL COMMENT
Section 1.23(a) provides that documents accepted for filing become effective at the time and date of filing, or at another specified time on that date, unless delayed effective date is selected under section 1.23(b). This section gives express statutory authority to the common practice of most secretaries of state of ignoring processing time and treating a document as effective as of the date it is submitted for filing even though it may not be reviewed and accepted for filing until several days later.
Section 1.23(a) requires secretaries of state to maintain a date and time stamp for recording the receipt of documents and provides that documents become effective at the stamped time on the date of filing. This provision should eliminate any doubt about situations involving same-day transactions in which documents, for example articles of merger, are filed on the morning of the date the merger is to become effective. Section 1.23(a) contemplates that the time of filing, as well as the date, will be routinely recorded.
Section 1.23(b) provides an alternative method of establishing the effective date of a document. The document itself may fix as its effective date any date within 90 days after the date it is filed; it may also fix the time it becomes effective on that date. If no time is specified, the document becomes effective as of the close of business on the specified date. The Model Act also allows the effective date fixed in a document to be corrected to a limited extent. See the Official Comment to Section 1.23.
Section 1.23(b) does not authorize or contemplate the retroactive establishment of an effective date before the date of filing. Official Comment to Section 1.23 of the Model Business Corporation Act.
SOUTH CAROLINA REPORTERS' COMMENTS
This section has no counterpart in the former nonprofit statutes. The former law required a three-day public notification of an intent to form a nonprofit corporation and then an investigation by the Secretary of State before the nonprofit charter could be issued (former Sections 33-31-20 and 33-31-60). Former Section 33-31-50 did provide that upon filing the Declaration, First Report, and $25 in fees that the Secretary of State was to issue the Certificate of Incorporation for the proposed term. This section is, however, identical to Section 33-1-230 of the South Carolina Business Corporation Act.
Section 33-31-124. Correcting filed document.
(a) A domestic or foreign corporation may correct a document filed by the Secretary of State if the document:
(1) contains an incorrect statement; or
(2) was defectively executed, attested, sealed, verified, or acknowledged.
(b) A document is corrected:
(1) by preparing articles of correction that:
(i) describe the document, including its filing date, or attach a copy of it to the articles;
(ii) specify the incorrect statement and the reason it is incorrect or the manner in which the execution was defective; and
(iii) correct the incorrect statement or defective execution; and
(2) by delivering the articles of correction to the Secretary of State.
(c) Articles of correction are effective on the effective date of the document they correct except as to persons relying on the uncorrected document and adversely affected by the correction. As to those persons, articles of correction are effective when filed.
OFFICIAL COMMENT
Section 1.24 permits making corrections in filed documents without refiling the entire document or submitting formal articles of amendment. This correction procedure has two advantages: (1) filing articles of correction may be less expensive than refiling the document or filing articles of amendment, and (2) articles of correction do not alter the effective date of the underlying document being corrected. Indeed, under section 1.24(c), event the correction relates back to the original effective date of the document except as to persons relying on the original document and adversely affected by the correction. As to these persons, the effective date of articles of correction is the date the articles are filed.
A document may be corrected either because it contains an `incorrect statement' or because it was defectively executed (including defects in optional forms of execution that do not affect the eligibility of the original document for filing). Official Comment to Section 1.24 of the Model Business Corporation Act.
SOUTH CAROLINA REPORTERS' COMMENTS
This section has no counterpart in the former provisions of Chapter 31, Title 33. Former Section 33-31-90 provided that:
No irregularity in complying with the provisions of this article shall be held to vitiate the incorporation until a direct proceeding to set aside and annul the charter be instituted by the proper authorities of the State. And all acts done and contracts entered into shall have the same force and effect as if no irregularity had existed. Any corporation heretofore formed for any of the purposes enumerated in Section 33-31-20 shall be deemed to have qualified under the provisions of Section 33-31-10.
This new Section 33-31-124, however, is identical with Section 33-1-240 of the South Carolina Business Corporation Act.
Section 33-31-125. Filing duty of the Secretary of State.
(a) If a document delivered to the office of the Secretary of State for filing satisfies the requirements of Section 33-31-120, the Secretary of State shall file it.
(b) The Secretary of State files a document by stamping or otherwise endorsing `filed', together with his name and official title and date and time of receipt, on both the original and document copy, together with a further endorsement that the document is a true copy of the original document. After filing a document, except as provided in Sections 33-31-503 and 33-31-1510, the Secretary of State shall deliver the document copy to the domestic or foreign corporation or its representative and the document copy must be retained as part of the permanent records of the corporation.
(c) Upon refusing to file a document, the Secretary of State shall return it to the domestic or foreign corporation or its representative within five days after the document was delivered, together with a brief, written explanation of the reason or reasons for the refusal.
(d) The Secretary of State's duty to file documents under this section is ministerial. His filing or refusing to file a document does not:
(1) affect the validity or invalidity of the document in whole or in part;
(2) relate to the correctness or incorrectness of information contained in the document; or
(3) except as provided in Section 33-31-127, create a presumption that the document is valid or invalid or that information contained in the document is correct or incorrect.
OFFICIAL COMMENT
1. Filing Duty in General
Under section 1.25 the secretary of state is required to file a document if it `satisfies the requirements of section 1.20.' This language should be contrasted with earlier versions of the Model Act (and many state statutes) that required the secretary of state to ascertain whether the document `conformed with law' before filing it. The purpose of this change is to limit the discretion of the secretary of state to a ministerial role in reviewing the contents of documents. If the document submitted is in the form prescribed and contains the information required by section 1.20 and the applicable provision of the Model Act, the secretary of state under section 1.25 must file it even though it contains additional provisions the secretary of state may feel are irrelevant or not authorized by the Model Act or by general legal principles. consistently with this approach, section 1.25(d) states that the filing duty of the secretary of state is ministerial and provides that filing a document with the secretary of state does not affect the validity or invalidity of any provision contained in the document and does not create any presumption with respect to any provision. Persons adversely affected by provisions in a document may test their validity in a proceeding appropriate for that purpose. Similarly, the attorney general of the state may also question the validity of provisions of documents filed with the secretary of state in an independent suit brought for that purpose; in neither case should any presumption or inference be drawn about the validity of the provision from the fact that the secretary of state accepted the document for filing.
2. Mechanics of Filing
Section 1.25(b) provides that when the secretary of state files a document, he stamps or endorses it as filed, retains the signed original document for his records, and returns the exact or conformed copy (which must accompany the document under section 1.20(i) to the corporation or its representative with the secretary of state's fee receipt or acknowledgement of receipt if no fee is required. This will establish that a document has been filed in the form of the copy. considerations was given to dispensing with the document copy entirely and providing only for the return of a fee receipt or equivalent document Several states currently follow this practice with respect to articles of incorporation and other documents. It was felt to be important, however, to continue a practice by which each corporation receives back from the secretary of state for its records a document that on its face shows that it is an exact or conformed copy of the document that was filed with the secretary of state. This copy is usually placed in the minute book and is available for informal inspection without requiring a person to examine the records of the secretary of state. Of course, a person desiring a certified copy of any filed document may obtain it from the office of the secretary of the state by paying the fee prescribed in section 1.22(c).
3. Elimination of Certificates of Incorporation and Similar Documents
Section 1.25(b) provides that acceptance of articles of incorporation or other documents is evidenced merely by the issuance of a fee receipt or acknowledgement of receipt if no fee is required. Earlier versions of the Model Act and the statutes of many states provided that acceptance by the secretary of state is evidenced by a `certificate' (e.g., of incorporation, of merger, or of amendment. This older practice was not retained in the revised Model Act because it was felt desirable to reduce the number of pieces of paper issued by the secretary of state. Under the older practice most state offices routinely issued both fee receipts and certificates. A single document -- the fee receipt or acknowledgment -- should sufficiently indicate that the document has been accepted for filing, and in fact many states in recent years have dispensed with the formal certificate.
4. Rejection of Document by Secretary of State
Because of the simplification of formal filing requirements and the limited discretion granted to the secretary of state by the Model Act it is probable that rejection of documents for filing will occur only rarely. Section 1.25(c) provides that if the secretary of state does reject a document for filing he must return it to the corporation or its representative within five days together with a brief written explanation of his reason for rejection. This rejection may be the basis of judicial review under section 1.26." Official Comment to Section 1.25 of the Model Business Corporation Act.
SOUTH CAROLINA REPORTERS' COMMENTS
1. Substantial revisions.
This section is a major change from the former provisions of Chapter 31, Title 33. In the past, former Sections 33-31-60, 33-31-70, and 33-31-80 imposed on the Secretary of State's office a duty to investigate whether the proposed corporation was entitled to be formed. In addition, former Section 33-31-170, Filing and recording of papers, provided that:
All papers required to be filed hereunder and all charters or amendments thereof that may be granted shall be filed under proper numbers and indexed by the Secretary of State. The charter or amendment shall be recorded within thirty days after receipt in the officer of the clerk of court or register of mesne conveyances in the county in which the corporation is organized.
The effect of the new law is to eliminate any duty (or authority) of the Secretary of State's office to make any initial investigations. (Earlier versions of the statute directed the Department of Welfare to review only proposed "charitable" nonprofit corporations, see 1944-45 Op.S.C. Attorney General, 166.) It likewise makes clear that the Secretary of State has a mandatory ministerial duty to file all documents proffered in the form prescribed by Section 33-31-120, and deletes any authority or discretion of the Secretary of State to withhold the filing of any document properly completed. There is no longer any requirement that the articles be filed in any county office.
2. Non-Model Act provisions
This section differs from the 1987 Model Act Official Text in four ways:
a. Continuing existing practice, the Secretary of State will endorse on the copy that it is a "true copy" of the original.
b. The Secretary of State has not, and will not, issue a separate receipt of payment. The conformed, stamped copy (and any canceled check)is sufficient verification of payment.
c. Also continuing existing South Carolina practice, subsection (b) requires the corporation to retain the conformed copy of the articles and any document as part if its official records.
d. Although the actual filing of a document does not generally create any presumption that the information contained in the document is correct, a certified document, pursuant to Section 33-31-127 shall be treated as being prima facie evidence of the facts therein stated.
3. Rejection of document within five days
There was debate whether it was reasonable, as is now required in the South Carolina Business Corporation Act, to require the Secretary of State to reject a document within 5 days, or whether he should have a longer time. The conclusion was to require the five-day period.
Section 33-31-126. Appeal from Secretary of State's refusal to file document.
(a) If the Secretary of State refuses to file a document delivered for filing to the Secretary of State's office, the domestic or foreign corporation may appeal the refusal to the court of Common Pleas for Richland County. The appeal is commenced by petitioning the court to compel filing the document and by attaching to the petition the document and the Secretary of State's explanation of the refusal to file.
(b) The court may summarily order the Secretary of State to file the document or take other action the court considers appropriate.
(c) The court's final decision may be appealed as in other civil proceedings.
OFFICIAL COMMENT
1. The Court With Jurisdiction to Hear Appeals From the Secretary of State
The identity of the specific court with jurisdiction to hear appeals from the secretary of state under section 1.26 must be supplied by each state when enacting this section. It is intended that this should be a court of general civil jurisdiction. It may either be the court located in the corporation's principal business office is located in the state or, if the corporation does not have a principal office in the state, the court located in the county in which its registered office is located. The annual report of the corporation must state where the principal office of the corporation (which need not be within the state) is located. See section 16.22. [South Carolina does not require an annual report.] Other sections of the Model Act also contemplate that the court with jurisdiction over substantive corporate matters will be designated in the statute.... It is expected that jurisdiction over litigation with respect to substantive matters will normally be vested in the court in the county of the corporation's principal or registered office. See the Official Comment to sections 7.03.
2. `Summary' Orders
In view of the limited discretion of the secretary of state under the Act, a `summary' order appears to be appropriate in section 1.26. Throughout the Model Act the term `summarily order' or similar language is used where courts are authorized to order action taken and the person charged with taking the original action has little or no discretion. The word `summary' is not used in a technical sense but to refer to a class of cases where the court might appropriately order that action be taken on the face of the pleadings or after an oral hearing but without any need to resolve disputed factual issues.
3. Burden of Proof and Review Standard
The revised Model Act, unlike earlier versions, does not address either the burden of proof or the standard for review in judicial proceedings challenging action of the secretary of state. It is contemplated that these matters will be governed by general principles of judicial review of agency action in each adopting state.
DERIVATION: Official Comment to Section 1.26 of the Model Business Corporation Act.
SOUTH CAROLINA REPORTERS' COMMENTS
It is anticipated that this section will be used very little. For governmental convenience and to reduce costs, the Court of Common Pleas for Richland County has been designated the appropriate court to hear these actions. In regard to the burden or proof and standard of review, please see the South Carolina Reporters' Comments to Section 33-1-260 of the South Carolina Business Corporation Act.
Section 33-31-127. Evidentiary effect of copy of filed document.
A certificate attached to a copy of a document filed by the Secretary of State, bearing his signature, which may be in facsimile, and the seal of this State, is conclusive evidence that the original document is on file with the Secretary of State and must be taken and received in all courts, public offices, official bodies, and in all proceedings as prima facie evidence of the facts therein stated.
OFFICIAL COMMENT
The secretary of state may be requested to certify that a specific document has been filed with him upon payment of the fees specified in section 1.22 (c). Section 1.27 provides that the certificate is conclusive evidence only that the original document is on file. The limited effect of the certificate is consistent with the ministerial filing obligation imposed on the secretary of state under the Model Act.
DERIVATION: Official Comment to Section 1.27 of the Model Business Corporation Act.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is identical to the formerly applicable statute, Section 33-31-260 of the South Carolina Business Corporation Act.
This section, which goes beyond the Model Act, does two things. First, in keeping with Section 19-5-510 of the 1976 Code, Uniform Photographic Copies of Business and Public Records as Evidence Act, the statute "authenticates" certified copies. Second, this section provides an exception to the hearsay rule. The contents of the document are prima facie evidence of the truth of that stated in the document. This second feature is a non-Model Act provision, but is in conformity with the Federal Rules of Evidence, Rule 803(8), and in conformity with existing South Carolina common law. According to Prof. Walter A. Reiser, Jr. Comparison of the Federal Rules of Evidence With South Carolina Evidence Law, 53 (3rd. Ed. 1987):
The leading South Carolina case is State v. Pearson, 223 S.C. 377, 76 S.E.2d 151 (1953), which holds that `where public officers are under a duty to keep a record of transactions, which occur in the course of their public service, the official records and writings so made by such officers, or under their supervision, are of public nature and are ordinarily admissible in evidence as proof of their contents, even though not proved by the person who actually made the entries.'
The Secretary of State is routinely subpoenaed to testify in cases where all that is being asked of him is to confirm that a document is on file and does contain the information in the copy, for example, that a corporation was formed and named certain people as its initial directors. This type of information is basically uncontroverted, and thus to require the Secretary to actually testify in these many proceedings truly would be an unreasonable request and policy. There was discussion as to whether the language provided sufficient protection to the Secretary of State from being needlessly required to testify as to the content of various filed forms. The identical language in the South Carolina Business Corporation Act has been effective. This provision should be equally effective.
Section 33-31-128. Certificate of existence.
(a) A person may apply to the Secretary of State to furnish a certificate of existence for a domestic corporation or certificate of authorization for a foreign corporation.
(b) The certificate of existence or authorization sets forth:
(1) the domestic corporation's corporate name or the foreign corporation's corporate name used in this State;
(2) that (i) the domestic corporation is duly incorporated under the law of this State, the date of its incorporation, and the period of its duration if less than perpetual; or (ii) that the foreign corporation is authorized to transact business in this State;
(3) that all fees, taxes and penalties owed to the Secretary of State have been paid;
(4) that the Secretary of State has not mailed notice to the corporation pursuant to either Section 33-31-1421 or 33-31-1531 that the corporation is subject to being dissolved or its authority revoked;
(5) that articles of dissolution have not been filed; and
(6) other facts of record in the office of the Secretary of State that may be requested by the applicant.
(c) Subject to any qualification stated in the certificate, a certificate of existence or authorization issued by the Secretary of State may be relied upon as conclusive evidence that the domestic or foreign corporation is in existence or is authorized to transact business in this State.
OFFICIAL COMMENT
Section 1.28 establishes a procedure by which anyone may obtain a conclusive certificate from the secretary of state that a particular domestic or foreign corporation is in existence or is authorized to transact business in the state. The certificate will probably be a standardized form. The secretary of state is to make the judgment whether or not the corporation is in existence or is authorized to transact business from public records only and is not expected to make a more extensive investigation. In appropriate cases, the secretary of state may issue a certificate subject to specified qualifications.
Section 1.28(b)(3) refers only to taxes, fees, or penalties collected by the secretary of state or collected by other agencies and reported to the secretary of state. In some states the secretary of state may ascertain from other agencies that franchise or other taxes have been paid and include this information in the certificate. In states where this procedure does not unduly delay the issuance of certificates, section 1.28 may be revised appropriately. Section 1.28(b)(3) relates only to taxes, fees, or penalties to the extent their nonpayment affects the existence or authorization to transact business of the corporation.
A certificate of existence or authorization that may be relied on as binding and conclusive is of material assistance to attorneys who may be required to give formal legal opinions in connection with corporate transactions. Official Comment to Section 1.28 of the Model Business Corporation Act.
SOUTH CAROLINA REPORTERS' COMMENTS
1. Former law
Former Section 33-31-160, Certified copy of charter or amendment as evidence of incorporation, provided:
A certified copy of the charter and any amendment thereof from the Secretary of State or from the clerk of the court or register of mesne conveyances of the county in which such charter is required to be recorded shall be sufficient evidence of the incorporation of a any corporation chartered under this article and of any amendment to its certificate of incorporation.
Obviously, this procedure has been dramatically changed.
2. Warning
The granting of the certificate of existence does not disclose whether there may be grounds which give the Secretary of State the right to begin dissolution proceedings. Nor will it disclose whether the corporation has violated the requirements of sections 33-31-170 - 33-31-173, and that the Attorney General is in the process of "canceling the corporation's articles of incorporation" for a domestic corporation or causing a foreign corporation to forfeit its right to operate in South Carolina. See section 33-31-174.
3. Certificate does not negate the possibility that other actions are pending to dissolve the corporation
The Attorney General (and in certain instances, the members) has the authority pursuant to Sections 33-31-1430 and 33-31-1431 to request that a nonprofit corporation be dissolved. Likewise, the Attorney General has the power to bring an action to revoke a foreign corporation's certificate of authority. See Section 33-31-1531. The certificate of existence will not negate the possibility that such actions are pending against the corporation or other events not within the jurisdiction of the Secretary of State. If an action has been brought under any of these sections, the corporation (or its officers or directors) will receive notice of the proceeding.
4. Differences from Model Act
Section 1.28(b)(3) of the 1987 Model Act Official Text requires the Secretary of State to provided information on unpaid taxes, fees, and penalties only if such information is available in the Secretary's records. Since the South Carolina nonprofit corporations are not required to pay either income or franchise taxes Model Act subsection (b)(3) has been revised. The South Carolina version specifies that the Secretary of State will only certify the payment of any taxes and fees owed to him.
Section 33-31-128(b)(4) differs from the Model Act in two respects. First, the annual report is not required. Second, subsection (b)(4) has been amended to require the Secretary of State to certify that he has not mailed notice to the corporation that it is subject to being dissolved. The South Carolina Secretary of State will give a "certificate of existence" for South Carolina corporations, and a "certificate of authorization to do business" for foreign corporations. This distinction is not made in the Model Act Official Text.
5. Use of term "transact business" not objectionable
It was determined that there was no real objection to borrowing the language from the South Carolina Business Corporation Act and say that a properly qualified foreign nonprofit corporation is one properly authorized to transact "business" in this State. The word "business" as used in this context is generic enough or broad enough merely to reflect that the entity is authorized to act in South Carolina.
Section 33-31-129. Penalty for signing false document
(a) A person commits an offense if he signs a document he knows is false in any material respect, including an omission of a material fact necessary in order to make the statements made in light of the circumstances under which they were made, not misleading, with intent that the document be delivered to the Secretary of State for filing.
(b) An offense under this section is a misdemeanor punishable by a fine of not to exceed five hundred dollars.
(c) A person who violates subsection (a) is liable to any person who is damaged by the violation.
OFFICIAL COMMENT
Section 1.29 makes it a criminal offense for any person to sign a document that he knows is false in any material respect with intent that the document be submitted for filing to the secretary of state.
Section 1.29(b) is keyed to the classification of offenses provided by the Model Penal Code. If a state has not adopted this classification, the dollar amount of the fine should be substituted for the misdemeanor classification. Official Comment to Section 1.29 of the Model Business Corporation Act.
SOUTH CAROLINA REPORTERS' COMMENTS
The South Carolina Business Corporation Act contains similar language, Section 33-1-290. This provision governed the operation of nonprofit corporations prior to the adoption of this South Carolina Nonprofit Corporation Act. The South Carolina version of this Section 33-31-290 differs from the Model Act Official Text in the following respects:
(1) an intentional omission makes the document false; and
(2) any injured person has a private (civil) cause of action against the wrongdoer.
No remedy is specified for any civil cause of action which may be brought pursuant to subsection (c). This is left to the courts to determine.
Section 33-31-130. Powers.
The Secretary of State has the power reasonably necessary to perform the duties required of the Secretary of State's office by this chapter.
OFFICIAL COMMENT
Section 1.30 is intended to grant the secretary of state the authority necessary for his efficient performance of the filing and other duties imposed on him by the Act but is not intended to give him general authority to establish public policy. The most important aspects of a modern corporation statute relate to the creation and maintenance of relationships among persons interested in or involved with a corporation; these relationships basically should be a matter of concern to the parties involved and not subject to regulation or interpretation by the secretary of state. Further, even in situations where it is claimed that the corporation ha been formed or is being operated for purposes that may violate the public policies of the state, the secretary of state generally should not be the governmental official that determines the scope of public policy through administration of his filing responsibilities under the Act. Rather, the attorney general may seek to enjoin the illegal conduct or to dissolve involuntarily the offending corporation.
Section 1.30 is more narrowly drafted than earlier versions of the Model Act and the statutes of many states. Official Comment to Section 1.30 of the Model Business Corporation Act.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is identical to Section 33-1-300 of the South Carolina Business Corporation Act. Certain specific duties required of the Secretary of State under the former nonprofit statutes have been repealed by this South Carolina Nonprofit Act. For example, the Secretary of State no longer has the duty (or the authority) to conduct an investigation of the claimed eligibility or status of the organization (former Section 33-31-60), to obtain the approval of any grand lodge before issuing a charter to a subordinate lodge (former Section 33-31-70), or to refuse a charter if he suspects that the organization will operate in violation of law or will keep a place where alcoholic beverages are stored, kept, given away, or supplied to members (former Section 33-31-80).
Section 33-31-140. Definitions.
Unless the context otherwise requires;
(1) `Approved by the members' or `approval by the members' means approved or ratified by the members entitled to vote on the issue through either:
(a) the affirmative vote of a majority of the votes of the members represented and voting at a duly held meeting at which a quorum is present or the affirmative vote of the greater proportion including the votes of any required proportion of the members of any class as the articles, bylaws, or this chapter may provide for specified types of member action; or
(b) a written ballot or written consent in conformity with this chapter.
(2) `Articles of incorporation' or `articles' include amended and restated articles of incorporation and articles of merger.
(3) `Board' or `board of directors' means the individual or individuals vested with overall management of the affairs of the domestic or foreign corporation, irrespective of the name by which the individual or individuals are designated, except that no individual or group of individuals is the board of directors because of powers delegated to that individual or group pursuant to Section 33-31-801(c).
(4) `Bylaws' means the code or codes of rules, other than the articles, adopted pursuant to this chapter for the regulation or management of the affairs of the corporation irrespective of the name or names by which the rules are designated.
(5) `Class' refers to a group of memberships which have the same rights with respect to voting, dissolution, redemption, and transfer. For the purpose of this section, rights are considered the same if they are determined by a formula applied uniformly.
(6) `Conspicuous' means so written that a reasonable person against whom the writing is to operate should have noticed it. For example, printing in italics or boldface or contrasting color or typing in capitals or underlined is conspicuous.
(7) `Corporation' means public benefit, mutual benefit, and religious corporation.
(8) `Delegates' means those persons elected or appointed to vote in a representative assembly for the election of a director or directors or on other matters.
(9) `Deliver' includes mail.
(10) `Directors' means natural persons, designated in the charter or bylaws or elected by the incorporators, and their successors and natural persons elected or appointed to act as members of the board, irrespective of the names or titles by which these persons are described.
(11) `Distribution' means the direct or indirect transfer of assets or any part of the income or profit of a corporation to its members, directors, or officers. The term does not include:
(a) the payment of compensation in a reasonable amount to its members, directors, or officers for services rendered;
(b) conferring benefits on its members in conformity with its purposes; or
(c) repayment of debt obligations in the normal and ordinary course of conducting activities.
(12) `Domestic corporation' means a corporation.
(13) `Effective date of notice' is defined in Section 33-31-141.
(14) `Employee' includes an officer but not a director. A director may accept duties that make him also an employee.
(15) `Entity' includes corporation and foreign corporation; business corporation and foreign business corporation; profit and nonprofit unincorporated association; corporation sole; business trust, estate partnership, trust, and two or more persons having a joint or common economic interest; and state, United States, and foreign government.
(16) `File', `filed', or `filing' means filed in the office of the Secretary of State.
(17) `Foreign corporation' means a corporation organized under a law other than the law of this State which would be a nonprofit corporation if formed under the laws of this State.
(18) `Governmental subdivision' includes authority, county, district, and municipality.
(19) `Includes' denotes a partial definition.
(20) `Individual' includes the estate of an incompetent individual.
(21) `Internal Revenue Code' means the Internal Revenue Code of 1986, or any future federal tax code or succeeding statute of like tenor and effect, and any reference to a section of the Internal Revenue Code also shall mean the corresponding section of any future federal tax code.
(22) `Means' denotes a complete definition.
(23) (a) `Member' means a person entitled, pursuant to a domestic or foreign corporation's articles or bylaws, without regard to what a person is called in the articles or bylaws, to vote on more than one occasion for the election of a director or directors or any other matter which under the terms of this chapter requires approval by the members.
(b) A person is not a member by virtue of any of the following:
(A) any rights the person has as a delegate;
(B) any rights the person has to designate or appoint a director or directors; or
(C) any rights the person has as a director.
(24) `Membership' refers to the rights and obligations a member has pursuant to a corporation's articles, bylaws, and this chapter.
(25) `Mutual benefit corporation' means a domestic corporation which either is formed as a mutual benefit corporation pursuant to Sections 33-31-201 through 33-31-207, is designated a mutual benefit corporation by a statute, or does not come within the definition of public benefit or religious corporation.
(26) `Notice' is defined in Section 33-31-141.
(27) `Person' includes any individual or entity.
(28) `Principal office' means the office, in or out of this State, so designated in the articles of incorporation, application for certificate of authority, or in a notice of change of principal office filed pursuant to either Section 33-31-505 or 33-31-1515 where the principal office of a domestic or foreign corporation is located.
(29) `Proceeding' includes civil suit and criminal, administrative, and investigatory action.
(30) `Public benefit corporation' means a domestic corporation which is formed as a public benefit corporation pursuant to Sections 33-31-201 through 33-31-207 or is required to be a public benefit corporation pursuant to Section 33-31-1707.
(31) `Record date' means the date established under Sections 33-31-601 through 33-31-640 or Sections 33-31-701 through 33-31-730 on which a corporation determines the identity of its members and their membership rights for the purposes of this chapter. The determinations must be made as of the time of close of transactions on the record date unless another time for doing so is specified at the time the record date is fixed.
(32) `Religious corporation' means a domestic corporation which is formed as a religious corporation pursuant to Sections 33-31-201 through 33-31-207 or is required to be a religious corporation pursuant to Section 33-31-1707.
(33) `Secretary' means the corporate officer to whom the board of directors has delegated responsibility under Section 33-31-840(b) for custody of the minutes of the directors' and members' meetings and for authenticating the records of the corporation.
(34) `State', when referring to a part of the United States, includes a state and commonwealth, and their agencies and governmental subdivisions, and a territory, and insular possession, and their agencies and governmental subdivisions, of the United States.
(35) `United States' includes district, authority, bureau, commission, department, and any other agency of the United States.
(36) `Vote' includes authorization by written ballot and written consent.
(37) `Voting power' means the total number of votes entitled to be cast on the issue at the time the determination of voting power is made, excluding a vote which is contingent upon the happening of a condition or event which has not occurred at the time. Where a class is entitled to vote as a class for directors, the determination of voting power of the class must be based on the percentage of the number of directors the class is entitled to elect out of the total number of authorized directors.
OFFICIAL COMMENT
With a few exceptions, all the definitions in the Model Act are set forth in section 1.40. A few "special definitions" appear in subchapters or sections to which they apply.
The following is a discussion of some of the more important definitions:
1. Approved by (or Approval by) the Members
This definition sets forth the minimum statutory requirements for having a matter approved by the members. Approval may be by a vote of the members at a membership meeting or by written ballot or written consent. Compare sections 7.01, 7.02, 7.08 and 7.04.
To be approved by the members the following minimum conditions must be met:
1. A quorum must be present. See section 7.22. Presence may be established by physical presence, presence by proxy or by signing a written consent or written ballot.
2. A majority of the votes represented and voting must vote in favor of a proposal. While abstentions may be counted in the quorum, abstentions are not counted as no votes in determining whether a majority of the votes have been cast in favor of approving a proposal.
3. The votes cast for a proposal must constitute a majority of the required quorum.
The following example illustrates the interplay of these requirements. A quorum is a majority of the votes entitled to be cast. Assume the number of votes entitled to be cast is 100, the number of votes present is 60. If 26 votes are cast in favor of a proposal, 17 against the proposal and 17 abstain, the proposal is approved. The 26 votes for the proposal constitute a majority of the required quorum of 51. If, however, there are 25 votes in favor of a proposal, 12 against the proposal and 23 abstain, the proposal is defeated. The 25 votes for the proposal are not a majority of the required quorum. Consequently the proposal is defeated even though the number of affirmative votes is greater than the number of negative votes.
In addition to the minimum requirements, the Model Act or a corporation's articles or bylaws may mandate a higher vote or a vote by class or some other unit or grouping. If so, unless the relevant article or bylaw provision contravenes a Model Act requirements, a matter cannot be approved by the members unless it is approved by the higher vote.
2. Board or Board of Directors
The definition of board of directors distinguishes between the board of directors and the group or groups to which the articles may delegate some or all of the powers of the board. See section 8.01(c). Such groups are not treated as the board for purposes of the Model Act. They do, however, assume the duties and responsibilities of the board insofar as they have been delegated some or all of the powers of the board.
3. Bylaws
The term "bylaws" has a particularly expansive definition. The term refers to the code or codes of rules, other than the articles, adopted for regulation or management of corporate affairs regardless of the name by which such rules are designated.
4. Delegates
Professional associations, churches, political parties and numerous other organizations hold representative assemblies from time to time at which major corporate and policy decisions are made. These representative assemblies may be called conventions, annual meetings or some other name. See sections 1.40(7) and 6.40. The people elected or appointed to vote at these representative assemblies are "delegates" for purposes of the Model Act even if they are called by some other name.
5. Distribution
"Distribution" is defined in section 1.40(10) as "the payment of a dividend or any part of the income or profit of a corporation to its members, directors or officers." The payment of any part of the income or profit of a corporation to its members, directors or officers does not include:
(i) the payment of compensation in a reasonable amount to its members, directors or officers for services rendered; or
(ii) conferring benefits upon its members in conformity with its purposes.
This definition is based on and represents no substantive change from section 26 of the prior version of the Model Nonprofit Corporation Act.
6. Member
A "member" is a person who is given the right under a corporation's articles or bylaws to vote for a director or directors of the corporation. See section 1.40(21). Whenever the Model Act refers to members it is referring to them based on the definition set forth in section 1.40(21). If a person is called a member by a nonprofit corporation, but does not have the right to vote for directors, that person is not a member for the purposes of the Model Act. Persons who cannot vote for directors but are called members, associates, affiliates or some other name may have common law or other rights. The question of what rights they have is left to a state by state determination.
A corporation is not required to have "members." Once it has decided to have such members, these members are afforded basic protections and rights by the Model Act. People who have the right to vote for directors are treated as members for Model Act purposes regardless of the name by which they are called.
As a result of section 1.40(21) three categories of people who select directors are not treated as members by the Model Act. Section 1.40(21) provides that a person is not a member because of any rights that person has as a delegate. Therefore, a delegate who votes for directors is not a member. A person may be a delegate and a member if he or she has the right to vote for directors and that right does not arise out of that person's rights as a delegate.
The Model Act does not treat delegates as members for two reasons. The first reason is practical. The Act provides notice and other rights to members on the assumption that the members can always be identified. Often delegates are not identified until they appear or are accredited at a convention. By that time it is often too late to fulfill notice and other procedural requirements of the Model Act. Moreover there is a question of how long a person remains a delegate and what a delegate's role is between conventions. The law in this area is unclear and in an early stage of development. It would be premature to write statutory rules when there is no consensus as to what the law should be. See section 6.40 which recognizes and legitimizes the role delegates play.
The fact that the Model Act does not provide specific right to delegates does not mean that delegate are without rights. A corporation's articles or bylaws or a state's common law may prescribe rules governing delegates and their rights and obligations.
Some individuals or public and other entities that want the right to appoint directors do not or legally cannot become members of nonprofit corporations. Therefore, the Model Act provides that the articles or bylaws of a corporation may authorize any person to appoint a director and that the person is not made a member as a result of appointing a director. See sections 1.40(21) and 8.04. Certain protections are provided to people who have the right to appoint directors. See sections 8.09, 8.10 and 10.30. Persons appointing directors may have additional rights as a result of article or bylaw provisions, negotiated agreements with the corporation, or state common law.
Directors are the third category of persons who select directors, but are not members. Directors who select other directors have adequate protection in their capacity as directors and should not be treated as members.
7. Membership
The term "membership" is defined as the totality of rights and obligations a member or members may have arising out of the articles, bylaws or the Model Act. It does not include rights and obligations that may arise out of contractual or other obligations. Two or more persons may hold one membership.
8. Mutual Benefit Corporation
See the Introduction to the Model Act for a discussion of mutual benefit corporations. Section 1.40(23) distinguishes between corporations existing before and those formed on or after the effective date of the Model Act. Corporations formed on or after the effective date as mutual benefit corporations must provide in their articles that they are mutual benefit corporations. Section 17.07 requires certain corporations existing prior to the effective date to be mutual benefit corporations.
9. Principal Office
Section 16.22 requires each nonprofit corporation to designate a principal office. Section 1.40(26) defines a principal office as the office designated in the annual report as the place where the corporation's principal offices are located. [In South Carolina the principal office is designated originally in the articles or application for certificate of authority, and as is changed in a Notice of Change of Principal Office.] The place designed as a principal office should be the place, if any, that is the center of the corporation's activities. For many nonprofit corporations there is no place which is really the center of their activities, so these corporations may designate the officer or home of an officer as their principal office.
10. Public Benefit Corporation
See the Introduction to the Model Act for a discussion of public benefit corporations. Section 1.40(28) distinguishes between corporations existing before and those formed on or after the effective date of the Model Act. Corporations formed on or after the effective date as public benefit corporations must provide in their articles that they are public benefit corporations. Section 17.07 requires certain corporations existing prior to the effective date to be public benefit corporations.
11. Religious Corporation
See the Introduction to the Model Act for a discussion of religious corporations. Section 1.40(30) distinguishes between corporations existing before and those formed on or after the effective date of the Model Act. Corporations formed on or after the effective date as religious corporations must provide in their articles that they are religious corporations. Section 17.07 requires certain corporations existing prior to the effective date to be religious corporations.
SOUTH CAROLINA REPORTERS' COMMENTS
1. Prior statutes
This section has no real counterpart in the former nonprofit statutes. Some of the definitions are similar to those in the South Carolina Business Corporation Act, Section 33-1-400, but particular attention should be paid to the Official Comments to this section.
2. Non-Model Act definitions
The definitions of the following terms are different from the Model Act definitions:
Approved by the members
Board
Directors
Distribution
Employee
Member
Mutual benefit corporation
Principal office
Record date
Voting Power
In addition, this South Carolina section has a definition of the term "conspicuous" which does not appear in the Model Act.
3. Definition of a religious corporation
There was substantial consideration given to whether there should be a limiting definition of "religious corporation." The purpose of such a definition would be to limit the types of entities which could file articles in South Carolina claiming that they are a religious corporation. Consideration was given to incorporating language from Section 33-31-1707, but after significant debate it was determined that this statute should not contain a limiting definition.
For example, this statute does not regulate whether or not a nursing home formed and operated by a religious denomination could be formed as a religious corporation. This decision is left to the parties forming the entity.
It should be noted that the only practical effect of whether or not a corporation is for South Carolina purposes a religious corporation (and not a public benefit corporation) is the degree of monitoring that will be done of that corporation. For example, if a public benefit corporation dissolves, the Attorney General must receive a report of the distribution of its assets. If the same entity were formed as a designated religious corporation and it dissolved, the corporation would not have to report to the Attorney General how it distributed its assets.
It should also be noted that the federal government, through the IRS, is very active in policing entities which claim to exist for religious purposes but do not.
Section 33-31-141. Notice.
(a) Notice may be oral or written.
(b) Notice may be communicated in person; by telephone, telegraph, teletype, facsimile transmission (FAX), or other form of wire or wireless communication; or by mail or private carrier. If these forms of personal notice are impracticable, notice may be communicated by a newspaper of general circulation in the area where published; or by radio, television, or other form of public broadcast communications.
(c) Oral notice is permissible if reasonable under the circumstances and is effective when communicated if communicated in a comprehensible manner. Oral notice also includes notice through broadcast transmission.
(d) Written notice, if in a comprehensible form, is effective at the earliest or the following:
(1) when received;
(2) five days after its deposit in the United States mail, if mailed correctly addressed and with first class postage affixed;
(3) on the date shown on the return receipt, if sent by registered or certified mail, return receipt requested, and the receipt is signed by or on behalf of the addressee;
(4) fifteen days after its deposit in the United States mail, if mailed correctly addressed and with other than first class, registered, or certified postage affixed.
(e) Written notice is correctly addressed to a member of a domestic or foreign corporation if addressed to the member's address shown in the corporation's current list of members.
(f) A written notice or report delivered as part of a newsletter, magazine or other publication regularly sent to members constitutes a written notice or report if addressed or delivered to the member's address shown in the corporation's current list of members, or in the case of members who are residents of the same household and who have the same address in the corporation's current list of members, if addressed or delivered to one of such members, at the address appearing on the current list of members.
(g) Written notice is correctly addressed to a domestic or foreign corporation, authorized to transact business in this state, other than in its capacity as a member, if addressed to its registered agent or to its secretary at its principal office shown in its most recent Notice of Change of Principal Office and if none has been filed, in its articles of incorporation or application for certificate of authority.
(h) If Section 33-31-705(b) or any other provision of this chapter prescribes notice requirements for particular circumstances, those requirements govern. If articles or bylaws prescribe notice requirements, not inconsistent with this section or other provisions of this chapter, those requirements govern.
OFFICIAL COMMENT
Section 1.41 sets forth the rules for determining the effective date of notices given under the Model Act.
Unless the Act otherwise provides, notice may be oral or written. Oral notice is effective when communicated in a comprehensible manner. Written notice must be in a comprehensible form to be effective. The effective date of written notice depends on the means used to send the written notice. Written notice is effective when received or at any of the following times if they are earlier:
1. Five days after the notice is deposited in the United States mail correctly addressed with first class postage;
2. On the date shown on the signed return receipt for mail sent by registered or certified mail; or
3. Thirty days [15 in South Carolina] after the notice is deposited in the United States mail correctly addressed with other than first class postage.
As a result of the above rules nonprofit corporations can be sure of the effective date of a mailing even if the mail does not reach the intended person. The Model Act recognizes that many nonprofit corporations have special mailing privileges. These organizations can send their mail at the nonprofit rate; the effective date of any such mailing is thirty days [15 in South Carolina] after the mail is deposited in the United States mail.
Many nonprofit corporations include notices in newsletters, magazines or other publications regularly sent to members. Subsection (f) allows notices or reports contained in such publications to constitute written notice. If more than one member has the same address on the corporation's current records and lives in the same household as other members, notice in a publication delivered or mailed to such member at the correct address serves as written notice to all the members at the same address.
Other provisions of the Act may override the rules set forth in section 1.41. See section 1.41(h). Moreover, if a corporation's articles or bylaws provide different notice requirements, those requirements, if not inconsistent with the Act, are valid. For example, bylaws may provide more stringent notice requirements for a meeting of the board than those set forth in section 8.22.
SOUTH CAROLINA REPORTERS' COMMENTS
There is no comparable provision in the former provisions of Chapter 31, Title 33. This section is not identical to the notice provision for business corporations, although some of the provisions are similar. See Section 33-1-410. Notice is effective after placed in the mail according to the procedures specified in this section or otherwise when given, e.g. when a broadcast is made or someone has been told of a meeting. This section varies from the Model Act in a number of ways. Oral notice is limited. The South Carolina language only permits oral notice if it is "reasonable under the circumstances." Broadcast transmission is specifically defined as oral notice. Section 33-31-141(b) provides that notice may be given by "facsimile transmission." If notice is not mailed by first class (e.g., civic club bulletin) it will be deemed effective 15 days (not 30) after properly being mailed. Section 33-31-141(d)(4) provides for 15 days rather than 30 days. Proof of mailing under this section would be made by affidavit. The Model Act states that proof would be from the postmark which is unavailable to the sender. If the sender provides an affidavit of mailing or other proof of mailing (or other notice), the burden will be on the party who claims that mailing (or other notice) was not made.
Section 33-31-150. Private foundations.
Except where otherwise determined by a court of competent jurisdiction, a corporation that is a private foundation as defined in Section 509(a) of the Internal Revenue Code:
(a) shall distribute such amounts for each taxable year at such time and in such manner as not to subject the corporation to tax under Section 4942 of the Internal Revenue Code;
(b) may not engage in any act of self-dealing as defined in Section 4941(d) of the Internal Revenue Code;
(c) may not retain any excess business holdings as defined in Section 4943(c) of the Internal Revenue Code;
(d) may not make any taxable expenditures as defined in Section 4944 of the Internal Revenue Code.
(e) may not make any taxable expenditures as defined in Section 4945(d) of the Internal Revenue Code.
OFFICIAL COMMENT
Under section 508(e)(1) of the Internal Revenue Code, a private foundation (as defined in section 509(a)) is not exempt from federal income tax under section 501(a) unless its governing instrument includes provisions the effects of which are:
(1) to require its income for each taxable year to be distributed at such time and in such manner as not to subject the foundation to tax under section 4942; and
(2) to prohibit the foundation from engaging in any act of self-dealing (as defined in section 4941(d)), from retaining any excess business holdings (as defined in section 4943(c)), from making any investments in such manner as to subject the foundation to tax under section 4944, and from making any taxable expenditures (as defined in section 4945(d)).
Section 1.508.3(d) of the Income Tax Regulations provides that a private foundation's governing instrument is deemed to conform with the requirements of section 508(e) of the Code if valid provisions of state's law have been enacted which either require the foundation to comply with the provisions of section 508(e)(1), or treat the required provisions as contained in the foundation's governing instrument.
Section 508(e)(2) of the code provides that the requirements of paragraph 1 of the section do not apply to a foundation organized before January 1, 1970 which has been excused from complying with the requirements of paragraph 1 by a court order secured in a proceeding begun before January 1, 1972.
Under the applicable Income Tax Regulation (section 1.508(3)(d)), section 1.50 requiring a corporate foundation to comply with the provisions of section 508(e) of the Code satisfies the requirement that a foundation's governing instrument include such provisions. The section applies only to foundations which are corporations, and does not satisfy the requirements of section 508(e) in the case of trusts or other entities which qualify as private foundations under section 509(a) of the Code.
The introductory clause "Except where otherwise provided by a court of competent jurisdiction" incorporates the exception specified under paragraph 2 of section 508(e) for foundations organized prior to January 1, 1970 which have been relieved from the requirements of paragraph 1 by a timely judicial proceeding.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is very similar to former Section 33-31-310. The former statute stated that these provisions are incorporated into the articles - but this new statute simply states that these requirements govern the corporation. No change was intended by this rewording. The former statute also provided that certain acts, such as "taxable expenditures" were only wrongful if they would result in a tax. This proposed Model Act language makes all such acts, whether or not a tax will result, as being impermissible. Again, no substantive change is intended. Non-Model Act language is used to refer to the Internal Revenue Code.
The former statutes also included three provisions related to Section 33-31-310 (namely, former Sections 33-31-320 through 33-31-340). These additional provisions have been retained as Sections 33-31-151, 33-31-152, and 62-7-507.
Section 33-31-151. Express amendment excluding application of Section 33-31-150.
A corporation may amend its articles of incorporation expressly to include the application of Section 33-31-150, or any portion of that section.
OFFICIAL COMMENT
None
SOUTH CAROLINA REPORTERS' COMMENTS
This provision was formerly contained in Section 33-31-320 and has been renumbered as Section 33-31-151 to come within the scheme of this revised act.
Section 33-31-152. Rights of State are not impaired.
Nothing in Sections 33-31-150, 33-31-151, 62-7-506, and 62-7-507 impairs the rights and powers of the courts or the Attorney General of this State with respect to a corporation.
OFFICIAL COMMENT
None
SOUTH CAROLINA REPORTERS' COMMENTS
This provision was formerly contained in Section 33-31-340 and has been renumbered as Section 33-31-152 to come within the scheme of this revised act.
Section 33-31-160. Judicial relief.
(a) If for any reason it is impractical or impossible for a corporation to call or conduct a meeting of its members, delegates, or directors, or otherwise obtain their consent, in the manner prescribed by its articles, bylaws, or this chapter, then upon petition of a director, officer, delegate, member, or the Attorney General, the court of common pleas for the county in which the principal office designated on the last filed notice of change of principal office, articles, or application for authority to transact business is located, or if none within South Carolina, then the Richland County Court of Common Pleas, may order that such a meeting be called or that a written ballot or other form of obtaining the vote of members, delegates, or directors be authored, in such a manner as the court finds fair and equitable under the circumstances.
(b) The court, in an order issued pursuant to this section, shall provide for a method of notice reasonably designed to give actual notice to all persons who would be entitled to notice of a meeting held pursuant to the articles, bylaws, and this chapter, whether or not the method results in actual notice to all such persons or conforms to the notice requirements that would otherwise apply. In a proceeding under this section, the court may determine who the members or directors are.
(c) The order issued pursuant to this section may dispense with any requirement relating to the holding of or voting at meetings or obtaining votes, including any requirement as to quorums or as to the number or percentage of votes needed for approval, that would otherwise be imposed by the articles, bylaws, or this chapter.
(d) Whenever practical, any order issued pursuant to this section shall limit the subject matter of meetings or other forms of consent authorized to items, including amendments to the articles or bylaws, the resolution of which will or may enable the corporation to continue managing its affairs without further resort to this section. However, an order under this section may also authorize the obtaining of whatever votes and approvals are necessary for the dissolution, merger, or sale of assets.
(e) Any meeting or other method of obtaining the vote of members, delegates, or directors conducted pursuant to an order issued under this section and that complies with all the provisions of such order, is a valid meeting or vote, as the case may be, and has the same force and effect as if it complied with every requirement imposed by the articles, bylaws, and this chapter.
OFFICIAL COMMENT
Section 1.60 provides an escape valve allowing nonprofit corporations to conduct meetings or obtain the consent of members, delegates or directors when it is otherwise impractical or impossible to do so. For example, a corporation may have a high quorum requirement preventing it form holding a meeting of members because the required number of members won't attend a meeting. It may have inaccurate records and be unable to identify its members or directors. The section allows directors, officers, delegates, members or the attorney general to petition the appropriate court for an order allowing the members or directors to vote or hold a meeting even if the order dispenses with requirements of the Model Act, the articles or bylaws concerning voting or holding meetings. The court in exercising its discretion should provide a procedure that is fair and equitable under all the circumstances.
Judicial relief should not be granted under this section if the nonprofit corporation has duly adopted a viable method for holding meetings or obtaining consent. In a hierarchical church, for example, the church hierarchy may be empowered to determine the manner of holding meetings or obtaining consent.
Whenever practical the court order should limit the matters considered to those matters which will allow the corporation to continue its activities without further resort to section 1.60. Once the impediment to member or director action is removed, the members and directors can act without court aid.
If the corporation cannot locate or identify the members or directors, the court is empowered to authorize notice by any method reasonably designed to give actual notice even if the method does not result in actual notice or comply with the notice requirements that would otherwise apply. in appropriate cases, notice to members or directors may be by publication. See section 1.41(b).
SOUTH CAROLINA REPORTERS' COMMENTS
This section is entirely new and has no counterpart in the South Carolina Business Corporation Act. Although the language of this Section 33-31-160 grants the court discretionary authority as to whether or not it will hear a petition for judicial relief, it was the clear intent of the legislature that if after two consecutive notices had been given in any manner authorized by Section 33-31-141 calling either a meeting of the members or the directors, and any person certifies that there was no quorum for any such called meeting, the court of common pleas upon a complaint filed by any person identified in Section 33-31-160(a) shall grant a hearing and shall endeavor to provide the relief as specified in this Section 33-31-160. Likewise, if any person who was elected as an officer, director, or delegate (and whose position has not been affirmatively terminated by appropriate action of the corporation) certifies to the court that it is impractical to determine the identify of either a majority of the members or directors of the corporation, and he or she petitions the court for relief as provided in this Section 33-31-160, the court shall grant a hearing and endeavor to provide the relief as specified in this Section 33-31-160. These are merely examples of situations which will trigger the court's obligation to hear a complaint filed under this section and are not the exclusive situations in which the court has a duty to hear a complaint filed pursuant to Section 33-31-160.
Section 33-31-170. Attorney General.
(a) The Attorney General must be given notice of the commencement of any proceeding that this chapter authorizes the Attorney General to bring but that has been commenced by another person.
(b) Whenever a provision of this chapter requires that notice be given to the Attorney Ggeneral before or after commencing a proceeding or permits the Attorney General to commence a proceeding:
(1) if no proceeding has been commenced, the Attorney General may take appropriate action including, but not limited to, seeking injunctive relief;
(2) if a proceeding has been commenced by a person other than the Attorney General, the Attorney General, as of right, may intervene in the proceeding.
OFFICIAL COMMENT
Subsection (a) requires that the attorney general be given notice of any proceeding that could have been brought by the attorney general, but is commenced by another person. Subdivision (b)(1) grants the attorney general independent authority to act when notice is required under subsection (a) or any other provision of the Model Act. This carries out the policy implicit in such notice requirements by specifically empowering the attorney general to protect the public interest when it may be adversely affected. Subdivision (b)(2) permits the attorney general to intervene in any proceeding that the attorney general could have commenced but that was brought by another person, such as a director, or member. To protect the public interest, the attorney general may either commence a proceeding or intervene in a proceeding commenced by another person who is authorized to do so.
Section 1.70 does not detract from the jurisdiction the attorney general may otherwise have in states adopting the Model Act.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is entirely new and has no counterpart in the South Carolina Business Corporation Act. Former Sections 33-31-410 through 33-31-450 granted the Attorney General rights to investigate the organization, conduct, and management of any nonprofit corporation. The information obtained was confidential and was obtained upon written request. Failure to comply with an investigation would result in the forfeiture of the corporation's charter. These provisions have been retained as Sections 33-31-171, 33-31-172, and 33-31-173. This new section expands upon these former/retained sections. Other rights are specified in other sections, e.g., the right to dissolve a nonprofit corporation which is abusing its authority is granted in Section 33-31-1430.
Section 33-31-171. Investigation by Attorney General authorized.
The Attorney General, or any of his assistants or representatives when authorized by the Attorney General, may make investigations into the organization, conduct, and management of a nonprofit corporation, domestic or foreign, operating in this State. Every such corporation shall permit the Attorney General or any of his authorized assistants or representatives to examine and take copies of all its books, accounts, records, minutes, letters, memoranda, documents, checks, vouchers, telegrams, articles, bylaws and any and all other records of any such corporation as often as the Attorney General may deem it necessary to show or tend to show that the corporation has been, or is, engaged in acts or conduct in violation of its charter rights and privileges or in violation of any law of this State.
SOUTH CAROLINA REPORTERS' COMMENTS
This is neither a Model Act provision nor similar to any provision in the South Carolina Business Corporation Act. It is essentially identical with the former Section 33-31-410 of the 1976 Code.
Section 33-31-172. Requesting permission to make examinations.
A written request must be made to the president or another officer of the nonprofit corporation at the time the Attorney General or his assistants or representatives desire to examine the affairs of the corporation, and it is the duty of the officer or his agent to immediately permit the Attorney General, or his authorized assistants or representatives, to inspect and examine any of the documents of the corporation.
SOUTH CAROLINA REPORTERS' COMMENTS
This is neither a Model Act provision nor similar to any provision in the South Carolina Business Corporation Act. It is essentially identical with the former Section 33-31-420 of the 1976 Code.
Section 33-31-173. Use of information is restricted.
The Attorney General, or his authorized assistants or representative, may not make public or use any document, copy, or other information derived in the course of an examination authorized by Sections 33-31-170 through 33-31-175, except in a judicial proceeding to which the State is a party or in a suit by the State to revoke the certificate of authority or cause the articles of the corporation to be forfeited or to collect penalties for a violation of the laws of this State or for the information of any officer of this State charged with the enforcement of its laws.
SOUTH CAROLINA REPORTERS' COMMENTS
This is neither a Model Act provision nor similar to any provision in the South Carolina Business Corporation Act. It is essentially identical with the former Section 33-31-430 of the 1976 Code.
Section 33-31-174. Forfeiture of right to operate for refusing examination.
A foreign nonprofit corporation operating in this State under certificate of authority granted under the laws of this State, or any officer or agent thereof, or any domestic nonprofit corporation which fails or refuses to permit the Attorney General or his authorized assistants or representatives to examine or take copies of any of its documents as provided in Sections 33-31-170 through 33-31-175, whether they be situated within or without this State, shall forfeit its right to operate in this state and its articles of incorporation or certificate of authority shall be canceled or forfeited.
SOUTH CAROLINA REPORTERS' COMMENTS
This is neither a Model Act provision nor similar to any provision in the South Carolina Business Corporation Act. It is essentially identical with the former Section 33-31-440 of the 1976 Code.
Section 33-31-175. Provisions are cumulative.
The provisions of Sections 33-31-170 through 33-31-175 are cumulative of all other laws now in force in this State and may not be construed as repealing any other means afforded by law for securing testimony or inquiring into the affairs of domestic or foreign nonprofit corporations.
SOUTH CAROLINA REPORTERS' COMMENTS
This is neither a Model Act provision or similar to any provision in the South Carolina Business Corporation Act. It is essentially identical with the former Section 33-31-450 of the 1976 Code.
Section 33-31-180. Religious corporations - Constitutional protections.
If religious doctrine governing the affairs of a religious corporation is inconsistent with the provisions of this chapter on the same subject, the religious doctrine controls to the extent required by the Constitution of the United States or the Constitution of South Carolina, or both.
OFFICIAL COMMENT
As a result of history, policy, and constitutional principles, religious corporations are entitled to protections not available to business or other nonprofit corporations. Courts have been reluctant to interfere with the internal affairs of religious organizations. They will not decide between conflicting religious doctrine or determine the "true" faith. However, courts have often decided internal property disputes by applying neutral principles of contract or corporate law to organizational documents of religious organizations. See Mansfield, "The Religious Clauses of the First Amendment and the Philosophy of the Constitution," 72 Calif. L. Rev. 847 (1984); Ellman, "Driven from the Tribunal: Judicial Resolution of Internal Church Disputes," 69 Calif. L. Rev. 1878 (1981).
This reluctance is based in part on the First Amendment to the United States Constitution which provides: "Congress shall make no law respecting an establishment of religion, or prohibiting the exercise thereof . . . ." The establishment clause applies to states [Everson v. Board of Education, 330 U.S. 1 (1947)], as does the free exercise clause [Cantwell v. Connecticut, 310 U.S. 296 (1940]. The Model Act attempts to walk the thin line between the establishment clause and the free exercise clause. It allows religious corporations to be formed and gives them the same rights and privileges as other corporations. The Model Act avoids interfering with the free exercise of religion by negating or allowing religious corporations to negate provisions of the Model Act that might result in excessive entanglement in religious activities by the state. By limiting state intrusion the Model Act uses the least restrictive means to provide an orderly structure in which religious corporations can be formed and operate.
Section 1.80 is based on the recognition that some provisions of the Model Act may conflict with the United States Constitutions or state constitutions. The exact scope of constitutional imitations is less than clear and is subject to debate. Section 1.80 overcomes this difficulty by providing that to the extent religious doctrine applicable to a religious corporation sets forth provisions inconsistent with provisions of the Model Act, the religious doctrine law shall control to the extent required by the United States Constitution or applicable state constitutions. Section 1.80 was derived from 15 Pa. C.S.A. section 7106.
While in one sense section 1.80 simply states the obvious, it is helpful to remind those dealing with the religious corporations that they must consider constitutional mandates. The approach of section 1.80 also allows a case-by-case determination of difficult questions and automatically conforms the Model Act to the opinions of the United States Supreme Court and the applicable state courts.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is entirely new. As noted in Section 33-31-140, there is no limiting definition as to what entities may be incorporated as religious corporations. The main distinction in regard to South Carolina law between a religious corporation and a public benefit corporation is that there is more public monitoring of religious corporations, particularly by the Attorney General. This is in recognition of the separation of church and state.
Section 33-31-201. Incorporators.
One or more persons may act as the incorporator or incorporators of a corporation by delivering articles of incorporation to the Secretary of State for filing.
OFFICIAL COMMENT
Section 2.01 allows one or more persons to incorporate a corporations by delivering to the secretary of state the articles of incorporation. The term "person" is broadly defined in section 1.40(25) to allow a wide variety of individuals or entities to serve as incorporators. Anyone serving as an incorporator must sign the original of the articles of incorporation. Sections 1.20(f), (g), and 2.02(c).
Section 1.20(i) requires an original and one exact or conformed copy of the articles to be delivered to the secretary of state. An "exact" copy is a photographic or similar reproduction of the executed original articles. A "conformed" copy is a copy of the original articles on which the existence of any signature of signatures is noted. The prior law required delivery of "articles of incorporation in duplicate" to the secretary of state. While this is no longer a requirement, a person submitting duplicate originals to the secretary of state would meet the requirement of having filed an original and a "conformed" copy.
An exact or conformed copy of the articles is required so that the incorporator(s) will have a record of the incorporation. See the Official Comment to Section 2.03.
In addition to filing the articles, the incorporators are authorized to complete the formation of the corporation as set forth in section 2.05.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is a significant modification from prior practice but in conformity with the South Carolina Business Corporation Act (Section 33-2-101). Note that a corporation may serve as the incorporator since the definition of "person" includes an entity (Section 33-31-140). If desired, the incorporators may verify the filing but this is not required. Note that Section 33-31-129 mandates both criminal penalties and civil liabilities for any wrongful statement in a filed document.
Section 33-31-202. Articles of incorporation.
(a) The articles of incorporation must set forth:
(1) a corporate name for the corporation that satisfies the requirements of Section 33-31-401;
(2) one of the following statements:
(i) This corporation is a public benefit corporation.
(ii) This corporation is a mutual benefit corporation.
(iii) This corporation is a religious corporation;
(3) the street address of the corporation's initial registered office with zip code and the name of its initial registered agent at that office;
(4) the name, address, and zip code of each incorporator;
(5) whether or not the corporation will have members;
(6) provisions not inconsistent with law regarding the distribution of assets on dissolution; and
(7) the address, including zip code, of the proposed principal office for the corporation which may be either within or outside South Carolina.
(b) Unless the articles provide otherwise, no director of the corporation is personally liable for monetary damages for breach of any duty to the corporation or members. However, this provision shall not eliminate or limit the liability of a director:
(1) for any breach of the director's duty of loyalty to the corporation or its members;
(2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law;
(3) for any transaction from which a director derived an improper personal benefit; or
(4) under Sections 33-31-831 through 33-31-833.
This provision shall not eliminate or limit the liability of a director for an act or omission occurring before the date when the provision becomes effective.
(c) The articles of incorporation may set forth:
(1) the purpose for which the corporation is organized which may be, either alone or in combination with other purposes, the transaction of any lawful activity;
(2) the names, addresses, and zip codes of the individuals who are to serve as the initial directors;
(3) provisions not inconsistent with law regarding:
(i) managing and regulating the affairs of the corporation;
(ii) defining, limiting, and regulating the powers of the corporation, its board of directors, and members, or any class of members; and
(iii) the characteristics, qualifications, rights, limitations, and obligations attaching to each or any class of members;
(4) any provision that under this chapter is required or permitted to be set forth in the bylaws.
(d) Each incorporator and director named in the articles must sign the articles.
(e) The articles of incorporation need not set forth any of the corporate powers enumerated in this chapter.
OFFICIAL COMMENT
1. Introduction
Section 2.02 allows a simple one- or two-page document to serve as a corporation's articles of incorporation. While there are numerous standard provisions that must be contained in the articles, there is no single standard form of articles.
Section 2.02 requires certain provisions to be in the articles of incorporation and allows the articles to contain other optional provisions. If no limitation is placed on the duration of the corporation and no optional provisions are contained in the articles, the corporation will have perpetual existence, the purposes set forth in section 3.01 and the broad powers enumerated in section 3.02. However, as a result of sections 2.02(b)(3)(ii) and 3.02, a corporation may limit its duration and corporate powers.
To meet the requirements of Internal Revenue Code section 501 or equivalent state tax provisions, the articles of many nonprofit corporations must contain limitations on corporate activity and restrictions on the use and distribution of corporate assets. In addition, the articles of all nonprofit corporations must contain provisions dealing with the disposition of corporate assets on dissolution.
2. Required Provisions
The articles of incorporation must contain the following information:
(a) A corporate name that meets the requirements of section 4.01.
(b) A statement that the corporation is a public benefit, a mutual benefit or a religious corporation. This election requires those forming a nonprofit corporation to choose between public benefit, mutual benefit and religious status at the time of incorporation. See the Introduction to the Model Act for comments on the significance of this distinction. This election will avoid confusion as to the status of nonprofit corporations under the Model Act. See Los Angeles County Pioneer Society v. Historical Society of Southern California, 40 Cal. 2d 852, 257 P.2d 1 (1953); Lynch v. Spilman, 67 Cal. 2d 251, 62 Cal. Rptr. 12, 431 P.2d 636 (1967). Assets held by public benefit and religious corporations may not be distributed to members, directors, officers or controlling persons in violation of section 13.01 and may only be distributed on dissolution as set forth in section 14.06. If a mutual benefit corporation holds assets in charitable trust, the same limitations apply to distribution of those assets. Other assets held by mutual benefit corporations may not be distributed to members, directors, officers or controlling persons until the corporation dissolves. See chapter 13 that governs distributions.
(c) The address of the corporation's initial registered office and the name of its initial registered agent.
(d) The name and address of each incorporator.
(e) Whether or not the corporation will have members. The term "members" has a limited meaning which is set forth in section 1.40(17). Many nonprofit corporations do not have members. They operate with a self-perpetuating board of directors, delegates, or some other system. Those corporations that will not have members must so indicate in their articles. Those corporations that will have members must indicate that there will be members. However, the bylaws and not the articles usually set forth the characteristics, qualifications, rights, limitations and obligations of the members. See initial Comment 3(c)(ii) regarding optional provisions setting forth rights and obligations of members.
(f) The disposition of assets on dissolution. A nonprofit corporation, unlike a business corporation, must provide for the distribution of its assets on dissolution. If a business corporation dissolves, its net worth will be distributed to its shareholders. Upon dissolution of a nonprofit corporation, its assets are not necessarily distributed to its members. In fact, the assets of public benefit and religious corporations and organizations that have section 501(c)(3) status generally cannot be distributed to members. See chapter 13 and section 14.06.
Some provision for distribution must be set forth in a corporation's articles. There are a wide variety of dissolution provisions ranging from those specifying a specific organization to those authorizing the directors to choose any organization or to choose among various organizations or types of organizations. A dissolution provision must be consistent with the type of tax exempt status the corporation is seeking.
3. Optional Provisions
Section 2.02(b) allows the article to contain a number of optional provisions. In determining whether to insert an optional provision in the articles, a person forming a corporation should consider the advantages and disadvantages of making the provision subject to public scrutiny, the procedure necessary to amend articles, and the requirements of federal and state income and property tax laws.
Optional provisions include:
(a) A broad or a limited purpose clause. To obtain tax exempt status under federal and state law, many nonprofit corporations will elect to limit their corporate purpose. As the tax laws differ for various types of organizations and change from time to time, it is not feasible to mandate particular limitations. Those forming a corporation, however, should be careful not to limit the purposes or impose more limitations than required by the tax laws unless they have a particular reason to do so. For example, while it may be necessary to irrevocably dedicate assets of a section 501(c)(3) organization to charitable, educational, or certain other activities, it may not be necessary to irrevocably dedicate a corporation's assets to such purposes in order to obtain other exempt status. By irrevocably dedicating assets when such dedication is not required, the incorporators may inadvertently impress the assets of a corporation with unintended restrictions and obligations. While a narrow purpose clause may serve to identify the existence of the corporation, a narrow purpose clause may unduly restrict corporate activity. For example, if the articles limit the corporate purpose to operating a hospital, the corporation may not be able to only operate outpatient clinics. See Queen of Angels Hospital v. Younger, 66 Cal. App. 3d 359, 136 Cal. Rptr. 36 (1977).
(b) The names and addresses of the individuals who are to serve as initial directors. Section 2.02(e) requires all individuals named as initial directors to sign the articles to evidence their consent to serving as directors. This requirement prevents people from being named as initial directors without their consent. This problem is more acute in nonprofit corporations than in business corporations. In nonprofit corporations incorporators sometimes name respected or famous individuals as directors in the hope that they will serve as directors.
If initial directors are named in the articles, they have the powers set forth in section 2.05 and may continue to serve as directors subject to being replaced as set forth in the Model Act or the bylaws of the corporation.
(c) Provisions not inconsistent with the law regarding management or regulation of the affairs of the corporation including.
(i) Defining, limiting, and regulating the powers of the corporation, its directors and members. It is not necessary to set forth any corporate powers enumerated in the Act. See section 3.02.
(ii) The characteristics, qualifications, rights, limitations, and obligations of the members. Typically, provisions relating to members' rights and obligations are set forth in the bylaws of a corporation and not in its articles. This is for two reasons. First, it allows membership provisions to be contained in a private or semi-private document and not in the articles that are filed with the secretary of state. Second, amendments to the article always require a vote of members which may be cumbersome and time consuming. Compare sections 10.01-10.08 with sections 10.20-10.22. Thus, more privacy and greater flexibility are obtained by putting membership provisions in bylaws.
(iii) Any provision that under the Act is required or permitted to be set forth in the bylaws. See the Official Comment to Section 2.06.
SOUTH CAROLINA REPORTERS' COMMENTS
1. Similarities to former statutes
Although this is a major revision, both the old law (found in prior Chapter 31, Title 33) and this new law require the name of the corporation to be on the articles. Whereas the old law required a specific purpose to be identified, the new law simply requires the corporation to identify whether it is a public benefit, mutual benefit, or religious corporation, and permits the articles to identify the purpose or purposes for which the corporation is organized which may be, either alone or in combination with other purposes, the transaction of any lawful activity. The old law and new law both permit the inclusion of certain "other provisions." The corporation's powers are not specified in the articles; however, in addition to irrevocably dedicating its assets as described in the Official Comments to Section 33-31-202 and as contained in the language in Section 33-31-1406(a)(6), if the organization intends to qualify for exemption within the meaning of Section 501(c)(3) of the Internal Revenue Code, its articles must limit its purposes to those specified in Section 501(c)(3) and must limit its powers to these within the scope of Section 501(c)(3). Since most corporations will not file tax returns and will not file either an initial or subsequent annual reports, different from the Model Act but in keeping with prior South Carolina procedure, each corporation must specify the address of its principal office in the articles.
Some nonprofit corporations such as Rotary clubs, the Kiwanis, and others, will not have an actual permanent location. They will have a usual place of meeting and may maintain a mailbox or a member's address as their mailing address. It is anticipated that the Secretary of State will liberally construe the requirement in this section that the organization list its "street address." In situations where the organization does not actually own or lease property, it is assumed that the filing will be acceptable if it specifies the usual mailing address which the organization uses. The organization, if it desires, could also specify its usual date, time, and place of meeting - or merely its usual place of meeting.
2. Items removed
As noted in the preceding paragraph, the actual purpose of the nonprofit corporation does not have to be specified as was formerly true. (The existence of an additional catch-all "purpose" to engage in any business enterprise was deemed to be uncertain and unclear thus forming one of the reasons to deny a charter to the Ku Klux Klan, 1956-57 Op.S.C. Attorney General, 179 (April 8, 1957.) The old law required the articles to be filed by two or more officers or agents elected or appointed to supervise the corporation whose residence addresses had to be identified. The new law simply provides for execution by at least one incorporator. There is no longer a requirement to specify the names and residences of all officers, mangers, trustees, directors, or other officers and agents. (The names and addresses of the directors may be listed on the articles, and if so listed, the directors must sign the articles.)
3. Items added
The name must meet the requirements of Section 33-31-401. The street address and name of the initial registered agent at that office must be identified. The articles must designate whether or not the corporation will have members, and provisions regarding the distribution of assets on dissolution. Various optional items may be included. Provisions not inconsistent with law can be included in regard to (a) managing and regulating the affairs of the corporation; (b) defining, limiting, and regulating the powers of the corporation, its board of directors, and members (or any class of members); and (c) the characteristics, qualifications, rights, limitations and obligations attaching to each or any class of members. Any provision that under the Act is required or permitted to be set forth in the bylaws can be placed in the articles.
A director immunity provision is adopted as paragraph (b). Each corporation automatically includes this provision in its articles unless the incorporator affirmatively elects not to include it. This provision only protects against monetary damages and does not relate to injunctive or equitable remedies. Likewise, certain wrongful conduct is not protected. However, grossly negligent conduct is protected by this provision. The philosophy behind this protection is that most nonprofit corporate directors are volunteers serving at no or nominal compensation.
Section 33-31-834 also provides a very broad grant of immunity to directors of certain 501(c)(3) organizations and other entities. Section 33-55-210 provides certain immunities to true charitable organizations and possibly to their members. A discussion of these provisions is contained in the South Carolina Reporters' Comments to Section 33-31-204.
In adopting this Section 33-31-202(b), it was the legislative intent that the protections granted by the immunity provisions in these three sections are to be applied cumulatively. If any one of the sections contains an immunity provision which would protect a director (or member) against a claim, that section shall be applied even though the challenged behavior is not immunized under another section. For example, the directors of homeowner mutual benefit corporations are likely not protected by Section 33-31-834. However, if the challenged behavior of the homeowner director is immunized by the provisions of this Section 33-31-202(b), this section would in fact apply and protect the director of the homeowner mutual benefit corporation. Likewise, although grossly negligent conduct is not immunized by Section 33-31-834, it is pursuant to Section 33-31-202(b).
4. Tax exempt status
A public benefit or religious corporation will not be automatically exempt from federal or state income tax. If income tax exemption is desired, the articles should limit the purpose and powers of the corporation and irrevocably dedicate its assets to tax exempt purposes as required by tax laws, especially regulations adopted under Internal Revenue Code Section 501(c)(3). For example, the articles should contain language providing for the distribution of its assets upon dissolution in accordance with section 33-31-1406(6).
5. Provisions in other sections
Each nonprofit corporation is presumed to have perpetual existence. Section 33-31-302. The effective date of a filed document is controlled by Sections 33-31-123 and 33-31-203. Incorporators are described in Section 33-31-201. If the articles (or other controlling document, such as the bylaws) fail to provide how the assets will be distributed at dissolution, default provisions are provided in Section 33-31-1406(6) for public benefit corporations, and in Section 33-31-1406(7) for mutual benefit corporations.
6. Optional provisions
If the members desire, for example, to transfer the authority to appoint officers from the board to themselves, the provisions of subsection (c)(3)(i) and section 33-31-801(c) grant them this power. The members could place a provision in the articles which simply states that the members, instead of the directors, have the exclusive power to appoint all of the corporation's officers. See also the comments to section 33-31-801. :
Section 33-31-203. Incorporation.
(a) Unless a delayed effective date is specified, the corporate existence begins when the articles of incorporation are filed.
(b) The Secretary of State's filing of the articles of incorporation is conclusive proof that the incorporators satisfied all conditions precedent to incorporation except in a proceeding by the State to cancel or revoke the incorporation or involuntarily dissolve the corporation.
OFFICIAL COMMENT
1. Corporate Existence
Unless a delayed effective date is specified, a de jure corporation is formed when the secretary of state files the articles. Typically, the articles are stamped and dated as "filed" when they are delivered to the secretary of state even if internal procedures of the secretary of state require additional processing time. See section 1.25. Those forming a corporation may, however, request that the corporation's existence begin at a specified time following delivery of the articles to the secretary of state.
2. Proof of Incorporation
Pursuant to section 2.03(b), the secretary of state's filing of the articles is conclusive proof that all conditions precedent to incorporation have been met except in a proceeding brought by the state.
SOUTH CAROLINA REPORTERS' COMMENTS
Nonprofit corporations always have enjoyed a delayed effective date in that the "declaration" ("articles") could not be even filed until three newspaper announcements had run (former Section 33-31-20). The prior law, former Section 33-31-60, granted substantial discretion to the Secretary of State who formerly was to investigate the merits of the proposed nonprofit corporation. Together with Section 33-31-125, this new section makes formation of a nonprofit purely mechanical: If promoters comply with the form and mechanics of the statutory filing requirements, the Secretary of State "shall" file proffered articles, which become effective (so that the corporate existence begins) on the date of filing. This eliminates even any nominal discretion the Secretary of State may have previously enjoyed. The new law follows the South Carolina Business Corporation Act, Section 33-2-103, and now states that the corporation is formed when filed with the Secretary of State unless the parties desire a delayed effective date. Note that the delayed effective date cannot be longer than ninety days, Section 33-31-123. Subsection (b) of this section is more precise in its predecessor section (former Section 33-31-90) in providing that, once filed, the corporation is formed even though there is an error in the document.
Section 33-31-204. Liability for preincorporation transactions.
All persons purporting to act as or on behalf of a corporation, knowing there was no incorporation under this chapter, are jointly and severally liable for all liabilities created while so acting except for any liability to any person who knew or reasonably should have known that there was no incorporation.
OFFICIAL COMMENT
There is a wide variety of factual situations in which third parties seek to impose liability on persons purporting to act as or on behalf of a corporation that has not been formed. There are numerous situations in which such liability would lead to an unjust result. This is particularly true in the nonprofit area where corporations are not operated for personal gain and where members are often less sophisticated than shareholders.
At one extreme, section 2.04 by implication protects individuals who erroneously and in good faith believe that a corporation has been formed. At the other extreme, section 2.04 imposes liability on individuals who purport to act as or on behalf of a corporation knowing that it has not been formed and knowing that the party with whom they are dealing believes a corporation exists. In the myriad of factual patterns falling between these extremes, a court may deny recovery when it is equitable to do so after considering all the circumstances. For example, if a third party insisted that a contract be signed on behalf of a corporation knowing that the corporation had not been formed, a court could apply equitable principles and not impose personal liability on the individual who signed the contract.
Even if personal lability is appropriate, it should not be imposed on all members of the corporation. Not all members of nonprofit unincorporated associations are necessarily liable for the obligations of the association. See Libby v. Perry, 311 A.2d 527 (Me. 1973); Steuer v. Phelps, 41 Cal. App. 3d 468, 116 Cal. Rptr. 61 (1974).
SOUTH CAROLINA REPORTERS' COMMENTS
1. Comparison to South Carolina Business Corporation Act
Section 33-2-104 of the South Carolina Business Corporation Act is the counterpart to this section. (It formerly applied to nonprofit corporations.) There are now significant differences between the two statutes. The South Carolina Business Corporation Act adopts a stringent test that makes it likely that a person acting prior to the formation of a corporation will be held personally liable for the debts of the purported entity. However, many nonprofit corporations will be churches and other bona fide charities. Likely true innocent mistakes will be made in forming these entities. It seems that as a matter of policy that it is not desirable to hold persons liable for the debts of these entities if simple or bona fide mistakes are made. Therefore, the "more liberal" section proposed in the Model Nonprofit Act was adopted for nonprofit corporations.
This section intends to insulate from liability persons who take action as an nonprofit corporation not knowing that the entity has not yet been formed. If there is no entity, those persons purporting to act on behalf of the entity will likely be deemed acting as members (or officers-directors) of an association. Without this section there would be a risk that they would be personally liable for the pre-incorporation activities of the purported nonprofit corporation.
2. Non-Model Act provision
The last phrase of the section, "except for any liability to any person who know or reasonably should have known that there was no incorporation," is a non-Model Act provision. The purpose of this language is to give the organizers additional protection. If the claimant knew that there was no corporation then there is no reason to permit such party to recover against the individuals.
3. Liability of members of an association
a. Common law. Dicta in Crocker v. Barr, 295 S.C. 195, 367 S.E.2d 471 (App.1988), rev'd, 305 S.C. 406, 409 S.E. 2d 368 (1991), citing, Elliot v. Greer Presbyterian Church, 181 S.C. 84, 186 S.E. 651 (1936), and Medlin v. Ebenezer Methodist Church, 132 S.C. 498, 129 S.E. 830 (1925) states that "case law in South Carolina generally recognizes that members of any unincorporated association are jointly and severally liable for its obligations." See also, Hall v. Walters, 226 S.C. 430, 437, 85 S.E.2d 729 (1955).
b. Statutory liability. Whatever the status of the common law, there is a very dangerous statute:
Section 15-35-170. Judgments against unincorporated associations.
On judgment being obtained against an unincorporated association under process served as provided in Section 15-9-330 final process may issue to recover satisfaction of such judgment, and any property of the association and the individual property of any copartner or member thereof found in the State shall be liable to judgment and execution for satisfaction of any such judgment.
In addition to Section 15-35-170, Judge Bell recently made it clear that one can bring the members of the association into the action prior to a judgment being rendered by merely suing the association. Service on the individual members is not required. Graham v. Lloyd's of London, 296 S.C. 249, 371 S.E.2d 801 (App. 1988).
c. Members liable to their co-members. Not only may a member of an unincorporated association be liable for contracts entered between the association and third parties, for tortious wrongs committed by the association against a non-member, but he may also be liable for injuries suffered by a co-member. The case law in South Carolina on this point is still unclear. For example, church members may be personally liable, but this is somewhat unclear. Crocker v. Barr, 305 S.C. 406, 409 S. E. 2d 368 (1991). Union members may lose, and homeowner association members do lose. Murphy v. Yacht Cove Homeowners Association, 289 S.C. 367, 369, 345 S.E.2d 709 (1986).
d. Parent organizations may be liable for tortious acts done by members of a local unit or chapter. Not only may members of the association be personally liable, but there are two significant South Carolina cases which impose an "upstream" liability. In Ballou v. Sigma Nu General Fraternity, the "national organization" (itself an unincorporated association) was held responsible for the wrongful death (hazing) of a pledge at the University of South Carolina chapter of the fraternity (itself likely also another unincorporated association). Likewise in Easler v. Hejaz Temple of Greenville,285 S.C. 348, 329 S.E.2d 753 (1985) the court found the national masonic organization liable for injuries inflicted during initiation rites conducted by the local unincorporated chapter.
e. Unincorporated charities, their members, and directors are not fully protected by statute. There is a popular misconception that unincorporated "charities," and therefore their members, are protected from claims. There are two protective statutes, Sections 33-55-210 and 33-31-834, but there are serious gaps in both. Section 33-31-834 appeared as Section 33-31-180 in the prior statute.
Although churches and other "true" charities are protected in part by Section 33-55-210, notably not protected at all are country clubs, homeowner associations, and possibly civic clubs. Section 33-55-210 gives no protection at all to members for contract claims and there may be a question whether it protects the members (as contrasted to the "entity") from tort claims. A similar Ohio statute was deemed to grant merely an alternative remedy against the organization and did not replace the plaintiff's right to proceed directly against the members. Lyons v. American Legion Post #650 Realty Co., 172 Ohio St. 331, 175 N.E.2d 733 (1961). Section 33-55-210 was recently held to be constitutional Lazerson v. Hilton Head Hospital, Inc., et al. _S.C._, S.E.,2d_ (1994).
The directors of certain charitable entities are given certain protection by Section 33-31-834. An obvious weakness with Section 33-18-834 is that it does not protect either the members themselves or the entity (in the case of an incorporated body), see 1988 Op.S.C.Attorney General, 158 (#88-55). The only persons who are protected are the directors or those who function in that capacity. It would seem that high level officers would not be protected. Directors are only protected in cases of negligence. It would seem that if a problem is serious enough to consider a claim against the board, that many times the wrongful conduct would arguably be wanton or grossly negligent. Behavior of this type is not insulated. See, 1988 Op.S.C. Attorney General, 1558 (#88-55). Directors for various types of nonprofit corporations and associations are not protected by this statute. If the corporation is not a section 501(c)(3), (6), or (12) entity for tax purposes, the directors receive no help. Missing from this list and thus not protected are again homeowner associations, country clubs, and others. (No opinion was expressed in 1988 Op.S.C. Attorney General, 1558 (#88-55) as to whether the Directors of the Alumni Association's National Council of Clemson University were within the protected class.)
Section 33-31-205. Organization of corporation.
(a) After incorporation:
(1) if initial directors are named in the articles of incorporation, the initial directors shall hold an organizational meeting, at the call of a majority of the directors, to complete the organization of the corporation by appointing officers, adopting bylaws, and carrying on any other business brought before the meeting;
(2) if initial directors are not named in the articles, the incorporator or incorporators shall hold an organizational meeting at a call of a majority of the incorporators:
(i) to elect directors and complete the organization of the corporation; or
(ii) to elect a board of directors who shall complete the organization of the corporation.
(b) Action required or permitted by this chapter to be taken by incorporators at an organizational meeting may be taken without a meeting if the action taken is evidenced by one or more written consents describing the action taken and signed by each incorporator.
(5c) An organizational meeting may be held in or out of this State in accordance with Section 33-31-821.
OFFICIAL COMMENT
Section 2.05 provides alternative ways to complete the process of incorporation.
If initial directors have been named in the articles, they may complete the organization of the corporation at a meeting or by unanimous written consent. See sections 2.05(a) and 8.21. There is no reason to name initial "dummy" directors as the same function can be carried out and privacy maintained by use of incorporators.
The completion of the organization typically includes opening a bank account, applying for federal and state tax-exempt status, electing officers, adopting bylaws, providing for and admitting members, if any, applying for licenses from state and local authorities, obtaining an employer identification number, registering with the attorney general or other state authorities, and entering into arrangements and contracts for ongoing operations.
If initial directors have not been named in the articles, the incorporators at an organizational meeting may elect directors and complete the organization of the corporation. Section 2.05(a)(2). In completing the organization, incorporators should act with caution as they are responsible for their actions.
If no organizational meeting is held, the incorporators may act by signing a written approval of the actions they take. This procedure should be followed rather than preparing minutes of a meeting that does not take place.
SOUTH CAROLINA REPORTERS' COMMENTS
This section permits the initial directors either to hold an organizational meeting or to act by unanimous written consent as permitted by Section 33-8-210. This section is identical to the formerly applicable statute, Section 33-2-105 of the South Carolina Business Corporation Act. The former nonprofit statutes in Chapter 31, Title 33 had at best only vague references in former Section 33-31-100 as to how the corporation was to be organized.
Section 33-31-206. Bylaws.
(a) The incorporators or board of directors of a corporation shall adopt bylaws for the corporation.
(b) The bylaws may contain any provision for regulating and managing the affairs of the corporation that is not inconsistent with law or the articles of incorporation.
OFFICIAL COMMENT
A nonprofit corporation is required to adopt bylaws. The term "bylaws" has a broad meaning. See section 1.40(3). Failure to adopt bylaws will lead to much confusion and uncertainty about the internal structure and organization of the corporation. However, failure to adopt bylaws will not affect the de jure status of a corporation.
The bylaws may contain any provision regulating and managing the affairs of the corporation not inconsistent with law or the articles. If a nonprofit corporation has members, its bylaws frequently contain detailed provisions dealing with their characteristics, qualifications, rights, limitations and obligations. Such provisions may relate to voting rights procedures governing admission, expulsion, suspension and other matters. The bylaws may either specify the exact number of directors or specify that the number of directors may be fixed within a stated range by the board or the members. Additional provisions that may appear in bylaws include: provisions for distribution of assets on dissolution in addition to those required by the articles (see section 2.02(a)(7)); levying dues, fees and assessments; setting the fiscal year; notice and the mechanics of meetings of directors and members; indemnification of officers, directors and agents; conventions and appointing delegates, if any; the authority of the officers and the executive director, if any; procedures to be followed in regard to checks and bank accounts; keeping and inspecting corporate records; and provisions, not inconsistent with the Model Act or articles, for amending the bylaws.
The incorporators or initial directors should adopt the initial bylaws of a corporation prior to the admission of members. The Model Act contains specific procedures that must be followed to amend the bylaws or to repeal them and adopt new bylaws. See sections 10.20-10.22.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is identical to Section 33-2-106 of the South Carolina Business Corporation Act which previously governed nonprofit corporations.
A description of bylaws of the Piedmont Interstate Fair Association is contained in Bean v. Piedmont Interstate Fair Association, 222 F.2d 227 (4th Cir. 1955). In 1975-76 Op. S.C. Attorney General, 375 (#4514) it was determined that under the former law that members of nonprofit corporations could vote by proxy. This 1993 South Carolina Nonprofit Corporation Act specifically authorizes proxy voting in Section 33-31-724.
Section 33-31-207. Emergency bylaws and powers.
(a) Unless the articles provide otherwise, the directors of a corporation may adopt, amend, or repeal bylaws to be effective only in an emergency defined in subsection (d). The emergency bylaws, which are subject to amendment or repeal by the members, may provide special procedures necessary for managing the corporation during the emergency, including:
(1) how to call a meeting of the board;
(2) quorum requirements for the meeting; and
(3) designation of additional or substitute directors.
(b) All provisions of the regular bylaws consistent with the emergency bylaws remain effective during the emergency. The emergency bylaws are not effective after the emergency ends.
(c) Corporate action taken in good faith in accordance with the emergency bylaws:
(1) binds the corporation; and
(2) may not be used to impose liability on a corporate director, officer, employee, or agent.
(d) An emergency exists for purposes of this section if a quorum of the corporation's directors cannot readily be assembled because of some catastrophic event.
(e) A corporate director, officer, employee, or agent is not liable for deviation from normal procedures if the conduct was authorized by emergency bylaws adopted as provided in this section.
OFFICIAL COMMENT
In the absence of an article provision to the contrary, the directors may adopt, amend or repeal bylaws to be effective only in the event of an emergency. Emergency bylaws are normally adopted prior to the existence of the emergency as defined in section 2.07(d). An emergency exists if a quorum of a corporation's directors cannot readily be achieved because of a catastrophe. A catastrophe could include an attack upon the United States or a serious fire or flooding that makes it difficult or impossible to obtain a quorum of the board. The emergency bylaws may provide special procedures necessary for managing the corporation during the emergency.
To provide incentive for adoption of emergency bylaws, section 2.07(c) provides that action taken in good faith in accordance with the emergency bylaws binds the corporation and may protect directors, officers, employees and agents of the corporation from liability.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is intended to apply when the board members cannot meet because of some disaster. Section 33-31-160 provides a method whereby a court can order a meeting held if the entity cannot otherwise function. Section 33-31-160 anticipates the situation where the entity has become inactive or there has been a failure to keep up with the formalities or some other similar event.
This section is comparable to Section 33-2-107 of the South Carolina Business Corporation Act which was the previously applicable statute. A list is provided in the South Carolina Reporters' Comments to Section 33-2-107 of the provisions which might be included in a set of emergency bylaws.
Different from the Model Act, this section includes paragraph (e) which clarifies that a director or agent operating under the emergency bylaws is totally protected.
It should also be noted that nothing in this section implies that the corporation must have members.
Section 33-31-301. Purposes.
(a) Every corporation incorporated under this chapter has the purpose of engaging in any lawful activity unless a more limited purpose is set forth in the articles of incorporation.
(b) A corporation engaging in an activity that is subject to regulation under another statute of this State may incorporate under this chapter only if incorporation under this chapter is not prohibited by the other statute. The corporation is subject to all limitations of the other statute.
OFFICIAL COMMENT
1. Introduction
Public benefit corporations operate for some public or charitable purpose, while religious corporations operate primarily or exclusively for religious purposes. Mutual benefit corporations act on behalf of their members or those they hold themselves out as representing or benefiting. The Model Act requires an election between public benefit, mutual benefit and religious status and allows each type of nonprofit corporation to engage in any lawful activity unless a narrower purpose clause is set forth in its articles. See section 2.02 and the Introduction to the Model Act.
The failure to set forth an explicit limitation on a nonprofit corporation's activities does not mean that an enterprising entrepreneur can improperly and with impunity operate in the nonprofit form. In general, public benefit and religious corporations cannot make distributions to members or controlling persons. Section 13.01. Unreasonable compensation cannot be paid to members or controlling persons. See Official Comment to Section 13.01. In addition, the attorney general has broad powers to ensure that a public benefit corporation is not operating for the private benefit of any individual. Section 1.70. Religious corporations are subject to minimal attorney general supervision.
Mutual benefit corporations cannot pay unreasonable compensation, but can make distributions to members or controlling persons upon dissolution, and are subject to less extensive attorney general supervision than public benefit corporations. An entrepreneur might try to establish a mutual benefit corporation without members and distribute its assets to himself upon dissolution. He should be prevented from doing so if the corporation led those from whom it received funds into believing that the corporation was operating for a public or charitable purpose, or that its assets would only be used for the benefit of those it represented or those to whom it provided goods or services. A court should find that the assets of the corporation may not be diverted for the personal benefit of a controlling person.
While section 3.01 does not impose any limitations on a corporation's purposes or the use of its assets, those forming nonprofit corporations may limit the corporate purposes in the articles of incorporation. Such limitations may be added to obtain tax exempt status, to attract a significant contribution, or to provide a limited purpose for a corporation. See the Official Comment to section 2.02 for a discussion of the dangers involved in narrowing a corporation's purposes or powers. Also see section 3.04 dealing with the ultra vires concept.
2. Other Statutes
A nonprofit corporation may incorporate pursuant to chapter 2 unless some other state statute or law prohibits incorporation or sets forth some condition to forming the nonprofit corporation. If so, incorporation is prohibited or may only take place after the condition has been meet. Section 3.01(b). For example, it may be necessary to obtain the consent of some regulatory body prior to incorporating.
Many nonprofit corporations are subject to regulation as a result of the nature of their activities. Hospitals, colleges, secondary schools and health maintenance organizations, for example, are subject to extensive regulation. Section 3.01(b) provides that nonprofit corporations continue to be subject to applicable statutory provisions even though they have broad corporate purposes.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is comparable to Section 33-3-101 of the South Carolina Business Corporation Act. Some jurisdictions only allow incorporation of activities regulated by another statute if incorporation as a nonprofit corporation is affirmatively "permitted" by the other statute. This South Carolina provision, following the Model Act, permits the incorporation under this statute unless incorporation as a nonprofit corporation is expressly "prohibited" by another statute.
Under the former provisions of Chapter 31, Title 33, the corporation's specific purpose had to be identified. The Attorney General used this requirement as part of his reason for denying a charter to the Ku Klux Klan which had a purpose to deal generally in any business enterprise. The 1956-57 Op.S.C. Attorney General, 179 (April 8, 1957) noted such a purpose is "indefinite and far reaching," and "a charter should not be issued to any corporation to engage in any business enterprises" but its purpose should be stated with greater certainty and clarity.
It is important to remember that there is a difference between a corporation which is "nonprofit" and one which additionally is "charitable" in nature. "Charitable" South Carolina nonprofit corporations at one time enjoyed immunity from tort claims. (Abolished generally in Fitzer v. Young Men's Christian Association, 277 S.C. 1, 282 S.E. 2d 230 (1981).) Additionally, charitable nonprofit corporations did and may continue to enjoy certain tax advantages. This South Carolina Nonprofit Corporation Act of 1994 helps clarify this distinction, since likely only "religious" and "public benefit" nonprofit corporations will qualify as charities for federal tax purposes. "Mutual benefit" nonprofit corporations will be true nonprofit entities but not charities.
South Carolinians often refer to nonprofit corporations as "eleemosynary" corporations. As stated in Eiserhardt v. State Fair, 235 S.C. 305, 309, 111 S.E. 2d 568 (1959), the word "eleemosynary" has been used, "in a broader sense, to denote an unselfish purpose to advance the common good in any form or manner," and not merely denoting a "purpose to promote the welfare of mankind by works of charity." In the 1961-62 Op.S.C. Attorney General, 182 (#1406), the Attorney General indicated that the term included anything which would advance the common good of the community and includes the term "benevolent" (which is broader than "charitable") "intended for the conferring of benefits rather than for gain or profit.
Prior to abolishing charitable immunity there was substantial litigation in South Carolina to determine if certain entities formed as nonprofit corporations, or similar thereto, were also charitable entities. "The fact that a corporation is not operated for profit is not controlling on the question of whether it is a charitable corporation." Bush v. Aiken Electric Coop, Inc., 226 S.C. 442, 449, 85 S.E. 2d. 716 (1955), see also, Byrd v. Blue Ridge Electrical Cooperative, 215 F. 2d 542 (4th Cir. 1954). The Spartanburg fair was deemed not to be such a charitable entity in Bean v. Piedmont Interstate Fair Association, 222 F.2d 227 (4th Cir. 1955). (It is interesting that the entity in this case, even though formed as a nonprofit corporation, had issued stock to its members which it sold and transferred on its books. It issued tickets in lieu of dividends.) In these cases, the court went beyond the stated purpose of the incorporating documents and looked to the actual activities of the corporation. The charter for the entity running the state fair was not conclusive of its charitable nature, Eiserhardt v. State Fair Association, 235 S.C. 305, 111 S.E. 2d 568 (1959). Even where it seemed likely that the doctrine of charitable immunity should apply, the court was still willing to look beyond the provisions of the incorporation documents, Vermillion v. Woman's College of Due West, 104 S.C. 197, 88 S.E. 649 (1914).
In the past, if the articles did not provide to whom the assets were to be distributed at dissolution, this might have been some indication that the corporation was not in fact eleemosynary, 1963-64 Op.S.C. Attorney General, 271 (#1759).
In Peden v. Furman University, 155 S.C. 1, 151 S.E. 907 (1930), the university was unable to obtain dismissal of a cause of action claiming that its baseball field was effectively a nuisance notwithstanding that it "might be an eleemosynary corporation.
This Act, like the former provisions of Chapter 31, Title 33, says nothing about whether the nonprofit corporation might be exempt from any South Carolina tax. See e.g., Textile Hall Corporation v. Hill, 215 S.C. 262, 54 S.E.2d 809 (1949). The court in this case found that although the corporation's charter, specially granted by the legislature, purported to exempt the entity from property tax, that the entity. although nonprofit, was not within the class of nonprofit corporations which were generally permitted by the Constitution to be exempt from tax. The court looked beyond the stated purpose in the charter to the actual operation of the textile hall. As noted in 1965-66 Op. S.C. Attorney General, 157 (#2064), a charitable, social, or fraternal corporation is not as such exempt from payment of any ad valorem property tax. Specific reference must be made to the taxing statutes for a determination as to whether any particular nonprofit corporation is exempt from any tax. See also, 1968-69 Opinion S.C. Attorney General, 252.
Section 33-31-302. General powers.
Unless its articles of incorporation provide otherwise, every corporation has perpetual duration and succession in its corporate name and has the same powers as an individual to do all things necessary or convenient to carry out its affairs including, without limitation, power:
(1) to sue and be sued, complain, and defend in its corporate name;
(2) to have a corporate seal, which may be altered at will, and to use it, or a facsimile of it, by impressing or affixing or in any other manner reproducing it;
(3) to make and amend bylaws not inconsistent with its articles of incorporation or with the laws of this State for regulating and managing the affairs of the corporation;
(4) to purchase, receive, lease, or otherwise acquire, and own, hold, improve, use, and otherwise deal with, real or personal property or any legal or equitable interest in property, wherever located;
(5) to sell, convey, mortgage, pledge, lease, exchange, and otherwise dispose of all or any part of its property;
(6) to purchase, receive, subscribe for, or otherwise acquire, own, hold, vote, use, sell, mortgage, lend, pledge, or otherwise dispose of, and deal in and with, shares or other interest in or obligations of any entity;
(7) to make contracts and guaranties, incur liabilities, borrow money, issues notes, bonds, and other obligations, and secure any of its obligations by mortgage or pledge of any of its property, franchises, or income;
(8) to lend money, invest and reinvest its funds, and receive and hold real and personal property as security for repayment, except as limited by Section 33-31-832;
(9) to be a promoter, partner, member, associate, or manager of any partnership, joint venture, trust, or other entity;
(10) to conduct its activities, locate offices, and exercise the powers granted by this chapter within or without this State;
(11) to elect or appoint directors, officers, employees, and agents of the corporation, define their duties, and fix their compensation;
(12) to pay pensions and establish pension plans, pension trusts, and other benefit and incentive plans for any or all of its current or former directors, officers, employees, and agents;
(13) to make donations not inconsistent with law for the public welfare or for charitable, religious, scientific, or educational purposes and for other purposes that further the corporate interest;
(14) to accept gifts, devises, and bequests subject to any conditions or limitations, contained in the gift, devise, or bequest so long as the conditions or limitations are not contrary to this chapter or the purposes for which the corporation is organized;
(15) to impose dues, assessments, and admission and transfer fees upon its members;
(16) to establish conditions for admission of members, admit members, and issue memberships;
(17) to carry on a business;
(18) to do all things necessary or convenient, not inconsistent with law, to further the activities and affairs of the corporation.
OFFICIAL COMMENT
Section 3.02 is an historic anomaly. In the nineteenth and early twentieth centuries corporate charters were granted for limited purposes. As corporation laws began to develop, they listed ad nauseam specific powers to overcome the problem of limited purpose corporations.
There was considerable sentiment on the Committee to simply have section 3.02 provide that corporations have the powers of an individual to do all things necessary or convenient to carry out their activities. However, in light of history, it was feared that a court might improperly conclude that a corporation lacked some power because it was not specifically set forth in the Model Act. In addition, there was some concern that attorneys might revert to the ill-advised practice of enumerating powers in articles of incorporation. Consequently, section 3.02 provides a broad grant of powers and sets forth a nonexclusive list of specific powers.
As a result of section 3.02, it is not necessary for a corporation to provide in its articles or bylaws that it has any particular powers. If nothing is said, a corporation automatically has the powers set forth in section 3.02.
In some instances, it may be desirable or necessary to limit corporate powers. Section 3.02 allows the articles of incorporation to limit the powers of a corporation. Limitations may be imposed to obtain federal or state tax status, because a grantor wishes to limit the activities of a corporation, or for some other reason. Persons forming or operating a nonprofit corporation may want to limit its powers.
A distinction should be drawn between the power of a corporation to do all things necessary or convenient to carry out its activities and the question of whether corporate acts are reasonable or otherwise prohibited. Section 1.50, for example, prohibits private foundations from taking certain actions, even though they have the power to do so. Similarly, unless limited by its articles of incorporation, a corporation has the power to guarantee performance of a contract, enter into a partnership, make political or other noncharitable contributions, but the directors in authorizing such actions may breach their duty of care or loyalty. See sections 8.30-8.33.
The following changes from and clarifications of the prior law should be noted:
(1) Nonprofit corporations can provide pension and other benefits to current and former directors, officers, employees and agents. Section 3.02(11) and (12). Under appropriate circumstances the board of directors may establish or change benefits for former employees.
(2) Nonprofit corporations have the power to make donations for public welfare or for charitable, scientific, or educational purposes and for other purposes, not inconsistent with law, to further the corporate interests. Section 3.02(13). This specific grant of power is not a limitation on the general power of nonprofit corporations to make the same donations individuals can make.
(3) Nonprofit corporations may impose dues, assessments, admission and transfer fees upon their members. Section 3.02(14). The fact that articles or bylaws authorize dues, assessments or fees does not necessarily impose liability on members. See sections 6.13-6.15.
(4) Nonprofit corporations have the power to engage in business. Nonprofit organizations operate hospitals, department stores, consulting firms, book stores, automobile associations, clearing houses and other activities that could be characterized as business. These activities are within a nonprofit corporations' powers as a result of section 3.02(16).
The fact that a nonprofit corporation has the power to operate a business does not mean that the corporation is acting properly in running the business. The business must be consistent with or in aid of the public or charitable purposes of a public benefit corporation, benefit the members of a mutual benefit corporation or be consistent with or in aid of the religious purpose of a religious corporation. A corporation that does not operate a business for those purposes can be challenged in a quo warranto or similar proceeding. See Olsen v. National Memorial Gardens, Inc., 115 N.W.2d 312, 366 Mich. 492 (1962); People v. Society of Good Neighbors, 42 N.W.2d 761, 327 Mich. 620 (1950); People v. White Circle League of America, 97 N.E.2d 811, 408 Ill. 564 (1951). Also see State v. National Ass'n of Angling & Casting Clubs, 51 N.E.2d 662 (1943), where profit from business activities was used for the objects of the organization and the court found no wrongful activity.
(5) Nonprofit corporations may establish conditions for admission to membership, admit members and issue memberships. Section 3.02(15). This provision does not validate all admission requirements but simply provides that a corporation has the power to set conditions. Whether the conditions are legal depends on applicable federal and state law.
SOUTH CAROLINA REPORTERS' COMMENTS
1. Historical information
A major problem with the prior nonprofit statute (former Chapter 31, Title 33) was that it did not grant nonprofit entities the necessary powers to operate efficiently. For example, some lawyers believed that the former statute prevented churches and other nonprofit corporations from investing their excess funds. (Although 1954-55 Op.S.C. Attorney General, 281, stated "the University [of South Carolina] or any other charitable corporation which is given funds for the use of the institution, without any restrictions as to the manner in which the same may be used, that the administrative officials may exercise their own judgment as to the use of such funds, including the investment of same.") In one case, question was raised whether the Porter Academy in Charleston had the power to own and convey real property, the court finding that it did, Pierson v. Porter Academy, 217 S.C. 168, 60 S.E. 2d. 82 (1950). (The plaintiff's claim that the state legislature's act in chartering the academy was an unconstitutional special legislation was likewise denied on the authority of Epworth Orphanage v. Wilson, Country Treasurer, 185 S.C. 243, 193 S.E. 644 (1937), "unless there is some affirmative showing that the Constitution was not complied with in the enactment of a special legislative act, the charter of the corporation is good.") Attorney General opinions have indicated that a nonprofit corporation may dispose of its assets as it sees fit in the absence of the existence of a charitable trust relationship, 1963-64 Op. S.C. Attorney General, 271 (#1759), has the right to own, buy and sell real estate in accordance with its bylaws, and if it has none, should likely obtain the members permission before selling any property, 1961-62 Op. S.C. Attorney General, 91 (#1324), and may accept bequests (e.g., for the promotion of the Boy Scout movement), 1958-59, Op. S.C. Attorney General, 107 (#612).
The nonprofit corporation is a jural "person" with all of the powers of a person. As the Official Comment makes clear, these powers must be exercised in a way consistent with the statute. The 1994 South Carolina Nonprofit Corporation Act gives a nonprofit corporation the "power" to carry on a business. The headnotes to an earlier Attorney General's opinion indicate that this power would cause the entity not to be a nonprofit corporation, 1956-57 Op.S.C. Attorney General, 179 (April 8, 1957). However, this power appeared in the proposed charter of the Ku Klux Klan. The Attorney General's opinion noted this power is "indefinite and far reaching," and "a charter should not be issued to any corporation to engage in any business enterprises" but its purpose should be stated with greater certainty and clarity.
In Lovering v. Seabrook Island Property Owners Assoc., 289 S.C. 77, 344 S.E. 2d 862 (Ct. Appls. 1986), aff'd. & mod. 291 S.C. 201, 352 S.E.2d 707 (1987), the board of a nonprofit homeowners association levied a special assessment to repair bridges within the subdivision and renourish the beach. The Court of Appeals held that the board did not have the power to do this and the act was therefore ultra vires.
Although the corporation's bylaws very clearly gave it the power to assess an annual maintenance charge to be levied on the basis of each lot's tax assessment, representations had been made in the Property Report (at time of purchase) that no special assessments would be made.
A corporation may exercise only those powers which are granted to it by law, by its charter or articles of incorporation, and any by-laws made pursuant thereto. . . Acts beyond the scope of a corporation's powers as defined by law or its charter are ultra vires . . . In determining a corporation's powers, its charter is to be construed strictly; any ambiguity in the terms of a corporate charter must operate against the corporation. . . . The specification of certain powers operates as a limitation on such objects as are embodied therein and is an implied prohibition of the exercise of other and distinct powers. . . .:
The Association contends it may impose special assessments for any corporate purpose pursuant to the general statement of purposes in its by-laws. The Association specifically directs our attention to a provision in the by-laws stating that the purpose of the Association is, among other things, "to engage in such other activities as may be to the mutual benefit of the owners of property on Seabrook Island." This provision, it contends authorizes it to impose special assessments for corporate purposes.
The general statement of corporate purposes relied on is not sufficient, standing alone, to authorize the levying of special assessments on property owners. . .
As a matter of general law, a nonprofit corporation has the power to enforce the collection of dues and charges in accordance with the provision of its by-laws. See Section 33-31-100, Code of Laws of South Carolina, 1976. In this case, however, nether the protective covenants nor the bylaws, give the Association power to levy special assessments.
[T]he specification of the power to levy an annual maintenance charge limits the power of the Association to impose other assessments on property owners within the Seabrook Island subdivision. It operates as an implied prohibition against the levying of special assessments. Therefore, the Association was without power to impose a special assessment even if its object was to carry out a legitimate corporate purpose. A permissible purpose cannot be accomplished by a prohibitive means.
The Court of Appeals also found that the board's action was not a proper amendment of the annual maintenance charge and thus invalid as an annual maintenance charge.
The Supreme Court affirmed as follows:
It is undisputed that the Association had no express power to impose the assessment at issue. The Association and the Company argue, however, that the power to levy this special assessment was an implied or incidental power of the Association's authority under its By-laws to maintain and preserve the amenities and values of the development.
Implied or incidental powers are those which are reasonably necessary to the execution of the corporation's express powers, not those which are merely convenient or useful . . .
Assuming, without deciding, that the Association had the responsibility of maintaining the streets and the beach, the By-laws provided the mechanism of an annual maintenance charge to finance the necessary repairs. Furthermore, the Association could have financed the repairs by use of its statutory authority to borrow funds under S. C. Code Ann. Section 33-31-100(2)(1976), a course of action the Association apparently considered and rejected. Since the power to levy a special assessment was not necessary for the Association to carry out its express powers, even if more convenient than the available fund raising methods, it could not be an implied or incidental power.
If the Association has the "power" (using the Supreme Court's term) and thus apparently the "right" to borrow the funds to repair the roads and beaches, who will pay this loan back? The assumption has to be that it will be the Association members. Therefore, other than the wrongful manner of apportioning the cost in the proposed assessment, how is the current assessment any different or less authorized than the borrowing?
It is also troubling that the Court of Appeals states that the corporate "powers" should be narrowly construed. This certainly is not the thrust of the Model Business Corporation or Nonprofit Corporation Acts, and hopefully will not be the way the new statutory powers are construed in the future. In fact, in adopting paragraph (18), it is the intent that the grant of powers is to be very broadly interpreted. It is the intent of this new statute, as specifically required in Section 33-31-302(18), that every nonprofit corporation has the unbridled power to "do all things necessary or convenient, not inconsistent with law, to further the activities and affairs of the corporation." Section 33-31-302 of this Act is not to be narrowly construed.
The court states that in determining the corporation's powers its charter is to be strictly construed. This is confusing. First of all, the corporation's powers are set forth in the statute and not in the charter. Second whether the "use" or "exercise" of a power to accomplish a particular objective should be "narrowly construed" is a different question. The court does not seem to make the distinction between whether a corporation has the "power" to do something generally, as contrasted with whether it has the right to exercise that power for a specific objective - whether the use of the power has been properly authorized. A simple example may help. No one would dispute the fact that a nonprofit corporation has the power to borrow money. However, if no one in the corporation properly approves of a particular loan, the corporation simply cannot borrow the money (even though the corporation has the "power" to borrow money).
2. Modification of former powers
Besides adding to the existing powers, some of the former powers have been modified. The former statute (Section 33-31-100(3)) granted the corporation the power to "expel or suspend" members. The new law states that the corporation shall have the power to establish conditions for admission of members. A separate section, Section 33-31-621, then specifies how members may be terminated, expelled, or suspended. The former statute stated in the list of powers that the corporation could adopt bylaws. Now this "power" is listed in a separate code section, Section 33-31-206.
3. New powers
Paragraph (14) of this section is not a Model Act provision, but will add certainty to the statute. This section specifically authorizes corporations to accept gifts, even if restricted, so long as the restrictions are not contrary to the Act or the purposes of the corporation. Likely, these powers are inherent in any nonprofit corporation, but in order to dispel any uncertainty, the language was added.
4. Interpretation of certain powers and comparison with the South Carolina Business Corporation Act
Some of these powers are very similar to the powers granted to a for-profit corporation. Therefore, the discussion of these powers in the South Carolina Reporters' Comments to Section 33-3-102 may be helpful.
a. Broad interpretation. It is important to note that the final power, Section 33-31-302(18), gives the corporation the power to do all things necessary or convenient, not inconsistent with law, to further the activities and affairs of the corporation. The purpose of item (18) is to ensure that all of the powers granted in this section are broadly interpreted and that there be no limitation imposed on the powers of any nonprofit corporation. As noted above, this specifically modifies the holdings of Lovering v. Seabrook Island Property Owners Assoc., 289 S.C. 77, 344 S.E. 2d 862 (Ct. Appls. 1986), aff'd. & mod. 291 S.C. 201, 352 S.E.2d 707 (1987).
b. Out-of-state operations. Although not specifically stated, all South Carolina nonprofit corporations, pursuant to the broad language of Section 33-31-302, have the inherent right to operate in other states.
c. Convertible securities. Nonprofit corporations may, if consistent with the type of corporation, their purposes, and this statute, issue convertible securities. Item (16) grants the corporation power to issue "convertible" memberships or memberships having specific or unique terms.
d. Profit sharing plans. Nonprofit corporations may enter into profit sharing plans. "Profit sharing plans" are encompassed within the meaning of the term "benefit and incentive plans" as used in item (12). (However, certain types of nonprofit corporations may because of tax statutes or regulations be prohibited from establishing profit sharing plans.)
Section 33-31-303. Emergency powers.
(a) In anticipation of or during an emergency defined in subsection (d), the board of directors of a corporation may:
(1) modify lines of succession to accommodate the incapacity of any director, officer, employee, or agent; and
(2) relocate the principal office, designate alternative principal offices or regional offices, or authorize the officer to do so.
(b) During an emergency defined in subsection (d), unless emergency bylaws provide otherwise:
(1) notice of a meeting of the board of directors need be given only to those directors it is practicable to reach and may be given in any practicable manner, including by publication and radio; and
(2) one or more officers of the corporation present at a meeting of the board of directors may be deemed to be directors for the meeting, in order of rank and within the same rank in order of seniority, as necessary to achieve a quorum.
(c) Corporate action taken in good faith during an emergency under this section to further the ordinary affairs of the corporation:
(1) binds the corporation; and
(2) may not be used to impose liability on a corporate director, officer, employee, or agent.
(d) An emergency exists for purposes of this section if a quorum of the corporation's directors cannot readily be assembled because of some catastrophic event.
(e) Corporate action taken in good faith under this section to further the affairs of the corporation during an emergency binds the corporation. A corporate director, officer, employee, or agent is not liable for deviation from normal procedures if the conduct was authorized by emergency powers provided in this chapter.
OFFICIAL COMMENT
Section 3.03 provides that a corporation has specified powers in the event of an emergency even if emergency bylaws have not been adopted pursuant to section 2.07. The section allows corporations that have not adopted emergency bylaws to continue to operate until the emergency is passed.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is essentially identical to the previously applicable section, Section 33-3-103 of the South Carolina Business Corporation Act. Subsection (e) is not found in the Model Act and also is not part of the South Carolina Business Corporation Act. Subsection (e) provides that the officer, director, agent, or employee will not be liable for deviation form normal procedures if the conduct was authorized by emergency powers provided in the chapter. However, nothing in this provision, and specifically subsection (e) in any manner lessens the fiduciary duties of the directors during the emergency.
Section 33-31-304. Ultra vires.
(a) Except as provided in subsection (b), the validity of corporate action may not be challenged on the ground that the corporation lacks or lacked power to act.
(b) A corporation's power to act may be challenged in a proceeding against the corporation to enjoin an act where a third party has not acquired rights. The proceeding may be brought by the Attorney General, a director, or by a member or members in a derivative proceeding.
(c) A corporation's power to act may be challenged in a proceeding against an incumbent or former director, officer, employee, or agent of the corporation. The proceeding may be brought by a director, the corporation, directly, derivatively, or through a receiver, a trustee, or other legal representative, or in the case of a public benefit corporation, by the Attorney General.
OFFICIAL COMMENT
The object of section 3.04 is to do away with the ultra vires doctrine. This long-discredited concept is based on the fiction that third parties dealing with corporations have constructive notice of limitations on corporate purposes and powers appearing in articles of incorporation. In the heyday of the ultra vires doctrine, innocent third persons or not-so-innocent corporations could have corporate acts and contracts declared void or unenforceable on the ground that they were beyond the corporate purposes or that the corporation had no power to enter into the transaction. Ballentine, "Proposed Revision of the Ultra Vires Doctrine," 12 Corn. L.Q. 453 (1927).
Courts developed a number of equitable doctrines to prevent unjust results. Section 3.04(a) directly attacks the problem by providing that, "except as provided in (b), the validity of corporate action may not be challenged on the ground that the corporation lacks or lacked power to act." Consequently, it is not necessary for a third person to check corporate articles for limitations on corporate purposes or powers; not, except as provided in subsection (b), can a corporation avoid an obligation on the ground that the obligation is beyond its purposes or powers.
Under subsection (b) a suit may be maintained by a member in a derivative proceeding, or a director, or the attorney general against a corporation to enjoin an act where a third party has not acquired rights in regard to the transaction. For example, if a corporation is about to enter into a binding commitment in violation of its articles, a proceeding could be brought to enjoin the corporation if a third party had not acquired any rights. A third party with prior actual knowledge of the limitation in the articles cannot acquire any rights.
If a corporation has entered into or completed an ultra vires transaction, a proceeding can be brought against the present or former directors, officers, employees, or agents who caused the corporation to act in violation of limitations contained in its articles. In such a situation a third party who had acquired rights could enforce the ultra vires action even though it violated a specific provision of the articles. However, a director approving such a contract would be liable if the director breached his or her duty of care or loyalty. The amount of money damages, if any, for violation of this section is left to the sound discretion of the courts. Similarly the circumstances in which an injunction will issue is left to judicially developed equitable principles.
The focus of section 3.04 is narrow. It only validates corporate actions that are attacked on the ground that the corporation had no power to act. It does not address actions that: (i) violate other provisions of the Model Act; (ii violate federal or state laws; (iii) breach duties owed by the directors, officers, employees or agents of the corporation; (iv) have not been approved or authorized as required by the Model Act; or (v) involve a claim by the corporation or a third party seeking to avoid liability on the ground that the person acting on behalf of the corporation was not authorized to do so or was acting beyond the scope of his agency or agency power; or (vi) breach duties owed by the corporation.
Moreover section 3.04 does not deal with the authority of power of a corporation to sell, transfer or otherwise convey assets held in charitable trust or subject to a reversionary or other interest.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is somewhat similar to the formerly applicable statute, Section 33-3-104 of the South Carolina Business Corporation Act. This new nonprofit statute differs from the Business Corporation statute. In the Business Code, an individual shareholder has the power to directly (not derivatively) bring an action to try and stop an action. However, all parties affected by the action must be joined. The court instead of giving injunctive relief may award damages (either to the corporation or the third party to the transaction). Under this section of the Nonprofit Act, a member of a nonprofit corporation has no right to bring a direct attack against a proposed action. The claim may only be brought derivatively. If an action has been accomplished and the members believe that the directors or others in charge have done something wrong, have acted "ultra vires," the members may bring a derivative action against the alleged wrongdoers.
There was consideration of adopting language more similar to the South Carolina Business Corporation Act. However, the South Carolina Business Corporation Act, as noted, provides for damage actions against the board which was viewed as undesirable in the context of nonprofit corporations. Consideration was also given as to whether the Attorney General should have authority to bring an action against directors of mutual benefit corporations as well as against directors of public benefit corporations. It was determined that the members of these corporations would have sufficient interest in the entity to adequately police any alleged wrongdoing.
There is at least one ultra vires case involving a nonprofit corporation. The Supreme Court in Deborde v. St. Michaels and All Angels Church, 272 S.C. 409, 252 S.E.2d 876 (1979), confirmed that the doctrine of ultra vires cannot be used as a sword by a third party to try and invalidate a corporate action. A third party non-church member argued that a church could not build a cemetery since the church's charter did not grant it the specific power to build a cemetery. The court stated that the third party (although a person affected by the act) had no standing to raise the claim since he was not a member of the church. The court also noted that given the broad purpose of a church, the power to build a cemetery was likely encompassed within its powers. (Should the court more accurately have referred to the "purpose" to operate a cemetery?)
In Lovering v. Seabrook Island Property Owners Assoc., 289 S.C. 77, 344 S.E. 2d 862 (Ct. Appls. 1986), aff'd. & mod. 291 S.C. 201, 352 S.E.2d 707
(1987), discussed in more detail in the Reporters' Comments to Section 33-31-302, the board of a nonprofit homeowners association levied a special assessment to repair bridges within the subdivision and renourish the beach. The Court of Appeals held that the board did not have the power to do this and the act was therefore ultra vires.
A corporation may exercise only those powers which are granted to it by law, by its charter or articles of incorporation, and any by-laws made pursuant thereto. . . Acts beyond the scope of a corporation's powers as defined by law or its charter are ultra vires.
Although not technically an ultra vires case, the court in Gilbert v. McLeod Infirmary, 219 S.C. 174, 64 S.E.2d 524 (1951), enjoined the sale of some corporation property on the basis that the sale had not been approved by a disinterested board.
Section 33-31-305. Powers of corporations created by legislative authority before 1900.
All charitable, social, and religious corporations validly created by legislative authority before 1900, or validly created before 1900 by the act of a city, county government, or other political subdivision, in addition to the powers theretofore granted them, have all the powers enumerated in Section 33-31-302, `Powers of Corporation'.
SOUTH CAROLINA REPORTERS' COMMENTS
Prior to 1900 the legislature chartered many nonprofit corporations, sometimes giving them specific or special powers. A number of charitable organizations were also chartered by cities. This section reflects that the original powers are preserved and are not modified by this Chapter 31, Title 33, except to the extent the powers were previously limited, in which case, the original powers are enhanced by Section 33-31-305. The former nonprofit statutes likewise recognized these powers, e.g. former Section 33-31-110 of the 1976 Code. There is, of course, a significant difference between a power and the manner in which members act, the board is elected, or other mechanics of the operations of the corporation. Nothing in Section 33-31-305, or Chapter 31, Title 33 generally, modifies, for example: the governing structure of such special entities; qualification, types, and terms of members, directors (or other managers of the entity), and officers; meetings of, and voting by, members and directors (or others managing the entity); amendments to the charter; or provisions for dissolution. Section 33-31-1701 grants corporations which were specially chartered by special acts of the General Assembly, or were chartered by cities and other governmental agencies, the specific power and authority to either (1) merge into nonprofit corporations formed under this chapter, or to (2) file an irrevocable election agreeing to be governed by this chapter. By merging into a shell corporation formed under this chapter or by filing the irrevocable election, these old legislatively chartered entities may bring themselves under the control of this chapter. However, nothing in this act requires these entities to do this. Many legislatively chartered corporations will desire to be governed by this chapter since it provides workable provisions governing the operation of corporations."
Section 33-31-401. Corporate name.
(a) A corporate name may not contain language stating or implying that the corporation is organized for a purpose other than that permitted by Section 33-31-301 and its articles of incorporation.
(b) Except as authorized by subsections (c) and (d), a corporate name must be distinguishable upon the records of the Secretary of State from the name appearing upon the records of the Secretary of State of any other nonprofit or business corporation, professional corporation, or limited partnership incorporated in, formed in, or authorized to do business in South Carolina, or a name reserved, registered, or otherwise filed upon the records of the Secretary of State.
(c) A corporation may apply to the Secretary of State for authorization to use a name that is not distinguishable upon the Secretary of State's records from one or more of the names described in subsection (b). The Secretary of State shall authorize use of the name applied for if:
(1) the other corporation consents to the use in writing and submits an undertaking in form satisfactory to the Secretary of State to change its name to a name that is distinguishable upon the records of the Secretary of State from the name of the applying corporation; or
(2) the applicant delivers to the Secretary of State a certified copy of a final judgment of a court of competent jurisdiction establishing the applicant's right to use the name applied for in this State.
(d) A corporation may use the name, including the fictitious name, of another domestic or foreign business or nonprofit corporation that is used in this State if the other corporation is incorporated or authorized to do business in this State and the proposed user corporation has:
(1) merged with the other corporation;
(2) been formed by reorganization of the other corporation; or
(3) acquired all or substantially all of the assets, including the corporate name, of the other corporation.
(e) Except for allowing foreign corporations to file for a certificate of authority under a fictitious name as provided in section 33-31-1506, this chapter does not control the use of fictitious names.
OFFICIAL COMMENT
1. No Requirement to Include "Corporation," "Incorporated," "Company," or "Limited" in Name
While the Model Business Corporation Act requires business corporations to use the term "corporation," "incorporated," "company," or "limited," or some abbreviation thereof in their names, the prior Model Nonprofit Corporation Act did not have a similar requirement. Imposition of such a requirement for nonprofit corporations would create two classes of corporations, those formed before and those formed after the effective date of the revised Model Nonprofit Corporation Act. This problem could be solved by imposing a name requirement on all nonprofit corporations. This approach is contrary to nonprofit tradition, would not materially protect the public and would entail considerable effort and cost. Hospitals, colleges, museums, trade associations and other nonprofit institutions usually do not include the words "corporation," "company," "incorporated," or "limited" in their names. Any such addition would sound strange and, particularly in the case of the words "company," and "limited," would not provide any meaningful information. Apart from the basic question of whether any of these words convey the concept of limited liability, nonprofit corporations can effectively undercut any such name requirement by operating under a fictitious name.
2. Names Must Be "Distinguishable Upon the Records of the Secretary of State"
A corporate name must be distinguishable upon the secretary of state's records from other corporate names that appear in the secretary of state's records. This requirement is imposed: "(1) to prevent confusion within the secretary of state's office and the tax office and (2) to permit accuracy in naming and serving corporate defendants in litigation. Thus, confusion in an absolute or linguistic sense is the appropriate test under the Model Act. . . . ." Official Comment to Model Business Corporation Act Section 4.01.
The fact that the secretary of state files a corporation's articles of incorporation does not give that corporation the right to use the name set forth in its articles. Whether it can or cannot use the name depends on general principles of fraud and unfair competition. See American Kennel Club v. American Kennell Club, Inc., 216 F. Supp. 267 (D. La. 1963); Lincoln Center for Performing Arts, Inc. v. Lincoln Center Classics, Record Soc., Inc., 25 Misc. 2d 686, 210 N.Y.S.2d 275 (1960); McCarthy, Trademarks and Unfair Competition Section 9.2 (2d ed. 1984).
A corporation may operate under a fictitious name that is different than the name appearing in its articles of incorporation. Of course, the use of a fictitious name maybe prevented under general principles of fraud and unfair competition.
What is "distinguishable upon the records of the secretary of state" is left to the discretion of the secretary of state. This discretion may be challenged pursuant to section 1.26.
3. Consent To Use Name
Subsection 4.01(c) allows the secretary of state to authorize the use of a name that is not distinguishable upon the secretary of state's records from the record name of another corporation if that corporation consents in writing and submits a satisfactory undertaking to change its name to one that is distinguishable upon the records of the secretary of state. The undertaking should be consistent with and no broader than the requirements of section 4.01.
SOUTH CAROLINA REPORTERS' COMMENTS
The prior nonprofit statutes found in Chapter 31, Title 33 had no provisions generally regulating the names of all nonprofit corporations. (However, there were provisions giving special protection to certain nonprofit corporation names.) This section relates to the comparable Business Corporation provisions (Sections 33-4-101 through 33-1-103) which generally were applicable before the adoption of this 1994 South Carolina Nonprofit Corporation Act. Different from the South Carolina Business Corporation Act, the Nonprofit Act does not require that the company names include a designation such as "Inc." The former "assumed name" statute was repealed which might have an effect on some nonprofit corporations (see the South Carolina Reporters' Comments to Section 33-4-101 of the South Carolina Business Corporation Act). The South Carolina Reporters' Comments to Section 33-4-101 may be helpful in explaining the effect of this section.
Consideration was given as to whether there should be controls on what names could be used both to protect the general public and those entities who have existing names. It was noted that the former statute did give protection to certain entities, e.g., the Masons. Consideration was given as to whether the Secretary of State should be required to make a determination that any national organization had granted a right to a local organization to use a particular name. (Some states have adopted this approach.) However, the Secretary of State does not want to be involved in determining if a national organization has given permission to a local entity to use its name. For various reasons, including efficiency, it was concluded that the Secretary of State should not have the obligation to determine if the entity had received any or all required permissions to use its proposed name.
The suggestion that the incorporator (or merely the corporation) could certify on its articles that the corporation had any required permission needed to use the organizational name - e.g., that it was permissible for the new corporation to use the term "Rotary" in the name, was likewise specifically rejected.
It was further noted that even if there might be some statutory protections provided as to name usage, that most of the protections come from common law doctrine. Further, if the statute granted some limited name protection, this might be wrongly construed as preempting the common law, not a desirable result.
It is important to recognize that any nonprofit corporation may incorporate under any "grammatically distinguishable" name, regardless that the name may be deceptively similar to an existing corporate name. The protections each existing corporation has in its name are derived solely from the common law. The common law, and not this statute, sets the policy as to what names can be used in public and which do not create unfair competition or are not deceptive. Nothing in this statute shall abrogate or limit the law as to unfair competition or unfair trade practice, or abrogate from the common law, the principles of equity, of the statutes of this State or of the United States with respect to the right to acquire and protect trade names and trademarks.
Section 33-31-402. Reserved name.
(a) A person may reserve the exclusive use of a corporate name including the corporate name of a foreign corporation or its corporate name with any change required by section 33-31-1506, by delivering an application to the Secretary of State for filing which shall set forth the name and address of the applicant and the name proposed to be reserved. Upon finding that the corporate name applied for is available, the Secretary of State shall reserve the name for the applicant's exclusive use for a nonrenewable one hundred twenty-day period.
(b) The owner of a reserved corporate name may transfer the reservation to another person by delivering to the Secretary of State a signed notice of the transfer that states the name and address of the transferee.
OFFICIAL COMMENT
Considerable effort is often expended in finding an appropriate name for a nonprofit corporation. Under the Model Act those forming a nonprofit corporation, after determining that a particular name is available, can reserve that name for a nonrenewable one hundred twenty-day period. The one hundred twenty-day period should be more than sufficient to form the corporation.
The ability to reserve a name is available to any person and is not dependent on any particular intent or purpose. The person reserving the name may transfer the reserved name to another person by delivering to the secretary of state a signed notice of the transfer stating the name and address of the transferee.
While a name reservation is not renewable, after the initial reservation period has lapsed, any person, including a person who held the prior reservation, may reserve the name.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is essentially the same as the formerly applicable statute, Section 33-4-102 of the South Carolina Business Corporation Act. Like the South Carolina Business Corporation Act, this section requires that the "application must set forth the name and address of the applicant and the name proposed to be reserved." This language is not included in the Model Nonprofit Act.
Section 33-31-403. Registered name of a foreign corporation.
(a) A foreign corporation may register its corporate name, or its corporate name with any change required by Section 33-31-1506, if the name is distinguishable upon the records of the Secretary of State from the name appearing upon the records of the Secretary of State of any other nonprofit or business corporation, professional corporation, or limited partnership incorporated in, formed in, or authorized to do business in this State, or a name reserved or registered upon the records of the Secretary of State.
(b) A foreign corporation registers its corporate name, or its corporate name with any change required by Section 33-31-1506, by delivering to the Secretary of State an application:
(1) setting forth its corporate name, or its corporate name with any change required by Section 33-31-1506, the state or country and date of its incorporation, a statement that the foreign corporation is not, and has not done business in South Carolina, and a brief description of the nature of the activities in which it is engaged; and
(2) accompanied by a certificate of existence, or a document of similar import, from the state or country of incorporation current within sixty days of delivery, duly authenticated by the official having custody of the corporation records in the state or country under whose law it is incorporated.
(c) The name is registered for the applicant's exclusive use upon the effective date of the application.
(d) A foreign corporation whose registration is effective may renew it for successive years by delivering to the Secretary of State for filing a renewal application, which complies with the requirements of subsection (b), between October first and December thirty-first of the preceding year. The renewal application renews the registration for the following calendar year.
(e) A foreign corporation whose registration is effective may qualify thereafter as a foreign corporation under that name or consent in writing to the use of that name by a corporation thereafter incorporated under this chapter or by another foreign corporation thereafter authorized to transact business in this State. The registration terminates when the domestic corporation is incorporated or the foreign corporation qualifies or consents to the qualification of another foreign corporation under the registered name.
OFFICIAL COMMENT
Section 4.03 allows a foreign corporation that is not qualified to transaction business in a state, to register and thereby reserve its name. In effect, section 4.03 allows a foreign corporation to reserve the right to qualify its name if it subsequently decides to do so. Even if a foreign corporation reserves its name, it may be precluded from using its name in the state under unfair competition or similar concepts. See Official Comment to Section 4.01.
A foreign corporation may renew its registered name yearly. Thus, the registration provisions of section 4.03 allow perpetual renewal while the reservation provisions of section 4.02 allow a single 120-day reservation with the possibility of additional reservations if no one else reserves the name.
A foreign corporation may only register its real corporate name or its corporate name with any change required by section 15.06. A foreign corporation that wishes to register a fictitious name may do so by incorporating an inactive domestic or foreign subsidiary using the desired fictitious name.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is comparable to the formerly applicable section, Section 33-4-103 of the South Carolina Business Corporation Act. A few grammatical modifications have been made to the Model Act format. In addition, different from the Model Act, the South Carolina law requires that in filing the application, the foreign corporation must include a statement that it is not doing business in South Carolina, and that the application must be accompanied by a certificate of existence or a document of similar import current within sixty days of delivery, duly authenticated by the official having custody of the corporation records in the state or country under whose law the foreign corporation is incorporated.
Section 33-31-404. Name change filing requirement when real property owned.
(a) When either a domestic or foreign nonprofit corporation which owns real property in South Carolina changes its corporate name by amendment of its articles, by merger, or reorganization, the newly named, surviving, acquiring, or reorganized corporation must file a notice of that name change in the office of the register of mesne conveyances of the county in this State in which the real property is situate. If there is no such office in that county, a notice of name change must be filed with the clerk of court of the county in which that real property is situate.
(b) The filing must be:
(1) by affidavit executed in accordance with the provisions of Section 33-31-120 and containing the old and new names of the corporation, which affidavit also may describe the real property owned by that corporation; or,
(2) by filing a certified copy of the amended articles or articles of merger; or
(3) by a duly recorded deed of conveyance to the newly named, surviving, acquiring, or reorganized corporation.
(c) the affidavit or filed articles must be duly indexed in the index of deeds.
(d) The purpose of this section is to establish record notice under Chapter 7, Title 30. Failure to make the required filing of a corporate name change will not affect the legality, force, effect, or enforceability as between the parties of any conveyance or other transaction involving the real estate owned by the affected corporation that is made subsequent to the change in name.
SOUTH CAROLINA REPORTERS' COMMENTS
This is a non-Model Act provision. It is essentially the same as Section 33-4-104 of the South Carolina Business Corporation Act. The South Carolina Reporters' Comments to that section may be helpful in interpreting this section. This provision also had a counterpart in the earlier nonprofit statutes. Former Section 33-31-170 required that all nonprofit charters and any amendments thereto (regardless if the corporation owned any real property) were to be recorded within thirty days after the charter was issued in the office of the clerk of court or register of mesne conveyances in the county in which the corporation is organized.
Section 33-31-501. Registered office and registered agent.
Each corporation must continuously maintain in this State:
(1) a registered office with the same address as that of the registered agent; and
(2) a registered agent, who may be:
(i) an individual who resides in this State and whose office is identical with the registered office;
(ii) a domestic business or nonprofit corporation whose office is identical with the registered office; or
(iii) a foreign business or nonprofit corporation authorized to transact business in this State whose office is identical with the registered office.
OFFICIAL COMMENT
Section 5.01 is particularly important for nonprofit corporations, many of which are small, have no permanent office, and are difficult to locate. Section 5.01, by mandating a registered agent and registered office, provides a place where service of process can be made and notices from governmental entities directed.
Section 5.01 requires all nonprofit corporations to maintain a registered office and a registered agent at the same address. The office may be anywhere in the state. It is a "legal" office and in many cases will not be the same as the real office, if any, of the corporation. Any person who resides in the state, any domestic nonprofit or business corporation or any foreign nonprofit or business corporation authorized to do business in the state may serve as the registered agent. Many nonprofit corporations will designate an officer or their attorney to act as their registered agent. Nonprofit corporations can employ corporation service companies to act as their registered agent and provide their registered office. The office of the agent will become the registered office of the corporation.
SOUTH CAROLINA REPORTERS' COMMENTS
1. Background information
Under the prior nonprofit statutes contained in former Chapter 31, Title 33, it was unclear whether nonprofit corporations were required to have statutory agents. The nonprofit statutes themselves were silent on the matter. However, a provision in the South Carolina Business Corporation Act, Section 33-20-103, stated:
Chapters 1 through 20 of this Title apply to every domestic nonprofit corporation and to every foreign nonprofit corporation which is authorized or transacts business in this State except as otherwise provided in Chapter 1 through 20 of this Title or by the law regulating the organization, qualification, or governance of the nonprofit corporation.
Did this language require nonprofit corporations to have statutory agents? The Secretary of State did not interpret the section as requiring such. This policy of not requiring statutory agents for nonprofit corporations created problems in the context of litigation respecting homeowner associations and incorporated condominium regimes. Whether or not formerly required, it was obvious and logical that nonprofit corporations should also have agents.
2. Operation of new section
This new section is identical to Section 33-5-101 of the South Carolina Business Corporation Act. Although not mentioned in this Section 33-31-501, but mentioned in Sections 33-31-202(a)(3) and 33-31-502, the actual street address (not post office box) must be listed for the office and agent. There is now a separate section, with identical language, which specifies the requirements for a registered office and agent for foreign nonprofit corporations. See Section 33-31-1507.
Section 33-31-502. Change of registered office or registered agent.
(a) A corporation may change its registered office or registered agent by delivering to the Secretary of State for filing a statement of change that sets forth:
(1) the name of the corporation;
(2) the street address, with zip code, of its current registered office;
(3) if the current registered office is to be changed, the street address, including zip code, of the new registered office;
(4) the name of its current registered agent;
(5) if the current registered agent is to be changed, the name of the new registered agent and the new agent's written consent, either on the statement or attached to it, to the appointment; and
(6) that after the change or changes are made, the street addresses of its registered office and the office of its registered agent which will be identical.
(b) If the street address of a registered agent's office is changed, the registered agent may change the street address of the registered office of any corporation for which the registered agent is the registered agent by notifying the corporation in writing of the change and by signing, either manually or in facsimile, and delivering to the Secretary of State for filing a statement that complies with the requirements of subsection (a) and recites that the corporation has been notified of the change.
OFFICIAL COMMENT
Section 5.02 provides an easy method for changing a registered agent or registered office without the need to obtain board or member approval. The section requires a newly designated registered agent to sign a written consent to the appointment. This is to ensure that a nonprofit corporation does not appoint someone to serve as registered agent without informing that person of the appointment and obtaining that person's consent.
Section 5.02(c) allows a registered agent to change the address of the registered office simply by notifying he corporation and signing and delivering a statement of change to the secretary of state.
SOUTH CAROLINA REPORTERS' COMMENTS
This is identical to the previously applicable section, Section 33-5-102 of the South Carolina Business Corporation Act. If a new agent is being appointed he must consent to the appointment. Any authorized officer can appoint a new agent without formal board of directors' approval. If the agent dies or becomes incapacitated, Section 33-31-501 imposes a duty on the nonprofit corporation to appoint a successor. The registered agent, as any other agent, serves at the pleasure of the corporation and the corporation has the right to terminate the agent. If the agent merely moves its office, the agent itself may notify both the corporation and Secretary of State of the move. The notification to the Secretary of State shall contain all the same information as if the corporation were directing the change.
Section 33-31-503. Resignation of registered agent.
(a) A registered agent may resign as registered agent by signing and delivering to the Secretary of State the original and two exact or conformed copies of a statement of resignation. The statement may include a statement that the registered office is discontinued also.
(b) After filing the statement the Secretary of State shall mail one copy to the registered office, if not discontinued, and the other copy to the corporation at its principal office as shown in its articles or most recently filed notice of change of principal office.
(c) The agency appointment is terminated, and the registered office discontinued if so provided, on the thirty-first day after the date on which the statement was filed.
OFFICIAL COMMENT
Under section 5.03 a registered agent may resign by delivering to the secretary of state a signed original and two copies of a statement of resignation. The secretary of state will then inform the corporation of the resignation by mailing one copy to the registered office and another copy to the corporation "at its principal office shown on its most recent annual report filed under section 16.22." [In South Carolina, the principal office shown on the most recent Notice of Change of Principal Office.]
SOUTH CAROLINA REPORTERS' COMMENTS
This section is similar to the formerly applicable provision of the South Carolina Business Corporation Act, Section 33-5-103. The agency does not end for thirty-one days after the agent gives notice. Therefore, resigning agents have a continuing duty during this thirty-one day period. Although there may be overlap if one agent quits and another one is appointed within the thirty-one day grace period, service on either agent would be proper. (Section 33-31-501 mandates the nonprofit corporation to appoint a successor agent.) This is a beneficial option. For example, during ongoing litigation a party will be able to serve the "old" agent for the thirty-day window period. The party will not have to continuously check the Secretary of State's office to determine if a new agent might have been appointed since the last service was made. Some states have a provision that the agency ends as soon as a new agent is appointed. This prevents an overlap which is possible under the South Carolina Statute. For example, in South Carolina if agent #1 quits, his resignation is not effective for thirty-one days. If Agent #2 is appointed one day after agent #1 quits both will be serving for the thirty-day window period. There is a an identical, separate section, Section 33-31-1509 dealing with the resignation of agents for foreign nonprofit corporations.
Section 33-31-504. Service on corporation.
Except as otherwise specifically provided in this chapter, service of process on a nonprofit corporation must be in accord with the applicable provisions of Title 15.
OFFICIAL COMMENT
[Portions of Model Act section 5.04 are incorporated into section 15-9-210 of the Code of Laws of South Carolina, 1976.] Section 5.04 sets forth two nonexclusive ways of serving a corporation with process. A nonprofit corporation can be served by serving its registered agent if it has one. If it has no registered agent, or the registered agent cannot with reasonable diligence be served, the corporation may be served at its principal office as shown on the most recent annual report filed under section 16.22. [In South Carolina the principal office is designated on the most recently filed Notice of Change of Principal Office.]
Section 5.04 does not prescribe the only means or necessarily the required means of serving the corporation. A state may have a code of civil procedure or other law providing alternative ways of serving nonprofit corporations.
SOUTH CAROLINA REPORTERS' COMMENTS
Portions of Model Act section 5.04 are incorporated into section 15-9-210. Extensive comments explaining Section 15-9-210 are contained in the Reporters' Comments to Section 33-5-104 of the South Carolina Business Corporation Act. In adopting the South Carolina Business Corporation Act, it was determined that the service provisions should be retained in Title 15. Since the proposed nonprofit service provisions are similar to the existing provisions in Section 15-9-210, it was reasonable to amend Section 15-9-210. If service is made directly on the corporate secretary as provided in Section 15-9-210(b), the address would be the last filed Notice of Change of Principal Office, or if none has ever been filed, the principal office specified in the articles of incorporation.
In some instances, if the corporation fails to maintain a statutory agent to receive service of process, the Secretary of State becomes the corporation's statutory agent. See, for example, section 33-31-1707(b).
Section 33-31-505. Notice of Change of Principal Office.
If a corporation changes the location of its principal office, the corporation within thirty days shall file a Notice of Change of Principal Office with the Secretary of State. The Notice of Change of Principal Office shall set forth:
a. The name of the corporation; and
b. The current street address with zip code of the corporation's principal office and the former principal office address.
SOUTH CAROLINA REPORTERS' COMMENTS
Historically, not all nonprofit corporations have been required to file an annual report with the Tax Commission. Churches have been exempt. With the adoption of this South Carolina Nonprofit Corporation Act, the Department of Revenue and Taxation desired to exempt all nonprofit corporations from filing an annual report since it was costing more to process the paper than it was worth.
The annual report as to for-profit corporations functions to advise the public of changes in the entity's principal office. The current directors (with addresses) are listed in the annual report. Therefore, by eliminating the requirement that nonprofit corporations file an annual report an alternative public notice was required.
Therefore, each nonprofit corporation must file a short form with the Secretary of State, much in the nature of a notice of change of statutory agent. This filing is required to be made within thirty days of any change in the corporation's principal office.
Some nonprofit corporations such as Rotary clubs, the Kiwanis, and others, will not have an actual permanent location. They will have a usual place of meeting and may maintain a mailbox or a member's address as their mailing address. It is anticipated that the Secretary of State will liberally construe the requirement in this section that the organization list its "street address." In situations where the organization does not actually own or lease property, it is assumed that the filing will be acceptable if it specifies the usual mailing address which the organization uses. The organization, if it desires, could also specify its usual date, time, and place of meeting - or merely its usual place of meeting.
Different from the requirements applicable to business corporations, nonprofit corporations are not required to report changes in their officers and directors. Different from business corporations, most nonprofit corporations, such as churches, clubs, and homeowner corporations, change their directors and officers at least once a year. It was determined that a filling requirement for director changes would be burdensome, would not be complied with, and would not provide significant information.
This is a non-Model Act provision. The Model Act requires all nonprofit corporations to file an annual report.
It should be noted that other provisions of the South Carolina Revised Code impose other filing requirements. For example, many nonprofit corporations will be required to register with the Secretary of State pursuant to the Charitable Solicitations Act, Sections 33-55-40, 33-55-70, and 33-55-120. The Attorney General pursuant to Section 62-7-502, requires not only trusts, but certain corporations to register with him.
Certain nonprofit corporations are also required, pursuant to Section 33-31-1620 to make reports to their members which reports may also be open to inspection by the Attorney General or Secretary of State.
Section 33-31-601. Admission.
(a) The articles or bylaws may establish criteria or procedures for the admission of members.
(b) No person may be admitted as a member without his consent.
OFFICIAL COMMENT
Section 3.02 allows, but does not require, a nonprofit corporation to admit members. Any person may be admitted as a member. See section 1.40(21). As the definition of person contained in section 1.40(25) is all encompassing, minors, corporations, partnerships, governmental subdivisions and any other person without limitation may be admitted to membership. See New York Not-for-Profit Corporation Law Section 601.
Section 3.02(15) allows corporations to "establish conditions for admission of members" and "admit members." The requirements for admission are normally set forth in the article, bylaws or a resolution adopted by the board. These requirements will be upheld unless they conflict with some federal or state law.
Subdivision (b) prevents corporations from admitting people as members unless they consent to becoming members. Consent may be express or implied. For example, consent may be implied by acceptance of membership benefits knowing that the benefits are only offered to members.
Corporations sometimes name people as members without knowing or having the ability to identify individual members. For example, a corporation's bylaws may provide that "all poor people within one mile of city hall are members entitled to vote for directors." In many instances there is not way to prepare a list of these "members" or meet the notice or other requirements of the Model Act as to them, unless they identify themselves to the corporation. As a result of section 6.01, the above bylaw provision simply authorizes poor people in the area to become members. Before they became members they would have to apply for or consent to joining by attending a meeting, voting or otherwise evidencing consent. Until they had manifested this consent they would not be "members" as that term is defined in section 1.40(21).
SOUTH CAROLINA REPORTERS' COMMENTS
The former act did not address membership directly, but, by analogy to the Business Corporation Act, arguably assumed that nonprofit corporations would have members just as business corporations have shareholders. This argument is strengthened by the former act's reservation to members of significant powers, e.g., the power to amend the corporate charter, Section 33-31-130, and the power to dissolve the corporation, Section 33-31-150. The present act, at Sections 33-31-302 and 33-31-603, permits but does not require nonprofit corporations to have members. This clarity and Section 33-31-601's provision of membership procedures are changes from prior statutory law.
Consent to membership can be implied from circumstances. For example, one who purchases a real estate interest which is subject to covenants of record making the purchaser a member of a nonprofit corporation would have "consented" to membership.
"Member" is defined at Section 33-31-140(21) as "any person". "Person" is defined very broadly to include "any entity".
Section 33-31-602. Consideration.
Except as provided in its articles or bylaws, a corporation may admit members for no consideration or for such consideration as is determined by the board.
OFFICIAL COMMENT
Issuance of a membership, unlike the sale of stock, does not necessarily involve the sale of something of value. Memberships in public benefit and religious corporations have no economic value, but reflect a contribution or a commitment to participate in or support the organization and its objectives. Memberships in mutual benefit corporations may or may not have a n economic value depending on the nature of the organization. Nonprofit corporations need the ability to issue memberships for no consideration or such consideration as is set forth in or determined by their articles, bylaws, or board. Section 6.02 provides this flexibility.
Consideration may take any form including but not limited to promissory notes, intangible property, or past or future services. Payment may be made at such times and upon such terms as are set forth in or authorized by the articles, bylaws or a resolution of the board. It may be a fixed amount or based on a formula. For example, in some trade associations the scot of joining is based on the sales, net worth, or other characteristics of the applicant.
Provisions regarding the amount, nature and time of payment may be set forth in the articles, bylaws or a resolution adopted by the board. Board members in determining the nature, timing, and amount, if any, of payments are required to fulfill their duty of care and loyalty. The obligation of members to make payments to their corporation is dealt with in section 6.13.
SOUTH CAROLINA REPORTERS' COMMENTS
This provision had no direct counterpart in the former act but, by analogy to the Business Corporation Act, membership could be issued only upon adequate consideration determined in the discretion of the board of directors, subject to the directors' standard of care and loyalty. See Section 33-6-210. Section 33-31-602 includes no concept of adequacy, but attention is drawn to the Official Comment's observation that the board's duties of loyalty and care are implicated in the determination of consideration for membership.
Section 33-31-603. No requirement of members.
A corporation is not required to have members.
OFFICIAL COMMENT
Nonprofit corporations are not required to have members. They may operate with designated or appointed directors, self-perpetuating boards or delegates. See sections 6.40 and 8.04(b).
Most mutual benefit corporations have members. The members are those persons for whose benefit the corporation operates. There was some sentiment on the Committee to require all mutual benefit corporations to have members. However, numerous mutual benefit corporations serve or represent individuals or entities who pay for the services or representation but have no right to vote for directors. As they have no right to vote for directors, they are not "members" as that term is used in section 1.40(21) of the Model Act. (The corporation may, however, refer to them as "members.") A majority of the Committee felt that the Model Act should not prevent mutual benefit corporations from operating with self-perpetuating boards. However, by allowing this flexibility, the Model Act does not affect the duties, if any, the board may have toward those for whose benefit the corporation operates and who pay to support its activities. The nature and the extent of these duties, if any, is left to a case-by-case determination.
SOUTH CAROLINA REPORTERS' COMMENTS
See the South Carolina Reporters' Comments to Section 33-31-601.
Section 33-31-610. Differences in rights and obligations of members.
All members have the same rights and obligations with respect to voting, dissolution, redemption, and transfer, unless the articles or bylaws establish classes of membership with different rights or obligations. All members have the same rights and obligations with respect to any other matters, except as set forth in or authorized by the articles or bylaws.
OFFICIAL COMMENT
Section 6.10 allows great flexibility and diversity in membership rights. In the absence of an applicable article or bylaw provision, all members have the same rights and obligations with respect to voting, dissolution, redemption and transfer. If some members have different rights or obligations in regard to any of these matters, these rights must be set forth in the articles or bylaws and those members comprise a class of members. See section 1.40(5) which defines class as "a group of memberships that have the same rights with respect to voting, dissolution, redemption and transfer." A class vote may be required to amend voting, dissolution, redemption or transfer rights. See sections 10.04 and 10.22. Unless the differences as to voting, dissolution, redemption or transfer are set forth in the articles, or bylaws, each member has the same rights and obligations in regard to these matters as every other member.
The articles or bylaws may authorize any person, group or committee to establish different rights and obligations for different members unless different rights and obligations would create a separate class of members.
The differences may relate to dues, assessments, transfers of memberships in mutual benefit corporations, use of facilities, termination or suspension of members, voting, distributions on dissolution of mutual benefit corporations and other factors. Distinctions can be made between individual, corporate and other entities that are members of the corporation. These distinctions between members can be based on size, net worth, number of employees, activity and other factors. These distinctions do not necessarily result in classes having the right to vote separately on matters requiring a member vote. See sections 10.04 and 10.22.
Federal or state law may prohibit some differences or distinctions. Absent such a law, the underlying philosophy of the Model Act as embodied in section 6.10 is to authorize great diversity in memberships.
Once members have been admitted, a vote of the members may be required to change membership rights and obligations. See sections 10.03, 10.04, 10.21 and 10.22. Members' obligations to the corporation are dealt with in section 6.14.
SOUTH CAROLINA REPORTERS' COMMENTS
Former statutory law permitted classification of members by analogy to the Business Corporation Act. By such analogy, under the former act membership could be classified only in the articles of incorporation. See Section 33-6-101. Accordingly, the ability to classify members in the bylaws is a change from former law.
Classification could be limited to articles provisions by corporations wishing to do so.
Section 33-31-611. Transfers.
(a) Except as set forth in or authorized by the articles or bylaws, no member of a mutual benefit corporation may transfer a membership or any right arising therefrom.
(b) No member of a public benefit or religious corporation may transfer a membership or any right arising therefrom.
(c) Where transfer rights have been provided, no restriction on them is binding with respect to a member holding a membership issued before the adoption of the restriction unless the restriction is approved by the members and the affected member.
OFFICIAL COMMENT
Subdivision (a) provides that a membership in a mutual benefit corporation cannot be transferred unless the articles or bylaws provide for transfers. This comports with the reasonable expectations of members of most mutual benefit corporations. A corporation's articles or bylaws may provide for transfers if the members want transferable memberships. The articles or bylaws may impose limitations, conditions, and fees as a condition to transferring memberships.
Subdivision (b) requires the concept that memberships in public benefit and religious corporations are not securities, do not represent a valuable asset, are personal to each member, and should not be sold for value. Moreover, subdivision (b) prohibits a member of a public benefit or religious corporation from giving a membership to another person. This prevents members from passing membership rights to their friends or relatives without regard to their qualifications.
Subdivision (c) is particularly important to members of mutual benefit corporations if their memberships represent a valuable asset. It provides that no restriction on transfer can be imposed after the fact without approval of the members and the affected member. A class vote may be required. See sections 10.04, 10.05, 10.21 and 10.22.
SOUTH CAROLINA REPORTERS' COMMENTS
The statutory prohibition on transfer of memberships and membership rights by members of religious and public benefit corporations is a change from former law.
Section 33-31-612. Member's liability to third parties.
A member of a corporation is not, as such, personally liable for the acts, debts, liabilities, or obligations of the corporation.
OFFICIAL COMMENT
Section 6.12 sets forth the general rule that members have no personal liability to third parties for the corporation's acts, debts, liabilities, or obligations. Following incorporation members have limited liability in the absence of: (i) facts allowing a court to pierce the corporate veil; or (ii) a legally enforceable obligation of a member to the corporation. See section 2.04 as to the liability of persons purporting to act as or on behalf of a corporation that has not been formed.
SOUTH CAROLINA REPORTERS' COMMENTS
The protection provided to members of nonprofit corporations by Section 33-31-612 lies at the heart of the nonprofit corporation act. The wording of Section 33-31-612 is intended to give members of nonprofit corporations no less protection than is given to shareholders of business corporations under Section 33-6-210(b). See the Official Comment and the South Carolina Reporter's Comments to Section 33-6-210. Section 33-31-612 appears in the Model Act as Section 6.12. Section 6.13 of the Model Act addresses the circumstances under which a member of a nonprofit becomes "liable" to the corporation for dues or assessments. Section 6.14 provides that judgment creditors of a nonprofit corporation may bring a deficiency action against members for such "liabilities". The committee felt that the provisions of Sections 6.13 and 6.14 modified to an unwarranted degree the present law of South Carolina and, after extensive discussion, the committee agreed not to recommend adoption of Sections 6.13 and 6.14.
Section 33-31-620. Resignation.
(a) A member may resign at any time.
(b) The resignation of a member does not relieve the member from any obligations the member may have to the corporation as a result of obligations incurred or commitments made before resignation.
OFFICIAL COMMENT
Section 6.20(a) sets forth the basic right of a member to resign from a nonprofit corporation at any time. A nonprofit organization cannot force a person to belong to it. However, a person may be liable to the corporation for wrongfully withdrawing in violation of contractual or other obligations to remain as a member. Under section 6.20(b) a person may be liable for obligations incurred or commitments made prior to the resignation. These commitments may extend beyond the time the member resigns.
Resignation from membership will not allow a person to avoid liability for goods or service already provided or for ongoing obligations to which the member agreed prior to resignation. Section 6.20(b). This provision is particularly important to corporations that provide benefits or services to members' businesses. The member in joining the organization may promise to use its facilities or services for a specified period of time. While section 6.20(a) allows a member to resign at any time, section 6.20(b) allows the corporation to enforce or obtain damages for violation of a member's agreement.
SOUTH CAROLINA REPORTERS' COMMENTS
This provision had no counterpart in former statutory law.
Section 33-31-621. Termination, expulsion, and suspension.
(a) No member of a public benefit or mutual benefit corporation may be expelled or suspended, and no membership or memberships in such corporations may be terminated or suspended except pursuant to a procedure that is fair and reasonable and is carried out in good faith.
(b) A procedure is fair and reasonable when either:
(1) the articles or bylaws set forth a procedure that provides:
(i) not less than fifteen days prior written notice of the expulsion, suspension, or termination and the reasons therefore; and
(ii) an opportunity for the member to be heard, orally or in writing, not less than five days before the effective date of the expulsion, suspension, or termination by a person or persons authorized to decide that the proposed expulsion, termination, or suspension not take place; or
(2) it is fair and reasonable taking into consideration all of the relevant facts and circumstances.
(c) Any written notice given by mail must be given by first class or certified mail sent to the last address of the member shown on the corporation's records.
(d) A proceeding challenging an expulsion, suspension, or termination, including a proceeding in which defective notice is alleged, must be commenced within one year after the effective date of the expulsion, suspension, or termination.
(e) A member who has been expelled or suspended may be liable to the corporation for dues, assessments, or fees as a result of obligations incurred or commitments made before expulsion or suspension.
OFFICIAL COMMENT
Section 6.21 codifies the judicially developed requirement that expulsions, suspensions and terminations in public benefit and mutual benefit corporations must take place by means of a fair and reasonable procedure. Subsection (b)(1) provides a procedural "safe harbor" for corporations that meet its requirements.
If the "safe harbor" provisions are not met, a court may still uphold the procedural aspects of a termination on the ground that they were "fair and reasonable taking into consideration all the relevant facts and circumstances." Subsection (b)(2).
Section 6.21 does not deal with the question of the substantive grounds for termination. Nor does it negate the requirements that the procedure be carried out in good faith and not conflict with the corporation's internal procedures.
To provide finality subsection (d) requires that a proceeding challenging an expulsion, suspension or termination be commenced within one year after the date of the expulsion, suspension or termination.
A person who has been expelled or suspended is liable for dues, assessments and fees based on commitments made or obligations incurred prior to the expulsion or suspension. If the person has contracted or agreed to make payments to the corporation regardless of his or her status as a member, that obligation continues even though the person is suspended or is no longer a member.
In general, courts have not evaluated the fairness and reasonableness of procedures used by religious corporations to expel or suspend members. Section 6.21 does not expand or contract the rights of members of religious corporations in regard to termination, expulsion or suspension.
SOUTH CAROLINA REPORTERS' COMMENTS
Prior statutory law contained no provisions analogous to this section. To the extent that membership in a nonprofit corporation was a vested right, common-law courts could well have required some form of due process, not dissimilar from that required by this section, to attend expulsion. The due process provided for in Section 33-31-621 is procedural only.
This section is not intended to raise any inference that one expelled from a corporation loses any economic interest which has vested in the member in conformity with statute.
The provisions of this section do not apply to charter or bylaw amendments meeting the requirements of Section 33-31-1031.
Section 33-31-622. Purchase of memberships.
(a) A public benefit or religious corporation may not purchase any of its memberships or any right arising therefrom.
(b) A mutual benefit corporation may purchase the membership of a member who resigns or whose membership is terminated for the amount and pursuant to the conditions set forth in or authorized by its articles or bylaws. No payment shall be made in violation of Article 13.
OFFICIAL COMMENT
Section 6.22 distinguishes public benefit and religious corporations from mutual benefit corporations by prohibiting the former from purchasing any of their memberships.
The assets of public benefit and religious corporations are held for a public, charitable or religious purpose and may not be distributed to members upon dissolution or while the corporation is operating. Allowing public benefit and religious corporations to purchase memberships would invite evasion of this rule.
Members in mutual benefit corporations may have an economic interest in the corporation and their memberships may represent a valuable asset. Upon dissolution, any surplus may be distributed to members in the absence of some other distribution provision. Consequently, there is no need for an absolute prohibition on purchase of memberships. In fact there is a need to authorize such purchases under specified conditions. For example, country clubs and other mutual benefit organizations often issue memberships and agree to repurchase them if certain conditions are met.
Certain protections must be provided to the creditors of the corporation to ensure that the assets are not improperly diverted to members thereby rendering the corporation unable to meet its liabilities. Consequently, the provisions of chapter 13 relating to prohibited distributions are specifically referenced in section 6.22.
If a mutual benefit corporation has members, a bylaw provision authorizing purchase of memberships must be approved by the members. See sections 10.21 and 10.22.
SOUTH CAROLINA REPORTERS' COMMENTS
The prohibition on transfers of memberships in religious and public benefit corporations had no direct counterpart in the former act. The limitation of subsection (b) on illegal distributions of mutual benefit corporations is analogous to the limitation on distributions to shareholders of Section 33-6-400 of the Business Corporation Act.
Section 33-31-630. Derivative suits.
Derivative suits may be maintained on behalf of South Carolina corporations in federal and state court in accordance with the applicable rules of civil procedure.
OFFICIAL COMMENT
[The Model Act provisions were not adopted in South Carolina.]
1. Who May Bring Derivative Suits
Section 6.30 authorizes any director or members of domestic or foreign corporations holding five percent or more of the voting power or fifty members, whichever is less, to bring a derivative suit on behalf of the corporation. Each complainant must be a member or director at the time of the proceeding, but does not have to have been a member or director at the time of the complained-of act. The five percent or fifty-member test and the discretion a court has to award expenses (including counsel fees) if it finds that the suit was commenced without reasonable cause, should prevent strike suits and suits by a single or insignificant number of members.
2. Prior Demand on Board
In most instances prior demand on a corporation's board is a condition precedent to bringing a derivative suit. The demand allows the directors to investigate the claim and to act on behalf of the corporation if they find that action is warranted. If the corporation's investigation is in progress when the proceeding is filed, the court has discretion to stay the suit until the investigation is completed.
In some instances it is not necessary to make a demand on the directors prior to bringing suit. Where a demand would be useless the person bringing the action need only allege the reasons a demand was not made. A demand would be useless, for example, if the suit was against all the directors for entering into a conflict of interest transaction.
There is no requirement of a demand on a corporation's members.
Section 6.30 does not answer the vexing question of the effect of a determination by an independent majority of the board not to sue. This question is left to a case-by-case determination by the courts.
3. Miscellaneous Procedural Matters
Section 6.30 does not require those bringing a derivative suit to post a bond for expenses of the corporation or its officers or directors. On balance a bond requirement does more to deter meritorious suits by those unable to afford a bond, than to provide protection to the corporation and its officers.
4. Termination of the Proceeding
To ensure that settlement of a derivative suit is fair to the corporation and all its members, common law requires court approval of any settlement or discontinuance of the action. If a court determines that a proposed discontinuance or settlement will substantially affect the interests of a corporation's members, it may require notice of the settlement to be sent to the members. The court has discretion to determine who is to pay for the cost of giving notice. If notice is required, a court should consider the possibility of giving notice by means of a corporate magazine or newsletter See section 1.41.
5. Award of Costs and Counsel Fees
A court has discretion to require the complainants to pay the defendant's reasonable expenses (including counsel fees) if it finds that the proceeding was commenced frivolously or in bad faith. Section 8.30(d). This provision is particularly important in the case of public benefit or religious corporations that may spend funds defending a lawsuit rather than devoting them to their public, charitable or religious purposes.
A court also has discretion to award reasonable expenses (including counsel fees) to complainants if: (1) they were successful in whole or in part (success requires that the corporation take some action that the complainants sought or receive some economic or other benefit); or (2) anything was received by the corporation as a result of a judgment.
If the complainants are members of a public benefit corporation they cannot receive anything of economic value as a result of a derivative suit. Members of mutual benefit or religious corporations may receive something of value so long as that which they receive is not a prohibited distribution.
6. Notice to the Attorney General
The attorney general must be given notice of any derivative suit involving a public benefit corporation or assets held in charitable trust by a mutual benefit corporations. The notice provides the attorney general an opportunity to learn of and evaluate the dispute. After an evaluation the attorney general may, but does not have to, join in any such action. See section 1.70.
7. Exhaustion of Internal Remedies
Some nonprofit corporations have procedures for resolving internal disputes. In general these procedures should be exhausted prior to bringing a derivative suit.
8. Constitutional Limitations
Federal or state constitutional provisions may prohibit courts from considering derivative suits brought on behalf of religious corporations.
SOUTH CAROLINA REPORTERS' COMMENTS
South Carolina Rule of Civil Procedure 23(b)(1) and Federal Rule of Civil Procedure 23(b)(1) apply to South Carolina nonprofit corporations, and this has not been changed. See the South Carolina Reporter's Comments to Section 33-7-400 of the Business Corporation Act.
Rule 23(b)(1) contains the following elements:
-- One or more members may bring a derivative action.
-- The complaint must be verified.
-- The plaintiff must have been a member at the time of the harm complained of.
-- The complaint must allege with particularity any effort made to obtain action from the board "and the reasons for his failure to obtain the action or for not making the effort."
-- The plaintiff must fairly and adequately represent the interests of the members in enforcing the corporation's right.
-- Once begun, a derivative action may not be dismissed without court approval; notice of dismissal must be given to the members.
See S.C.R. Civ. Pro. r.23(b)(1). The Model Act would require that a derivative action be brought by no less than five percent of the voting power or by fifty members, whichever is less. Model Act section 6.30. Other states which have adopted versions of the Model Act have enacted similar requirements; see, e.g., Ore. Rev. Stat. Ann. Section 65.174(1)(a) (two percent of the voting power or twenty members); Miss. Code 1972 Ann. Section 79-11-193(1)(a) (five percent or fifty members). Neither the Model Act nor the cited statutes, however, contain the requirement of rule 23(b)(1) that the plaintiff member be adjudged to represent fairly and adequately the interests of the members in enforcing the corporation's right. This provision of rule 23(b)(1) is intended to accomplish the purpose of the Model Act's higher standing requirement, that is, to minimize strike and nuisance suits.
Section 33-31-640. Delegates.
(a) A corporation may provide in its articles or bylaws for delegates having some or all of the authority of members.
(b) The articles or bylaws may set forth provisions relating to:
(1) the characteristics, qualifications, rights, limitations and obligations of delegates including their selection and removal;
(2) calling, noticing, holding, and conducting meetings of delegates; and
(3) carrying on corporate activities during and between meetings of delegates.
OFFICIAL COMMENT
Section 6.40 authorizes corporations to operate with delegates rather than or in addition to members or a self-perpetuating board. The law in regard to delegates and their rights is not as well developed as that relating to members or self-perpetuating boards. For this reason section 6.40 does not set forth detailed provisions. It authorizes the articles or bylaws to set forth rules in regard to delegates, and carrying on corporate activities during and between meetings of delegates.
Once rules have been adopted they must be applied in a reasonable way considering the nature, size, customs and operations of the corporation.
If the corporation has a board, the board is bound by the provisions set forth in Chapter 8. Insofar as the delegates have been given the powers or some of the powers of members of the board, they have analogous rights, duties and obligations. See section 8.01.
SOUTH CAROLINA REPORTERS' COMMENTS
Prior statutory law contained no counterpart to this section.
Section 33-31-701. Annual and regular meetings.
(a) A corporation with members shall hold a membership meeting annually at a time stated in or fixed in accordance with the bylaws.
(b) A corporation with members may hold regular membership meetings at the times stated in or fixed in accordance with the bylaws.
(c) Annual and regular membership meetings may be held in or out of this State at the place stated in or fixed in accordance with the bylaws. If no place is stated in or fixed in accordance with the bylaws, annual and regular meetings must be held at the corporation's principal office.
(d) At the annual meeting:
(1) The president and chief financial officer shall report on the activities and financial condition of the corporation; and
(2) Unless this chapter or the articles of incorporation or bylaws require otherwise, notice of an annual meeting need not include a description of the purpose for which the meeting is called.
(e) At regular meetings, the members shall consider and act upon matters as raised consistent with provisions of the articles of incorporation or bylaws and, in addition, with the notice requirements of this chapter.
(f) The failure to hold an annual or regular meeting at a time stated in or fixed in accordance with a corporation's bylaws does not affect the validity of a corporate action.
OFFICIAL COMMENT
Section 7.01(a) requires all nonprofit corporations with members to hold annual meetings. The main activity at most annual meetings is the election of directors. However, directors may be elected by written ballot or written consent. See sections 7.04 and 7.08. Even if directors are not to be elected, it is still necessary to have an annual meeting to: (1) serve as a town forum in which the president and officers report on and answer reasonable questions concerning the activities and financial condition of the corporation; and (2) consider matters that may be raised consistent with the requirements of sections 7.05 and 7.23(b).
Some nonprofit corporations hold regular meetings of members in addition to holding an annual meeting of members. In some cases these regular meetings deal with matters that might otherwise be dealt with by the board of directors. Section 7.01(b) recognizes this practice and allows nonprofit corporations to hold regular meetings of members at times stated in or fixed in accordance with their bylaws. The Model Act does not require that any action be taken at these meetings. However, any action taken must be consistent with the notice requirements of sections 7.05 and 7.23(b).
If an annual or required regular meeting is not held, a member and, in the case of a public benefit corporation, the attorney general, may sue under section 7.03 to compel the corporation to hold the meeting.
Many nonprofit corporations operate informally and may not hold an annual or regular meeting required by their bylaws. The failure to hold an annual or regular meeting: (1) "does not affect the validity of any corporate action" (section 7.01(d)); and (2) the directors in office continue to serve until their successors are elected and qualify (section 8.05(b)). The corporation can continue to function. Actions taken by its board, officers and employees will be valid even though the corporation has not complied with he requirements of section 7.0. However, the directors' failure to call an annual or regular meeting might violate the duties set forth in section 8.30.
The bylaws may state the time and place of annual and regular meetings or may authorize the board or some other person to determine the time and place of annual and regular meetings. If the latter approach is used, the board or person calling the meeting has great discretion in establishing a convenient time and place for the meeting. This discretion must be exercised in good faith consistent with the duties set forth in section 8.30.
Annual meetings are only required for corporations with members. If a corporation has no members, there is no purpose in mandating an annual meeting of members.
SOUTH CAROLINA REPORTERS' COMMENTS
The provisions found in Article 7 relating to meetings of corporations with members are closely analogous to those found in the Business Corporation Act relating to shareholders' meetings. See Section 33-7-101, et seq. The statutory provision for permissive regular meetings is not found in the Business Corporation Act although it would appear that a business corporation wishing to establish regular meetings would be free to do so, so that no change is made in the law by this provision.
Subject to such provisions as section 33-31-705(c)(2) (which requires prior notice before certain matters may be brought before the members at an annual meeting), Section 33-31-701(d)(2) has been varied from the Model Act provision to permit any business to come before a corporation's annual meeting. This is somewhat different from the South Carolina Business Corporation Act.
Section 33-31-701(e) has been varied from the Model Act to make clear that corporations may specify in the articles or bylaws matters which may be taken up at regular meetings without notice. It is contemplated that corporations could provide that any business could be taken up at a regular meeting without notice.
Section 33-31-702. Special meetings.
(a) A corporation with members shall hold a special meeting of members:
(1) on call of its board or the person or persons authorized to do so by the articles or bylaws; or
(2) except as provided in the articles or bylaws of a religious corporation, if the holders of at least five percent of the voting power of any corporation sign, date, and deliver to any corporate officer one or more written demands for the meeting describing the purpose or purposes for which it is to be held.
(b) The close of business on the thirtieth day before delivery of the demand or demands for a special meeting to any corporate officer is the record date for the purpose of determining whether the five percent requirement of subsection (a) has been met.
(c) If a notice for a special meeting demanded under subsection (a)(2) is not given pursuant to Section 33-31-705 within thirty days after the date the written demand or demands are delivered to a corporate officer, regardless of the requirements of subsection (d), a person signing the demand or demands may set the time and place of the meeting and give notice pursuant to Section 33-31-705.
(d) Special meetings of members may be held in or out of this State at the place stated in or fixed in accordance with the bylaws. If no place is stated or fixed in accordance with the bylaws, special meetings must be held at the corporation's principal office.
(e) Only those matters that are within the purpose or purposes described in the meeting notice required by Section 33-31-705 may be conducted at a special meeting of members.
OFFICIAL COMMENT
1. Matters To Be Considered at Special Meeting
Special meetings are called to consider matters that have arisen between annual meetings. Only those matters that are within the purpose or purposes described in the notice of the special meeting may be considered at a special meeting. Section 7.02(e). This is to ensure that members will have adequate notice of all matters to be considered, can decide whether or not to attend the meeting, and cannot be forced to vote on unnoticed matters.
2. Persons Who May Call Special Meetings
Special meetings of all nonprofit corporations may be called by: (1) the board of directors; and (2) a person or persons authorized to do so by the articles or bylaws. The articles or bylaws may authorize the presiding officer of the board, the president, any corporate officer, a member or any other person to call a special meeting of members. Except as provide din the articles or bylaws of a religious corporation a person or persons holding five percent or more of the voting power of any corporation may demand that a special meeting be called.
3. Obligations of Corporation
The corporation has thirty days from receipt of a proper demand for a special meeting to give notice of the meeting. It has discretion to set a convenient time and place for the meeting, but should give due consideration to the time and place suggested by the person demanding a special meeting. The board or person acting on behalf of the corporation must act in good faith consistent with the duties set forth in section 8.30.
4. Wrongful Refusal to Call Special Meeting
In a nonprofit corporation, unlike a business corporation, those seeking a special meeting may have no economic ability or incentive to bring a legal proceeding to compel a special meeting. Requiring those seeking a special meeting to sue may be tantamount to prohibiting special meetings wrongfully opposed by those running the corporation. Consequently, section 7.02(c) allows those seeking a special meeting to resort to self-help if the corporation has wrongfully refused to call a meeting for a thirty-day period. Those seeking the meeting are authorized to call the meeting at a convenient time and place. In setting the time and place they must act reasonably and in good faith. The self-help remedy will be available only if the members seeking the meeting have a membership list or access to a membership list. The provisions of section 7.20 and Chapter 16 allow access to a membership list to communicate with other members concerning a special meeting. However, a corporation that wrongfully refuses to call a special meeting is not likely to voluntarily supply a membership list. Therefore, as a practical matter, the self-help remedy is limited to corporations with a few members or those where the membership list is generally available.
If the members cannot or do not want to notice a meeting, they may sue under section 7.03 to compel the corporation to notice and hold the meeting.
SOUTH CAROLINA REPORTERS' COMMENTS
The provisions of Section 33-31-702 are very similar to those found in Section 33-7-102 of the Business Corporation Act, which governed nonprofit corporations until the passage of the present act. The differences are (i) Section 33-7-102(a)(2) requires ten percent of the voting power to call a special meeting and (ii) Section 33-7-102 (b) permits the record date to be set according to the procedures of Section 33-7-107; if the record date is not so set, then it is the date on which the first demand was signed.
Section 33-31-703. Court-ordered meeting.
(a) The court of common pleas of the county where a corporation's principal office in this State or, if none in this State, its registered office, is located may summarily order a meeting to be held:
(1) on application of a member or other person entitled to participate in an annual or regular meeting, and in the case of a public benefit corporation, the Attorney General, if an annual meeting was not held within the earlier of six months after the end of the corporation's fiscal year or fifteen months after its last annual meeting; or
(2) on application of a member or other person entitled to participate in a regular meeting, and in the case of a public benefit corporation, the Attorney General, if a regular meeting is not held within forty days after the date it was required to be held; or
(3) on application of a member who signed a demand for a special meeting valid under Section 33-31-702, a person or persons entitled to call a special meeting and, in the case of a public benefit corporation, the Attorney General, if:
(i) notice of the special meeting was not given within thirty days after the date the demand was delivered to a corporate officer; or
(ii) the special meeting was not held in accordance with the notice.
(b) The court may fix the time and place of the meeting, specify a record date for determining members entitled to notice of and to vote at the meeting, prescribe the form and content of the meeting notice, fix the quorum required for specific matters to be considered at the meeting, or direct that the votes represented at the meeting constitute a quorum for action on those matters, and enter other orders necessary to accomplish the purpose or purposes of the meeting.
(c) If the court orders a meeting, it may also order the corporation to pay the member's costs, including reasonable counsel fees, incurred to obtain the order.
OFFICIAL COMMENT
Section 7.03 allows members, persons entitled to participate in an annual or regular meeting or to call a special meting, and the attorney general in the case of a public benefit corporation, to have a court enforce the provisions of sections 7.01 and 7.02 requiring annual, regular and special meetings. The court may act if (1) the annual meeting has not been held within the earlier of six months after the end of the corporation's fiscal year or fifteen months after its last annual meeting; (2) the regular meeting has not been held within 40 days after the date it was required to be held; or (3) a special meeting is not noticed within thirty days after the date demand was delivered to a corporate officer or was not held within a reasonable time. See section 7.05.
Under section 7.03 a court has discretion to determine whether or not to call an annual, regular or special meeting, when and where it should be held, what the record date will be, and what conditions, if any, should be imposed as a condition to holding the meeting. If it orders a meeting, it also has discretion to determine whether or not attorney's fees and costs should be paid by the corporation. In exercising its discretion the court should consider the good faith of the parties, the reasons the meeting has not been noticed or held, and other relevant factors.
Subsection (b) allows the court to fix the quorum requirement "or direct that the votes represented at the meeting constitute a quorum for" specified matters. This second alternative prevents those opposing the meeting from not attending the meting or withholding sufficient proxies to prevent a meeting from occurring due to lack of a quorum. A court-ordered notice should set forth any special quorum requirements to prevent members from being misled.
SOUTH CAROLINA REPORTERS' COMMENTS
This section follows very closely the analogous provisions of South Carolina Business Corporation Act Section 33-7-103, altered only for purposes of clarity and application to nonprofit corporations. It therefore represents no substantive change from prior law.
Section 33-31-704. Action by written consent.
(a) Unless limited or prohibited by the articles or bylaws, action required or permitted by this chapter to be approved by the members may be approved without a meeting of members if the action is approved by members holding at least eighty percent of the voting power. The action must be evidenced by one or more written consents describing the action taken, signed by those members representing at least eighty percent of the voting power, and delivered to the corporation for inclusion in the minutes or filing with the corporate records.
(b) If not otherwise determined under Section 33-31-703 or 33-31-707, the record date for determining members entitled to take action without a meeting is the date the first member signs the consent under subsection (a).
(c) A consent signed under this section has the effect of a meeting vote and may be described as such in any document filed with the Secretary of State.
(d) Written notice of member approval pursuant to this section must be given to all members who have not signed the written consent. If written notice is required, member approval pursuant to this section is effective ten days after the written notice is given.
OFFICIAL COMMENT
Section 7.04 authorizes members holding at least eighty percent of the voting power acting by written consent to take any cation that could be taken at a meeting of members. See section 1.40(35) for a definition of voting power. Members, sale of all or substantially all of a corporation's assets, dissolution and other significant corporate actions can be approved by written consent. The articles or bylaws may limit or prohibit action by written consent.
Subsection (d) requires that each member who did not sign the written consent be given written notice of any action approved pursuant to section 7.04. Action authorized pursuant to section 7.04 is effective ten days after such notice is given. See section 1.41 for a definition of the effective date of the notice. This notice provides an opportunity for members to protect their rights.
Corporations with numerous members can usually hold a meeting quicker than they can take action pursuant to section 7.04. Consequently section 7.04 will only be useful to nonprofit corporations with a few members or with a few members who hold at least eighty percent of the voting power.
A member may withdraw his or her consent at any time prior to consents representing eighty percent of the voting power being delivered to the corporation. Any such withdrawal is ineffective if delivered after the requisite consents have been delivered to the corporation. The withdrawing member may bring some court action to annul the consent if it was procured by fraud or some other improper means.
Action by written consent cannot serve as a substitute for a special meeting. If a special meeting is properly demanded, it must be held even though the matter or matters to be considered at the meeting could be voted upon by written consent. Similarly the annual meting requirement of the Model Act may not be circumvented by having a written consent. Even if directors are elected by written consent, the annual meeting must be held as provided in section 7.01.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is very similar to the provisions of Section 33-7-104 of the South Carolina Business Corporation Act, except that under this section the signed writing need not be unanimous (unless so provided by the articles or bylaws).
Section 33-31-705. Notice of meeting.
(a) A corporation shall give notice consistent with its bylaws of meetings of members in a fair and reasonable manner.
(b) Any notice that conforms to the requirements of subsection (c) is fair and reasonable, but other means of giving notice also may be fair and reasonable when all the circumstances are considered. However, notice of matters referred to in subsection (c)(2) must be given as provided in subsection (c).
(c) Notice is fair and reasonable if:
(1) the corporation notifies its members of the place, date, and time of each annual, regular and special meeting of members no fewer than ten or if notice is mailed by other than first class or registered mail, thirty, nor more than sixty days before the meeting date;
(2) notice of an annual or regular meeting includes a description of any matter that must be approved by the members under Section 33-31-831, 33-31-856, 33-31-1003, 33-31-1021, 33-31-1104, 33-31-1202, 33-31-1401, or 33-31-1402; and
(3) notice of a special meeting includes a description of the matter for which the meeting is called.
(d) Unless the bylaws require otherwise, if an annual, regular, or special meeting of members is adjourned to a different date, time, or place, notice need not be given of the new date, time, or place, if the new date, time, or place is announced at the meeting before adjournment. If a new record date for the adjourned meeting is or must be fixed under Section 33-31-707, however, notice of the adjourned meeting must be given under this section to the members of record as of the new record date.
(e) When giving notice of an annual, regular, or special meeting of members, a corporation shall give notice of a matter a member intends to raise at the meeting if:
(1) requested in writing to do so by a person entitled to call a special meeting; and
(2) the request is received by the secretary or president of the corporation at least ten days before the corporation gives notice of the meeting.
OFFICIAL COMMENT
Section 7.05 provides alternative ways of complying with the notice requirements of the Model Act. A nonprofit corporation may comply with the "safe harbor" notice requirements contained in subsection (c) or for some matters it may give notice by any means consistent with its bylaws that is "fair and reasonable when all the circumstances are considered." The circumstances include the purpose of the meeting and the nature, size, customs, and operations of the corporation. Section 7.05(b).
The "safe harbor" provisions require notice of the place, date and time of each annual and special meeting of members. This notice must be given no fewer than 10 nor more than 60 days before the meeting date unless the notice is mailed by other than first class or registered mail. To save money, many nonprofit corporations use their nonprofit mailing privileges to send notices. To accommodate this practice, section 7.05(c)91) authorizes mailing by other than first class or certified mail but requires that notice sent by such means be mailed at least 30 days before the meeting date.
The "safe harbor" provisions distinguish between annual, regular and special meetings in one respect. Notice of special meetings must include a description of the matter or matters that will be considered at the meeting. The notice of annual and regular meetings does not require a description of any matters to be considered at the meetings unless there is a proposal to amend the articles or bylaws, to indemnify a director or to approve a merger, sale of assets, dissolution or conflict of interest transaction.
While the "safe harbor" provisions are similar to typical notice requirements for business corporations, they may not be consistent with the practice of small, nontraditional or financially insignificant nonprofit corporations. Therefore, section 7.05(b) provides that except for approval of conflict of interest transactions, indemnification, amendment of article and bylaws and approval of mergers, sale of assets and dissolution, "other means of giving notice may also be fair and reasonable when all the circumstances are considered." Posting notice of a meeting on a bulletin board, an oral announcement at a meeting of members or some other means of providing notice may be sufficient.
In determining whether notice is fair and reasonable past practice is of great significance but is not necessarily controlling. The fact that a corporation has traditionally given notice in a particular way is strong evidence that it is fair and reasonable. To be fair and reasonable, notice must follow provisions set forth in a corporation's bylaws.
Numerous other matters including the following may be important in determining whether notice was given in a fair and reasonable manner: the cost of complying with the "safe harbor" provisions relative to the assets of the corporation, the difficulty in complying with the "safe harbor" provisions, the good faith of those giving the notice, the importance and uniqueness of the matter voted upon, the sophistication and expectations of the members and the historical attitude of the members toward notice of meetings.
Section 1.41 sets forth various ways in which notice can be given. Subsection (f) of section 1.41 may be particularly helpful to nonprofit corporations. It allows a "notice . . . mailed or delivered as part of a newsletter, magazine or other publication regularly sent to members to constitute written notice. . . ."
Section 7.22 should be consider when giving notice of annual, regular and special meetings because the quorum requirement of section 7.22 vary depending on the type of notice provided and the number of members attending the meeting in person or by proxy.
SOUTH CAROLINA REPORTERS' COMMENTS
Although this section is very similar to the analogous Section 33-7-105 of the Business Corporation Act, it represents changes from prior law in:
(i) giving greater flexibility to nonprofit corporations than is enjoyed by business corporations; and
(ii) making provision for conveyance to members of members' initiatives, in appropriate circumstances.
Section 33-31-706. Waiver of notice.
(a) A member may waive any notice required by this chapter, the articles, or bylaws before or after the date and time stated in the notice. The waiver must be in writing, be signed by the member entitled to the notice, and be delivered to the corporation for inclusion in the minutes or filing with the corporate records.
(b) A member's attendance at a meeting:
(1) waives objection to lack of notice or defective notice of the meeting, unless the member at the beginning of the meeting objects to holding the meeting or transacting business at the meeting;
(2) waives objection to consideration of a particular matter at the meeting that is not within the purpose described in the meeting notice, unless the member objects to considering the matter when it is presented.
OFFICIAL COMMENT
1. Written Waiver
A member may waive any notice requirement imposed by the Model Act or a corporation's articles or bylaws by signing and delivering a written waiver of notice to the corporation. The waiver may be signed and delivered either before or after the meeting or other event the notice of which is being waived. It may be a general waiver of all matters considered at a meeting or a limited waiver of specified actions.
2. Waiver by Attending Meeting
A member waives defective notice or failure to give notice of the date, time and place of a meeting by appearing at the meeting without raising an objection at the beginning of the meeting. If a member objects at the beginning of the meeting, the member preserves the right to object to the defective notice or lack of notice.
"Defects waived by attendance . . . include a failure to send the notice altogether, delivery to the wrong address, a misstatement of the date, time or place of the meeting, and a failure to notice the meeting within the time periods specified in section 7.05. . . . For purposes of this section, `attendance' at a meeting involves the presence of the [member] in person or by proxy." Official Comment to Section 7.06 of the Model Business Corporation Act.
To meet the "safe harbor" provisions of section 7.05(c), each matter to be considered at special meetings and certain matters to be considered at annual and regular meetings must be set forth in the notice of the meeting. A member who attends a meting would not necessarily know that these matters would be considered unless the member received proper notice. Mere attendance at a meeting should not, and under the Model Act, does not, waive a member's right to object to consideration of matters not properly notice. A member may object to considering improperly notice matters when they are presented. A member who does not object to consideration of such matters when they are presented, waives the right to object.
In some instances the waiver procedures of the Model Act may be unfair to a nonaggressive or unsophisticated member who learns of a meting just before it commences or walks into a meeting while it is in progress without knowing what is occurring. On balance, however, the waiver provisions provide certainty to the corporation and prevent members from appearing, losing a vote, and subsequently raising an objection to a lack of notice in a legal proceeding.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is virtually identical to Section 33-7-106 of the Business Corporation Act, and accordingly represents no change from prior statutory law.
"Delivered", as used in subsection (a), is defined in Section 33-31-140(8) to include "mail". The affidavit of an appropriate agent of the corporation that delivery has been made should shift the burden of proof to the party alleging failure of delivery.
Section 33-31-707. Record date - determining members entitled to notice and vote.
(a) The bylaws of a corporation may fix or provide the manner of fixing a date as the record date for determining the members entitled to notice of a members' meeting. If the bylaws do not fix or provide for fixing a record date, the board may fix a future date as a record date. If no record date is fixed, members at the close of business on the business day preceding the day on which notice is given or, if notice is waived, at the close of business on the business day preceding the day on which the meeting is held are entitled to notice of the meeting.
(b) The bylaws of a corporation may fix or provide the manner of fixing a date as the record date for determining the members entitled to vote at a members' meeting. If the bylaws do not fix or provide for fixing a record date, the board may fix a future date as a record date. If no record date is fixed, members on the date of the meeting who are otherwise eligible to vote are entitled to vote at the meeting.
(c) The bylaws may fix or provide the manner for determining a date as the record date for the purpose of determining the members entitled to exercise any rights in respect of any other lawful action. If the bylaws do not fix or provide for fixing a record date, the board may fix in advance a record date. If no record date is fixed, members at the close of business on the day on which the board adopts the resolution relating thereto, or the sixtieth day before the date of such other action, whichever is later, are entitled to exercise such rights.
(d) A record date fixed under this section may not be more than seventy days before the meeting or action requiring a determination of members occurs.
(e) A determination of members entitled to notice of or to vote at a membership meeting is effective for any adjournment of the meeting unless the board fixes a new date for determining the right to notice or the right to vote, which it must do if the meeting is adjourned to a date more than one hundred twenty days after the record date for determining members entitled to notice of the original meeting.
(f) If a court orders a meeting adjourned to a date more than one hundred twenty days after the date fixed for the original meeting, it may provide that the original record date for notice or voting continues in effect or it may fix a new record date for notice or voting.
OFFICIAL COMMENT
The concept of a record date is foreign to many nonprofit corporations. Nonprofit corporations often allow people to vote who become members on the day of a meeting. Some corporations use the right to vote as an incentive to join. These corporations have a cutoff day in advance of the meeting to determine who will receive notice of the meeting, but allow members who subsequently join to vote. Other nonprofit corporations, typically large or sophisticated organizations, adopt the record date concept used by business corporations. These corporations use the same record date to determine those entitled to notice and vote at a meeting. To accommodate these diverse practices the Model Act separates the concept of record date for notice from record date for the right to vote.
If the bylaws do not fix or provide the manner of fixing a record date for notice of a meeting, the board may do so. If no provision is contained in the bylaws and the board does not act, "members at the close of business on the business day preceding the day on which notice is given . . . are entitled to notice of the meeting." Section 7.07(a). If a meeting is held without notice and notice is waived, the day for determining who is entitled to waive notice is "the close of business on the business day preceding the day on which the meeting is held." Section 7.07(a).
If the bylaws do not fix or provide a manner for fixing a record date for voting at a meeting, the board may do so. If no provision is contained in the bylaws and the directors do not act, "members on the date of the meeting who are otherwise eligible to vote are entitled to vote at the meeting." Section 7.07(b).
If the bylaws do not fix or provide the manner for determining the record date for exercising rights other than the right to notice or to vote at a meeting, the board may do so. For example, the directors may set a record date for determining members of a mutual benefit corporation entitled to a distribution on dissolution of the corporation. If the bylaws do not set such a record date and the directors do not act, then the record date is the day on which the board adopts the resolution authorizing he distribution or the 60th day prior to the distribution, whichever is later.
These results comport with the way most nonprofit organizations operate. Corporations that operate in a different manner may adopt a bylaw or a corporate resolution setting forth a different record date.
A record date for determining what members are entitled to notice or vote at a meeting of members may be effective for an adjourned meeting provided the adjourned meeting is no more than 70 days after the record date for determining members entitled to notice of the original meeting. The board may always fix a new date for determining members entitled to notice or vote at an adjourned meeting provided it does so in good faith in a manner consistent with its obligations under section 8.30.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is substantially the same as Section 33-7-107 of the Business Corporation Act, except that (i) it deals with notice, voting, and other rights in three separate subsections; and (ii) it provides for membership action in default of director action.
The one hundred twenty-day time period of subsection (e), which measures the length of adjournment after which a new record date must be set, is a variation from the Model Act. The variation was made so that the time period would match that of Section 33-7-107 of the South Carolina Business Corporation Act.
Section 33-31-708. Action by written ballot.
(a) Unless prohibited or limited by the articles or bylaws, any action that may be taken at any annual, regular, or special meeting of members may be taken without a meeting if the corporation delivers a written ballot to every member entitled to vote on the matter.
(b) A written ballot shall:
(1) set forth each proposed action; and
(2) provide an opportunity to vote for or against each proposed action.
(c) Approval by written ballot pursuant to this section is valid only when the number of votes cast by ballot equals or exceeds the quorum required to be present at a meeting authorizing the action, and the number of approvals equals or exceeds the number of votes that would be required to approve the matter at a meeting at which the total number of votes cast was the same as the number of votes cast by ballot.
(d) All solicitations for votes by written ballot shall:
(1) indicate the number of responses needed to meet the quorum requirements;
(2) state the percentage of approvals necessary to approve each matter other than election of directors; and
(3) specify the time by which a ballot must be received by the corporation in order to be counted.
(e) Except as otherwise provided in the articles or bylaws, a written ballot may not be revoked.
OFFICIAL COMMENT
Section 7.08 authorizes election of directors and approval of actions by written ballot. The ballots must be distributed to every member, provide specified information and allow a reasonable time for their return.
Most nonprofit corporations do not have sophisticated means of counting ballots. To ease the problem of counting ballots subsection (e) provides that a written ballot cannot be revoked unless revocation is authorized by the articles or bylaws.
Section 7.08 does not prohibit cumulative voting when directors are being elected by written ballot. However, the board of a corporation should think twice before allowing cumulative voting by written ballot. If election is by written ballot, contesting factions cannot sensibly decide how to allocate their votes to maximize the number of directors they can elect.
Action by written ballot may not serve as a substitute for an annual or special meeting of members.
SOUTH CAROLINA REPORTERS' COMMENTS
This section had no counterpart in prior statutory law. Significantly, ballots submitted pursuant to this section are not revocable, unlike proxies under Section 33-31-724.
"Deliver", as used in subsection (a), is defined in Section 33-31-140(8) to include "mail". The affidavit of an appropriate agent of the corporation that delivery has been made should shift the burden of proof to the party alleging failure of delivery.
Section 33-31-720. Members' list for voting.
(a) After fixing a record date for a notice of a meeting, a corporation shall prepare an alphabetical list of the names of all its members who are entitled to notice of the meeting and shall list the members by classification of membership, if any. The list must show the address and number of votes each member is entitled to vote at the meeting. The corporation shall prepare on a current basis through the time of the membership meeting a list of members, if any, who are entitled to vote at the meeting but not entitled to notice of the meeting. This list must be prepared on the same basis and be part of the list of members.
(b) The list of members must be available for inspection by any member for the purpose of communication with other members concerning the meeting, beginning the day after notice is given of the meeting for which the list was prepared and continuing through the meeting, at the corporation's principal office or at a reasonable place identified in the meeting notice in the city where the meeting will be held. A member, a member's agent, or member's attorney is entitled on written demand to inspect and, subject to the limitations of Sections 33-31-1602(c) and 33-31-1605, to copy the list, at a reasonable time and at the member's expense, during the period it is available for inspection.
(c) The corporation shall make the list of members available at the meeting, and any member, a member's agent, or member's attorney is entitled to inspect the list at any time during the meeting or any adjournment.
(d) If the corporation refuses to allow a member, a member's agent, or member's attorney to inspect the list of members before or at the meeting, or copy the list as permitted by subsection (b), the court of common pleas of the county where a corporation's principal office in this State or, if none in this state, its registered office, is located, on application of the member, may summarily order the inspection or copying at the corporation's expense and may postpone the meeting for which the list was prepared until the inspection or copying is complete and may order the corporation to pay the member's costs, including reasonable counsel fees, incurred to obtain the order.
(e) Unless a written demand to inspect and copy a membership list has been made under subsection (b) before the membership meeting and a corporation improperly refuses to comply with the demand, refusal or failure to comply with this section does not affect the validity of action taken at the meeting.
(f) The articles or bylaws of a religious corporation may limit or abolish the rights of a member under this section.
(g) A member may inspect and copy the membership list only if (i) his demand is made in good faith and for a proper purpose; (ii) he describes with reasonable particularity his purpose; and (iii) the list is directly connected with his purpose.
OFFICIAL COMMENT
1. Rights Provided to Members
A corporation is required to make its membership list available to any member for inspection or copying two days after notice of the meeting is given. The list must include the name and address and number of votes each member is entitled to cast at the meeting and must be updated to and including the date of the meeting. The need to update the list would only occur if members entitled to vote at the meeting join the corporation after the notice of the meeting is given. See section 7.07.
Prior to the meeting the list must be available at the corporation's "principal office" or "at a reasonable place identified in the meeting notice in the city where the meeting is to be held." In addition the list must be available at the meeting of members. Prior to and during the meeting of members the list may be copied at the member's expense by the member or the member's agent or attorney.
The right to inspect a copy of the list pursuant to section 7.20 is separate and independent of the inspection rights contained in Chapter 16. However, the limitations on inspection and copying rights of section 16.02(c) and 16.05 are applicable to inspection and copying under section 7.20.
If a record date notice a meeting is less than two days prior to the meeting because the meeting will be held pursuant to written waivers of notice, the list need only be available for inspection and copying at the meeting.
2. Enforcement of Rights
A court may summarily order inspection and copying of the list at the corporation's expense. In addition it may postpone the meeting for such period of time as it deems reasonable if the list has been wrongfully withheld and may order the corporation to pay the reasonable costs including counsel fees incurred to obtain the orders it makes. The court is not required to make any order, but has broad discretion to do what is appropriate and necessary under the circumstances taking into consideration the good faith of the parties, the reasons the corporation refused to provide the list, and other relevant facts.
3. Effect of Refusal to Comply with Section
With one exception the validity of any action taken at a meeting is not affected by the refusal or failure of the corporation to prepare, identify the location, or make available the list of members. In most instances members will not even ask to look at the membership list. In such cases the failure to follow the requirements of section 7.20 are of no consequence. Where a corporation wrongfully refuses a member's request prior to a meeting to inspect a membership list, a court may invalidate the meeting after consideration of all the equities. If an action is brought prior to the meeting, a court may postpone the meeting until the member has had a reasonable opportunity to copy and use the membership list.
4. Religious Corporations
The rights of inspection set forth in section 7.20 may be limited or abolished in a religious corporation's articles or bylaws. If they are not limited or abolished, members of religious corporations have the rights set forth in section 7.20.
SOUTH CAROLINA REPORTERS' COMMENTS
This section differs from South Carolina Business Corporation Act Section 33-7-200 chiefly in details pertinent to the differences between nonprofit and business corporations. This section has been varied from the Model Act in the following ways:
1. Subsection (a) has been modified to require that the members be listed by classification of membership, if any. This is analogous to the requirement of Section 33-7-200(a) of the South Carolina Business Corporation Act that the shareholders' list be arranged by voting group.
2. Subsection (b) has been altered to require that the list be available on the day notice is given, as is provided in Section 33-7-200 (b) of the South Carolina Business Corporation Act. The Model Act suggested that the list be required to be available two days after the date notice is sent.
3. Subsection (d) has been altered to delete a provision permitting courts to require the payment of a member's costs, when the member was refused inspection under this section. This alteration makes subsection (d) analogous to Section 33-7-200(d) of the South Carolina Business Corporation Act.
4. Subsection (g) has been added to make a member's right to inspect and copy the membership list coextensive with a shareholder's right to inspect and copy the record of shareholders under Section 33-16-102 of the South Carolina Business Corporation Act.
Section 33-31-721. Voting entitlement generally.
(a) Unless the articles or bylaws provide otherwise, each member is entitled to one vote on each matter voted on by the members.
(b) Unless the articles or bylaws provide otherwise, if a membership stands of record in the names of two or more persons, their acts with respect to voting have the following effect:
(1) if only one votes, the act binds all; and
(2) if more than one votes, the vote must be divided on a pro rata basis.
OFFICIAL COMMENT
Section 7.21 sets forth the basic rule that each member is entitled to one vote on each matter voted on by the members unless the articles or bylaws provide otherwise. Also see section 6.10. Corporations that wish to provide different voting rights may do so in their articles or bylaws. Different voting rights can be based upon the amount of dues paid or contributions made, the number of hours devoted to the corporation's activities, the net worth, sales volume, or number of outlets of a corporate member or innumerable other factors considered significant by the organization. These distinctions will be upheld by the courts unless they violate some federal or state law or are adopted in violation of some provision of the Model Act.
Subsection (b) deals with single memberships held by two or more persons. In the absence of a contrary bylaw provision, if only one person votes, that vote binds, the other holds. If more than one person votes, the vote is split pro rate based on the number of people voting. This rule comports with normal expectations, at least where one membership is held by a family and each member of the family is listed as holding part of the membership. In a mutual benefit organization where a membership is valuable, this rule may not make sense and some alternate approach should be set forth in the bylaws.
SOUTH CAROLINA REPORTERS' COMMENTS
This section varies from prior statutory law only in providing a default method of counting votes of dual memberships.
Section 33-31-722. Quorum requirements.
(a) Unless this chapter, the articles, or bylaws provide for a higher or lower quorum, ten percent of the votes entitled to be cast on a matter must be represented at a meeting of members to constitute a quorum on that matter.
(b) A bylaw amendment to change the quorum for a member action may be approved by the members and, if required, be approved as provided in Section 33-31-1030.
(c) An amendment to the articles of incorporation or bylaws that adds, changes, or deletes a greater quorum must be adopted under the quorum then in effect or proposed to be adopted, whichever is greater.
OFFICIAL COMMENT
Many nonprofit corporations have a low member turnout and need a low quorum to hold annual, regular or special meetings. In recognition of this need the section does not set a lower limit on a quorum requirement. For example, the bylaws may provide that the quorum is composed of those attending the meting or those voting upon a matter. This insures a quorum so long as one member attended the meeting or voted on a matter.
With the low quorum requirement authorized by section 7.22 a few members may plan to take over an annual or regular meeting and vote upon matters that were not noticed. To protect against this possibility section 7.22(d) prohibits members from voting upon a matter that was not noticed unless one third or more of the voting power is represented. When, however, a matter is noticed, a quorum of one member can act upon it. If the matter is not noticed, at least one third of the voting power must be present to take action. At special meetings members may only vote on matters that are noticed. See section 7.02(e).
Section 7.22(b) allows the members or the board to decrease the quorum. Decreasing the quorum should not be detrimental to the members as member action still requires at least approval by a majority of a quorum. The notice requirements of section 7.05 and voting requirements of section 7.23(a) provide additional protection. The bylaws may provide complete protection, and rigidity, by prohibiting the board from decreasing the quorum.
A bylaws amendment to increase the quorum may make it difficult for members to act. Consequently section 7.22(c) requires any such amendment to be approved by the members.
For those corporations whose articles or bylaws do not set a quorum, subsection (a) provides that the quorum shall be ten percent of the votes entitled to be cast on the matter. See section 1.40(35) for a definition of "voting power."
Quorum requirements may be changed by complying with the provisions of sections 10.01 through 10.05 when amending articles and sections 7.23 and 10.20 through 10.23 when amending bylaws. Section 10.30 may require the consent of a third person when the articles or bylaws are amended.
SOUTH CAROLINA REPORTERS' COMMENTS
Under prior law, the South Carolina Business Corporation Act provisions relating to quorums, Sections 33-7-250 and 33-7-270, governed nonprofit corporations. Those sections provided that a majority of votes entitled to be cast constituted a quorum unless the articles of incorporation provided differently. Section 33-31-722 sets the default quorum at ten percent, and permits this to be varied in the articles of incorporation or bylaws.
The Model Act version of this section permitted the board to amend the bylaws to decrease a quorum requirement for member action. That provision has been altered so that amendments to decrease and increase quorums for member action must be approved by the members. The articles of some nonprofit corporations may also require the approval of a third party. See Section 33-31-1030.
Subsection (c) has been added to the Model Act version of this section. It is similar to Section 33-7-270(b) of the South Carolina Business Corporation Act. See also Section 33-31-723(c).
The Model Act version of this section provides that unless at least one-third of the voting power is present at an annual or regular meeting, no action can be taken which is not described in the meeting notice. That provision has been deleted. Provisions of this sort can, of course, be included in a corporation's articles or bylaws.
Sections 33-31-1002, et seq. and 33-31-1021, et seq. address amendment of the articles and the bylaws, respectively. Attention is drawn to the notice and other requirements of those sections.
Section 33-31-723. Voting requirements.
(a) Unless this chapter, the articles, or the bylaws require a greater vote or voting by class, if a quorum is present, the affirmative vote of the votes represented and voting, which affirmative votes also constitute a majority of the required quorum, is the act of the members.
(b) A bylaw amendment to increase or decrease the vote required for a member action must be approved by the members and, if required, be approved as required in Section 33-31-1030.
(c) An amendment of the articles of incorporation or bylaws adding, changing, or deleting a voting requirement must be adopted by the same vote and classes of members required to take action under the voting requirements then in effect or proposed to be adopted, whichever is greater.
OFFICIAL COMMENT
See section 1.40(1) for the definition of "approved by the members." Also see the Official Comment to section 1.40 for a discussion of the meaning of "approved by the members." The question of the member vote required to approve an action should be within the control of the members. Consequently section 7.23(c) requires member approval to amend the bylaws to increase or decrease a required vote. Of course, the members cannot reduce the vote required for member action below a majority of the required quorum. Section 1.40(1). Nor may they change a vote mandated by the Model Act.
SOUTH CAROLINA REPORTERS' COMMENTS
Under prior statutory law, Section 33-7-250 of the South Carolina Business Corporation Act governed voting requirements. That section provides that the membership has acted where approving votes outnumber dissenting votes, a formulation which ignores abstentions. Section 33-31-723 requires that, for membership action, a majority of votes cast and a majority of a quorum must be cast in favor. Under this formulation, an abstention is effectively a negative vote.
Under prior statutory law, Section 33-7-270(b) of the South Carolina Business Corporation Act governed changes in voting requirements, providing that changes in voting requirements must be approved by the greater of the existing or the proposed new requirement. This provision has been added to Section 33-31-723 as subsection (c). This is a variation from the Model Act. See also Section 33-31-722(c).
Prior statutory law required variations in voting requirements to appear in the articles of incorporation. Section 33-31-723 contemplates that such variations may appear in the bylaws.
Section 33-31-724. Proxies.
(a) Unless the articles or bylaws prohibit or limit proxy voting, a member may appoint a proxy to vote or otherwise act for the member by signing an appointment form either personally or by an attorney-in-fact.
(b) An appointment of a proxy is effective when received by the secretary or other officer or agent authorized to tabulate votes. An appointment is valid for eleven months unless a different period is expressly provided in the appointment form. However, no proxy is valid for more than three years from its date of execution.
(c) An appointment of a proxy is revocable by the member.
(d) The death or incapacity of the member appointing a proxy does not affect the right of the corporation to accept the proxy's authority unless notice of the death or incapacity is received by the secretary or other officer or agent authorized to tabulate votes before the proxy exercises authority under the appointment.
(e) Appointment of a proxy is revoked by the person appointing the proxy:
(1) attending any meeting and voting in person; or
(2) signing and delivering to the secretary or other officer or agent authorized to tabulate proxy votes either a writing stating that the appointment of the proxy is revoked or a subsequent appointment form.
(f) Subject to Section 33-31-727 and any express limitation on the proxy's authority appearing on the face of the appointment form, a corporation is entitled to accept the proxy's vote or other action as that of the member making the appointment.
OFFICIAL COMMENT
Section 7.24 authorizes members to vote by proxy, but allows the articles or bylaws to prohibit or limit proxy voting.
"The word `proxy' is often used ambiguously, sometimes referring to the grant of authority to vote, sometimes to the document granting the authority, and sometimes to the person to whom the authority is granted . . . the word `proxy' is used only in the last sense; the term `appointment form' is used to describe the document appointing the proxy; and the word `appointment' is used to describe the grant of authority to vote." Official Comment to Section 7.22 of the Model Business Corporation Act.
A member or the member's attorney-in-fact may appoint a proxy by signing an appointment form. No particular type of form is required. A proxy may vote or otherwise act for the member on all matters unless the appointment form contains an express limitation on the proxy's authority. Members wishing to limit the power of a proxy should carefully draft the authorization form to limit the proxy's power.
The corporation must treat the act of the proxy as the act of the member unless the appointment form limits the power of the proxy or directs the proxy to act in a specified way. Any such limitation or direction must be observed by the corporation.
The appointment of a proxy may be revoked at any time. See subsection (e) for means of revocation.
To provide certainty, subsection (d) modifies common law principles and allows a corporation to accept a proxy's authority until it receives notice of the death or incapacity of the member appointing the proxy. A proxy's vote or other action is final and binding, but the proxy may be liable to the appointment member for damage resulting from the proxy's failure to act in accordance with the appointment.
SOUTH CAROLINA REPORTERS' COMMENTS
Under formerly applicable statutory law, the proxy rules for nonprofit corporations were borrowed from Section 33-7-220 of the South Carolina Business Corporation Act. The proxy rules of Section 33-31-724 differ from former law in the following ways: No provision is now made for irrevocable proxies; three years is established as the maximum duration of a proxy; proxies become effective when received by the officer authorized to tabulate votes and not at a date appearing on the proxy form; and there is no counterpart to the antifraud provision of the Business Corporation Act, Section 33-7-220(i).
In many nonprofit corporations, the directors are also the "members" for statutory purposes. Directors taking action as directors may not act by proxy, but directors taking action as the members may.
Section 33-31-725. Cumulative voting for directors.
(a) If the articles provide for cumulative voting by members, members may so vote by multiplying the number of votes the members are entitled to cast by the number of directors for whom they are entitled to vote, and cast the product for a single candidate or distribute the product among two or more candidates.
(b) Cumulative voting is not authorized at a particular meeting unless:
(1) the meeting notice or statement accompanying the notice states that cumulative voting will take place; or
(2) a member gives notice during the meeting and before the vote is taken of the member's intent to cumulate votes and if one member gives this notice, all other members participating in the election are entitled to cumulate their votes without giving further notice.
(c) A director elected by cumulative voting may be removed by the members without cause if the requirements of Section 33-31-808 are met unless the votes cast against removal, or not consenting in writing to the removal, would be sufficient to elect the director if voted cumulatively at an election at which the same total number of votes were cast or, if such action is taken by written ballot, all memberships entitled to vote were voted and the entire number of directors authorized at the time of the director's most recent election were then being elected.
(d) Members may not cumulatively vote if the directors and members are identical.
OFFICIAL COMMENT
Section 7.25 allows the articles or bylaws to authorize cumulative voting. As a condition to cumulative voting subsection (b) requires that the meeting notice or proxy statement state that cumulative voting will take place or that during the meeting a member gives notice of the member's intent to cumulate votes before the vote is taken. These requirements are imposed as cumulative voting should only be allowed if members know or reasonably should know that the election will be by cumulative voting. Otherwise unfair and unintended results will occur as some members will cumulate their vote and others will not.
Section 7.25 also sets forth the mechanics of cumulative voting and protects a minority that has elected a director from having that director removed by the majority.
Subsection (c) provides that protection by prohibiting the removal of a director if those opposing the removal would have been able to elect the director by cumulative voting.
Subsection (d) prevents potentially unintended and unfortunate results by prohibiting cumulative voting when the directors and members are identical. In such situations directors could perpetuate themselves in office by voting cumulatively. If self-perpetuation is desired, it should be done directly by designation of directors or by some other means, not inadvertently by allowing cumulative voting.
SOUTH CAROLINA REPORTERS' COMMENTS
Former law borrowed the rules for cumulative voting from Section 33-7-280 of the Business Corporation Act. Section 33-31-725 differs from former law in the following respects: It does not specify how directors are to be elected, so that specific provision must be made in the articles or bylaws. It does not contemplate the possibility of advance notice to a corporate officer found in Section 33-7-280(c)(2)(1). It prohibits cumulative voting where the directors and the members are identical.
Section 33-31-725 embodies a presumption that corporations will not have cumulative voting. This is the opposite of the presumption found in Section 33-7-280 of the South Carolina Business Corporation Act.
Section 33-31-726. Other methods of electing directors.
A corporation may provide in its articles or bylaws for election of directors by members or delegates:
(1) on the basis of chapter or other organizational unit;
(2) by region or other geographic unit;
(3) by preferential voting; or
(4) by any other reasonable method.
OFFICIAL COMMENT
As there is no valid reason to limit voting for directors to cumulative or straight voting, section 7.26 allows directors to be elected by three other specified methods and any other reasonable basis. The method of electing directors may not, however, be made up on an ad hoc basis, but must be set forth in or authorized by the articles or bylaws. The board in overseeing an election must comply with the fiduciary standards set forth in section 8.30 regardless of the manner in which the election is conducted.
SOUTH CAROLINA REPORTERS' COMMENTS
This section had no counterpart in the formerly applicable statutory law.
Section 33-31-727. Corporation's acceptance of votes.
(a) If the name signed on a vote, consent, waiver, or proxy appointment corresponds to the name of a member, the corporation if acting in good faith is entitled to accept the vote, consent, waiver, or proxy appointment and give it effect as the act of the member.
(b) If the name signed on a vote, consent, waiver, or proxy appointment does not correspond to the record name of a member, the corporation if acting in good faith is nevertheless entitled to accept the vote, consent, waiver, or proxy appointment and give it effect as the act of the member if:
(1) the member is an entity and the name signed purports to be that of an officer or agent of the entity;
(2) the name signed purports to be that of an attorney-in-fact of the member and if the corporation requests, evidence acceptable to the corporation of the signatory's authority to sign for the member has been presented with respect to the vote, consent, waiver, or proxy appointment;
(3) two or more persons hold the membership as cotenants or fiduciaries and the name signed purports to be the name of at least one of the coholders and the person signing appears to be acting on behalf of all the coholders; and
(4) in the case of a mutual benefit corporation:
(i) the name signed purports to be that of an administrator, executor, guardian, or conservator representing the member and, if the corporation requests, evidence of fiduciary status acceptable to the corporation has been presented with respect to the vote, consent, waiver, or proxy appointment;
(ii) the name signed purports to be that of a receiver or trustee in bankruptcy of the member and, if the corporation requests, evidence of this status acceptable to the corporation has been presented with respect to the vote, consent, waiver, or proxy appointment.
(c) The corporation is entitled to reject a vote, consent, waiver, or proxy appointment if the secretary or other officer or agent authorized to tabulate votes, acting in good faith, has reasonable basis for doubt about the validity of the signature on it or about the signatory's authority to sign for the member.
(d) The corporation and its officer or agent who accepts or rejects a vote, consent, waiver, or proxy appointment in good faith and in accordance with the standards of this section are not liable in damages to the member for the consequences of the acceptance or rejection.
(e) Corporate action based on the acceptance or rejection of a vote, consent, waiver, or proxy appointment under this section is valid unless a court of competent jurisdiction determines otherwise.
OFFICIAL COMMENT
Section 7.27 sets forth the rules under which corporations may accept the signature on a vote, consent, waiver, or proxy appointment as that of a member or of someone authorized to act on behalf of the member. Section 7.27 is designed to provide certainty and protect nonprofit corporations and their officers and agents who act in good faith in reliance on its rules. It therefore provides that corporations are entitled to reject a vote, consent, waiver, or proxy appointment if the person authorized to tabulate votes in good faith has reasonable basis for doubt about the validity of the signature or the signatory's authority to sign for the member. Even if the vote is in fact authorized, the corporation and its agents will not be liable. Similarly if a vote, consent, waiver, or proxy appointment is improperly accepted or rejected, there will be no liability to the corporation or its agent if the person making the decision acted in good faith in accordance with the standards of the section.
"The phrase `reasonable basis for doubt' about the validity of a signature or about the signer's authority creates an objective standard for the exercise of the authority . . . to reject proffered instruments. In the absence of a proxy fight or a seriously contested issue, instruments should be rejected only if there seems to be no basis for finding the execution regular on its face. In a proxy fight or other contested issue, the possibility of illegal or unauthorized execution is greatly increased, and a more cautious attitude should therefore be adopted." Official Comment to Section 7.24 of the Model Business Corporation Act.
In most instances instruments proportion to be executed by or on behalf of members will in fact have been executed by and on behalf of the member "and the corporation and its officers should be encouraged to accept them rather than to adopt unduly narrow requirements." Official Comment to Section 7.24 of the Model Business Corporation Act.
SOUTH CAROLINA REPORTERS' COMMENTS
This section, as it applies to mutual benefit corporations, is very similar to former law, found at Section 33-7-240 of the South Carolina Business Corporation Act. A substantive difference from former law is the exception of religious and public purpose corporations from the provisions of Section 33-31-727(b)(4).
Section 33-31-730. Voting agreements.
(a) Two or more members may provide for the manner in which they will vote by signing an agreement for that purpose. The agreements may be valid for ten years. For public benefit corporations the agreements must have a reasonable purpose not inconsistent with the corporation's public or charitable purposes.
(b) A voting agreement created under this section is specifically enforceable.
OFFICIAL COMMENT
Section 7.30 validates a written voting agreement signed by two or more members. For public benefit and religious corporations the agreement must be for a proper purpose not inconsistent with the corporation's purposes. Courts should take into account all relevant facts in determining whether an agreement has a proper purpose.
SOUTH CAROLINA REPORTERS' COMMENTS
By contrast to formerly applicable statutory law, found at South Carolina Business Corporation Act Sections 33-7-300 and 33-7-310, no provision is made in this Act for voting trusts. Voting agreements are permitted, but limited to a duration of ten years. The special provisions made for voting agreements relating to public purpose corporations had no counterpart in former law.
Section 33-31-801. Requirement for and duties of board.
(a) Each corporation must have a board of directors.
(b) Except as provided in this chapter or subsection (c), all corporate powers must be exercised by or under the authority of, and the affairs of the corporation managed under the direction of, its board.
(c) The articles may authorize a person or persons to exercise some or all of the powers which would otherwise be exercised by a board. To the extent so authorized, the person or persons shall have the duties and responsibilities of the directors, and the directors shall be relieved to that extent from the duties and responsibilities.
OFFICIAL COMMENT
The Model Act allows considerable flexibility in structuring nonprofit corporations. While every corporation must have a board of directors, the articles may authorize a person or persons to exercise some or all of the powers of the board.
Insofar as the powers of the board are delegated to some other person or persons, that person or persons assume the duties of the board and must meet the standards set forth in sections 8.30-8.33. If the board had no corporate power it would have no duties under sections 8.30-8.33.
In some organizations corporate authority is exercised by a representative assembly or a convention. The board may have little or no corporate power when the assembly or convention is meeting. Corporate power between assemblies or conventions may reside in a board of directors or some other person or persons. The person or persons under whose authority corporate power is exercised has the responsibilities of the board of directors.
The role played by the boards of nonprofit corporations varies widely due to the nature, size, characteristics and needs of the organizations. Absent a contrary article provision "[a]ll corporate powers shall be exercised by or under the authority of" the board.
In some nonprofit organizations the board is actively involved in the day-to-day activities of the corporation. Board members may carry on all or substantially all of the work of the corporation. In such instances the corporate powers are exercised by the board and the affairs actively managed under the direction of the board.
In other nonprofit corporations the board is significantly involved in fund-raising or other activities and also validates or approves a policy and other decisions made by the corporation's officers and employees. In such instances the corporate powers are exercised under the authority of the board and the affairs are managed under the direction of the board.
In each of the above instances the board has the ultimate authority and responsibility. The authority is exercised and responsibility is carried out in different ways. Each director must meet the standards and is entitled to the protection afforded by sections 8.30-8.33.
Boards of nonprofit corporations are sometimes called boards of trustees, regents, overseers, or by some other name. Section 8.01 applies to the person or group under whose authority corporate powers are exercised and under whose direction the affairs of the corporation are managed, regardless of the name of the person or group.
SOUTH CAROLINA REPORTERS' COMMENTS
This section does not represent a substantial change from previously applicable statutory law, which was found at Section 33-8-101 of the South Carolina Business Corporation Act. The major change is the absence of Section 33-8-101's recognition of a unanimous shareholders' agreement as a corporate governance document.
Similar to the Business Corporation Act, this section authorizes a corporation to include, for example, a provision in the articles which specifies that the members have the authority to appoint all or certain officers of the nonprofit corporation. Note, however, that section 33-31-843(b) gives the board carte blanche authority to remove any officer with or without cause - and possibly this section 33-31-843 would trump an additional simple provision in the articles that the board may not remove an officer appointed by the members. On the other hand, if the articles stated that not only do the members have the exclusive authority to appoint officers but they shall have the exclusive authority to remove officers, this later provision would seem to divest the power of the board to remove the officers appointed by the members.
Section 33-31-802. Qualifications of directors.
All directors must be natural persons. The articles or bylaws may prescribe other qualifications for directors.
OFFICIAL COMMENT
Only individuals may serve as directors of nonprofit corporations. The Model Act does not impose qualifications for directors. It does not require directors to be members of the corporation or residents of its state of incorporation. However, articles or bylaws may impose qualifications for election to or service on a board of directors. A corporation may require that each director be a member in good standing of the organization. For example, the Young Republicans may require each director to be under thirty-six and Republican.
An article or bylaw qualification existing at the time an individual is elected a director is valid unless it violates public policy or some law other than the Model Act. If a qualification adopted after the director's term commences would disqualify a director, it cannot be enforced until after the end of the director's term. The procedures for removing a director are set forth in sections 8.08-8.10.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is essentially similar to previously applicable Section 33-8-102 of the South Carolina Business Corporation Act, except that this section requires directors to be natural persons.
Section 33-31-803. Number of directors.
(a) A board of directors must consist of three or more directors, with the number specified in or fixed in accordance with the articles or bylaws.
(b) The number of directors may be increased or decreased, but to no fewer than three, by amendment to or in the manner prescribed in the articles or bylaws.
OFFICIAL COMMENT
Section 8.03 requires nonprofit corporations to have a minimum of three directors, but otherwise allows the number of directors to be specified or fixed in accordance with the articles or bylaws. The articles or bylaws may allow the board to set the number of directors without placing any limit on the maximum number of directors. Alternatively, the articles or bylaws may specify a fixed or maximum number of directors or a range within which the board or the members may determine the number of directors.
The Model Act does not limit the range within which the number of directors may be set. Where control is a factor, the articles or bylaws may appropriately limit the size of the board and the authority of the board to elect directors.
If the corporation has members, an amendment to the articles or bylaws changing the authorized number of directors must be approved by the members. See sections 10.03 and 10.21. If the corporation does not have members, an amendment must be approved by the board of directors. See sections 10.02(b) and 10.20. In either case approval by a third person may be required. See section 10.30.
SOUTH CAROLINA REPORTERS' COMMENTS
Board size was previously governed by Section 33-8-103 of the South Carolina Business Corporation Act, which permits boards as small as one. The requirement of a minimum of three directors is a change from former law. Former law also limited the percentage by which the board itself could alter its size, even if authorized by the articles of incorporation to make such changes. Section 33-31-103 contains no such limit.
Section 33-31-804. Election, designation, and appointment of directors.
(a) If the corporation has members entitled to vote for directors, all the directors, except the initial directors, must be elected at the first annual meeting of members, and at each annual meeting thereafter, unless the articles or bylaws provide some other time or method of election, or provide that some of the directors are appointed by some other person or designated.
(b) If the corporation does not have members entitled to vote for directors, all the directors, except the initial directors, must be elected, appointed, or designated as provided in the articles or bylaws. If no method of designation or appointment is set forth in the articles or bylaws, the directors, other than the initial directors, must be elected by the board.
OFFICIAL COMMENT
1. Corporations with Members
If a corporation has members, the members are entitled to elect all the directors in the absence of a contrary provision in the articles or bylaws. The articles or bylaws may set forth a simple one-vote-per-member structure or may provide for election by classes, chapters or other organizational units or by region or other geographic groupings. See sections 2.02 and 2.05 as to appointment of initial directors. see sections 7.04, 7.08, 7.21, 7.25 and 7.26 as to the ways in which members may vote.
Section 8.04 should be applied in a manner consistent with the concept that an election procedure must be reasonable. See Dozier v. Automobile Club of Michigan, 69 Mich. App. 114 (1976); Braude v. Havenner, 38 Cal. App. 2d 526, 113 Cal. Rptr. 386 (1974); Valle v. North Jersey Automobile Club, 125 N.J. Super. 302, 310 A.2d 518 (1973). The Model Act does not specify detailed procedures, but leaves the matter to developing case law.
Even if a corporation has members, the members need not elect all the directors. Some directors may hold office as a result of designation in the articles or bylaws or as a result of being appointed by some person or entity.
Designation occurs when the articles or bylaws name an individual as a director or designate the holder of some office or position as a director. For example, the President of Harvard, the Bishop of New York, or the head of a union may become a director of a corporation pursuant to an article or bylaw provision designating the holder of their position as a director of the corporation. The individual would cease to be a director upon ceasing to hold the designated position.
The articles or bylaws may authorize any person, corporation or entity to appoint a director. A city may want to appoint some or all the directors of a nonprofit corporation without becoming a member of the organization. It could do so by appointing rather than voting for the directors. A person who appoints but does not vote for the directors is not a "member" as that term is used in the Model Act. See section 1.40(21).
2. Corporations Without Members
Section 8.04 authorizes self-perpetuating boards of directors. If a corporation does not have members, the board elects directors in the absence of an article or bylaw provision setting forth some other approach. See sections 2.02 and 2.05 as to appointment of initial directors. See sections 8.21 and 8.24 as to methods by which the board may elect directors.
Section 8.04 also allows all or part of the board to be designated or appointed pursuant to article or bylaw provisions.
SOUTH CAROLINA REPORTERS' COMMENTS
Previously applicable statutory law, found at Sections 33-8-103 and 33-8-104 of the South Carolina Business Corporation Act, provided for annual election of directors with two permitted exceptions: staggering the board (Section 33-8-103(d)) and classifying the board (Section 33-8-104). As to nonprofits with members entitled to vote for directors, Section 33-31-104 permits greater flexibility than did prior law; the articles or bylaws may provide other times or methods of election, or for designation or appointment, without limitation. As the Official Comment points out, classification of the board would fall within this flexibility. Staggering the board is expressly permitted by Section 33-31-806. As to nonprofits without members entitled to vote for directors, subsection (b) provides for boards to elect their own successors, unless another method is prescribed in the articles or bylaws.
For statutory purposes, a director is "elected" only when chosen by vote of members entitled to vote for directors. Directors chosen by any other method are either "appointed" or "designated". As this section indicates, an appointed director is one chosen to be a director by some person designated for the purpose in the articles or bylaws. If corporate governance documents recite that a director shall be "elected" by the corporation's national organization, such a director is not "elected" for purposes of this statute, but appointed. A designated director is one who becomes a director by operation of the articles or bylaws without discretion being exercised by any person. For example, the articles might designate that the elected leader of some other organization be a director of the corporation, or that the minister of a particular church be such a director. Once these positions are filled, the persons filling them would become designated directors without further action on the part of anyone.
Section 33-31-805. Terms of directors generally.
(a) The articles or bylaws may specify the terms of directors. Except for designated or appointed directors, the terms of directors may not exceed five years. In the absence of a term specified in the articles or bylaws, the term of each director is one year. Directors may be elected for successive terms.
(b) A decrease in the number of directors or term of office does not shorten an incumbent director's term.
(c) Except as provided in the articles or bylaws:
(1) the term of a director filling a vacancy in the office of a director elected by members expires at the next election of directors by members; and
(2) the term of a director filling another vacancy expires at the end of the unexpired term that such director is filling.
(d) Despite the expiration of a director's term, the director continues to serve until the director's successor is elected, designated or appointed, and qualifies, or until there is a decrease in the number of directors.
OFFICIAL COMMENT
Section 8.04(a) allows the initial directors and directors elected by the members or the board to serve for up to five-year terms.
The members' right to vote is illusory unless it can have an impact on the board. In the case of self-perpetuating boards, five-year terms allow continuity and also provide a graceful way of removing directors who may otherwise think they have life tenure. See section 8.04(b) which allows a self-perpetuating board to elect successor directors.
Designated or appointed directors may serve any term prescribed by the articles or bylaws. See section 8.09 for provisions governing removal of designated or appointed directors.
In the absence of a contrary article or bylaw provision, the term of directors is one year.
The term of a director filling a vacancy of a director elected by members expires at the next election of directors by members. This election may be at the annual meeting or by written ballot. See sections 7.01 and 7.08. The members may elect the director filling the vacancy for the remainder of the unexpired term.
The term of a director filling the vacancy of a designated or appointed director or filling a vacancy on a self-perpetuating board is for the unexpired term of the director being replaced. See section 8.05(c). Section 8.11 sets forth the ways in which vacancies can be filled.
Section 8.05(a) prevents chaos by continuing directors in office until their successors are elected, designated, or appointed, and qualify. Even if successor directors are not elected, or if elected do not qualify, continuity on the board will be provided as the incumbent directors continue until their successors take office.
SOUTH CAROLINA REPORTERS' COMMENTS
Previously applicable statutory law, found at Section 33-8-105 of the South Carolina Business Corporation Act, limited directors to terms of a single year, except for members of staggered boards. Present law extends the permissible term to five years, and imposes no limits on appointed or designated directors' terms.
Subsections (b) and (d) are identical to the analogous subsections of Section 33-8-105, and thus represent no change from prior law. Subsection (c) differs from Section 33-8-105(c) and (d) in making its provisions variable in the articles of incorporation or bylaws.
The word "may" in the first sentence of subsection (a) has replaced the word "must" in the Model Act, for purposes of clarification.
Section 33-31-806. Staggered terms for directors.
The articles or bylaws may provide for staggering the terms of directors by dividing the total number of directors into groups. The terms of office of the several groups need not be uniform.
OFFICIAL COMMENT
Nonprofit corporations need to attract and keep qualified directors and provide continuity and experience on their boards of directors. Sections 8.05 and 8.06 address this need by allowing directors to serve staggered terms of up to five years and not imposing a limitation on their reelection.
When there is a fight for control of the corporation, staggered terms may frustrate those trying to oust an incumbent board. This is because not all of the directors will be up for election each year. Section 8.08 provides a safety valve by allowing the members to remove the entire board without cause.
SOUTH CAROLINA REPORTERS' COMMENTS
Previously applicable statutory law was found at Section 33-8-106 of the South Carolina Business Corporation Act, which permitted the staggering of boards into halves or thirds only, with groups as close to equal as possible and serving uniform terms. Section 33-31-106 does not require any uniformity.
Section 33-31-807. Resignation of directors.
(a) A director may resign at any time by delivering written notice to the board of directors, its presiding officer, or to the president or secretary.
(b) A resignation is effective when the notice is effective unless the notice specifies a later effective date. If a resignation is made effective at a later date, the board may fill the pending vacancy before the effective date if the board provides that the successor does not take office until the effective date.
OFFICIAL COMMENT
A director may resign at anytime by delivering written notice as set forth in section 8.07. The notice may be effective when delivered, unless it specifies a later effective date. Section 1.41 governs the effective date of a notice. In resigning, directors must meet their obligations under section 8.30.
Under appropriate circumstances a court may find that an oral resignation combined with acts or omissions evidencing an intent to resign results in an effective resignation.
If a director elected by the members resigns or ceases to serve as a director, the vacancy may be filled by the members or the directors.
SOUTH CAROLINA REPORTERS' COMMENTS
This section represents no change from the previously applicable statute, Section 33-8-107 of the South Carolina Business Corporation Act, except for the addition of the second sentence of subsection (b).
Section 33-31-808. Removal of directors elected by members or directors.
(a) The members may remove one or more directors elected by them without cause.
(b) If a director is elected by a class, chapter, or other organizational unit or by region or other geographic grouping, the director may be removed only by the members of that class, chapter, unit, or grouping.
(c) Except as provided in subsection (i), a director may be removed under subsection (a) or (b) only if the number of votes cast to remove the director would be sufficient to elect the director at a meeting to elect directors.
(d) If cumulative voting is authorized, a director may not be removed if the number of votes, or if the director was elected by a class, chapter, unit or grouping of members, the number of votes of that class, chapter, unit or grouping, sufficient to elect the director under cumulative voting is voted against the director's removal.
(e) A director elected by members may be removed by the members only at a meeting called for the purpose of removing the director and the meeting notice must state that the purpose, or one of the purposes, of the meeting is removal of the director.
(f) In computing whether a director is protected from removal under subsections (b) through (d), it should be assumed that the votes against removal are cast in an election for the number of directors of the class to which the director to be removed belonged on the date of that director's election.
(g) An entire board of directors may be removed under subsections (a) through (e).
(h) A director elected by the board may be removed without cause by the vote of two-thirds of the directors then in office or such greater number as is set forth in the articles or bylaws. However, a director elected by the board to fill the vacancy of a director elected by the members may be removed without cause by the members, but not the board.
(i) If, at the beginning of a director's term, the articles or bylaws provide that the director may be removed for reasons set forth in the articles or bylaws, the board may remove the director for such reasons. The director may be removed only if a majority of the directors then in office vote for the removal.
(j) The articles or bylaws of a religious corporation may:
(1) limit the application of this section; and
(2) set forth the vote and procedures by which the board or any person may remove with or without cause a director elected by the members or the board.
(k) For purposes of this section, `members' refers to members entitled to vote for directors.
OFFICIAL COMMENT
1. Removal of Directors Elected by Members
The members are authorized to remove directors elected by them without cause. While cause is not required, the removal may only take place at a meeting and may not take place by written consent or written ballot. A notice of the meeting must state that the purpose or one of the purposes is removal of the director. The Model Act does not require a director to be removed for cause as the members who elected the director, rather than a court, should determine whether the members wish to remove the director.
A director may only be removed if the number of votes cast to remove the director would be sufficient to elect the director at a meeting to elect directors. Normally this would require a majority of the votes cast at a meeting at which a quorum is present. If the articles or bylaws require a higher vote for election of a director, that higher vote is required to remove the director. If a director was elected by a class or some other grouping of members, the votes cast within that class or grouping to remove the director must also be sufficient to have elected the director at a meeting to elect directors.
If cumulative voting is authorized, even if a director was not elected by cumulative voting, the director may not be removed if there are sufficient votes cast against the director's removal to have elected the director under cumulative voting. In doing this calculation it should be assumed that those voting for and against removal are voting in the most efficient fashion possible for removal or retention.
In any vote to remove a director, the computation of whether the director is removed should be based on the number of directors of the same class elected at the time of the election of the director whose removal is being sought. For example, if there is a vote to remove director Ratner and Ratner was elected by cumulative voting with four other directors, then the number of votes necessary to prevent Ratner form being removed is equal to the number of votes necessary to elect Ratner in an election in which five directors are elected.
2. Removal of Directors Elected by the Board
If a board of directors is self-perpetuating or if it elects some of but not all of its members, it may remove the directors it has elected without cause by a vote of two-thirds of the directors then in office. Of course, the directors in removing a fellow director must meet the duty of care and duty of loyalty set forth in section 8.30. See section 8.22 for applicable notice requirements.
The articles or bylaws may impose a greater vote requirement to remove directors. Unanimity may be required to remove a director. Such a requirement would prevent a director from being removed by the board without his or her consent. Directors may be removed by a judicial proceeding under section 8.10.
3. Removal of Directors for Failing to Attend Meetings
Some nonprofit corporations, particularly those with large boards of directors, may find that some of their directors fail to attend meetings on a regular basis. Section 8.08(i) allows the articles or bylaws to authorize the board to remove any director for failing to attend a specified number of meetings. The exact number of meetings must be specified in the articles or bylaws at the time the director commences serving the term during which he or she is removed as a director. An article or bylaw provision adopted during the term of a director has no effect on that director until the director commences a new term. Removal requires a vote of a majority of the directors in office.
4. Religious Corporations
Religious corporations should not be bound by secular concepts regarding removal of directors, but should have flexibility in setting removal procedures. Subdivision (j) allows the articles or bylaws of a religious corporation to limit the application of section 8.08 and provide alternative ways of removing directors or prohibiting their removal by members or the board. The provisions of section 8.08 apply to religious corporations unless the corporation's articles or bylaws set forth different procedures or rules.
SOUTH CAROLINA REPORTERS' COMMENTS
Those portions of Section 33-31-108 relating to the removal of directors elected by members of a corporation are similar to the provisions of formerly applicable Section 33-8-108 of the South Carolina Business Corporation Act. Major differences, and therefore changes from prior law, include an absolute right in the members to remove directors without cause; the provisions of subsection (c), which would have the effect of protecting directors from being removed at a scantily attended meeting; and the special provisions of subsection (f).
Prior law had no counterpart to the provisions relating to the removal of directors elected by the board or the provisions of subsection (i) or (j).
Subsection (i) has been broadened from the text proposed by the Model Act to permit corporations flexibility in including in articles or bylaws mandatory responsibilities of directors, failure of compliance with which would constitute grounds for termination. The Model Act proposed in this regard only regular attendance at meetings.
Section 33-31-809. Removal of designated or appointed directors.
(a) A designated director may be removed by an amendment to the articles or bylaws deleting or changing the designation.
(b) Appointed directors:
(1) Except as otherwise provided in the articles or bylaws, an appointed director may be removed without cause by the person appointing the director.
(2) The person removing the director shall do so by giving written notice of the removal to the director and either the presiding officer of the board or the corporation's president or secretary.
(3) A removal is effective when the notice is effective unless the notice specifies a future effective date.
OFFICIAL COMMENT
1. Removal of Designated Directors
Designated directors hold office as a result of an article or bylaw provision designating them individually or in some representative capacity to serve as directors. Members and directors may not vote to remove designated directors. They may only be removed if the article or bylaw provision designating them is deleted or changed so that they are no longer designated directors. See Chapter 10A and B. Also see section 10.30 which allows any specified person to prevent an amendment to the articles or bylaws.
Designated directors may be removed in a judicial proceeding pursuant to section 8.10.
2. Removal of Appointed Directors
Any person authorized to appoint a director may remove that director without cause except as otherwise provided in the articles or bylaws. The articles or bylaws may limit or completely restrict the right of the appointing person to remove the director. The approval of the appointing person may be required for an amendment to the articles or bylaws, thereby insuring that a limitation on such person's ability to remove a director will not be added to the articles or bylaws without consent of such person. See section 10.30.
The appointing person may remove his or her appointee by giving written notice pursuant to the procedures set forth in section 8.09(b).
Appointed directors may be removed in a judicial proceeding pursuant to section 8.10.
SOUTH CAROLINA REPORTERS' COMMENTS
This section had no counterpart under prior statutory law, which made no provision for any method of choosing directors other than election.
Section 33-31-810. Removal of directors by judicial proceeding.
(a) The circuit court of the county where a corporation's principal office in this State, or, if none in this State, its registered office, is located may remove any director of the corporation from office in a proceeding commenced either by the corporation, its members holding at least five percent of the voting power of any class to elect directors, or the Attorney General in the case of a public benefit corporation, if the court finds that:
(1) the director engaged in fraudulent or dishonest conduct, or gross abuse of authority or discretion, with respect to the corporation, or a final judgment has been entered finding that the director has violated a duty set forth in Sections 33-31-830 through 33-31-833; and
(2) removal is in the best interest of the corporation.
(b) The court that removes a director may bar the director from serving on the board for a period prescribed by the court.
(c) If members or the Attorney General commence a proceeding under subsection (a), the corporation must be made a party defendant.
(d) If a public benefit corporation or its members commence a proceeding under subsection (a), they shall give the Attorney General written notice of the proceeding.
(e) The articles or bylaws of a religious corporation may limit or prohibit the application of this section.
OFFICIAL COMMENT
Section 8.10 authorizes members holding 10 percent or more of the voting power of any class to sue to remove a director. The corporation must be made a party to the action. Members holding less than 10 percent of the voting power of a class may bring a derivative suit to remove a director by complying with the provisions of section 6.30.
Section 8.10 also sets forth the grounds for removing an elected, designated or appointed director. A court must find that the director engaged in fraudulent or dishonest conduct, or gross abuse of authority or discretion, or that a final judgment has been entered finding that the director has violated a duty set forth in sections 8.30-8.33, or if section 8.13 has been adopted, that its provisions have been violated. In each case the court also must find that removal is in the best interest of the corporation.
A court may specify a period during which the removed director may not serve on the board or may impose conditions to that person becoming a director. Alternatively the court may bar a person who has been removed as a director from ever serving on the board.
The attorney general must be given notice of any proceeding under section 8.10 seeking removal of a director of a public benefit corporation. The attorney general may intervene in the proceeding. Section 1.70.
Section 8.10 allows removal of directors who have engaged in wrongful activity. Absent such wrongful conduct, it should not be used for internal policy disputes or as part of a fight for control.
Subsection (e) allows the articles or bylaws of a religious corporation to prohibit a court from removing corporate directors. Moreover, while subsection (a) authorizes the attorney general to bring an action to remove a director of a public benefit corporation, no such authorization is set forth in regard to mutual benefit or religious corporations. This is because the attorney general has broad oversight powers over public benefit corporations, but a much more limited role in regard to mutual benefit and religious corporations.
SOUTH CAROLINA REPORTERS' COMMENTS
Formerly applicable statutory law was found at Section 33-8-109 of the South Carolina Business Corporation Act. The present section changes prior law in several respects. The Attorney General is given standing to bring actions in respect of public benefit corporations. A final judgment that a director has violated a duty under Sections 33-31-830 through 33-31-833 is added to subsection (a)(1). Finally, subsections (d) and (e) are new.
The percentage of a class of members entitled to vote for directors who may bring an action to remove a director has been lowered from ten percent, as proposed by the Model Act, to five percent, to be consistent with the analogous South Carolina Business Corporation Act provision, found in Section 33-8-109.
Section 33-31-811. Vacancy on board.
(a) Unless the articles or bylaws provide otherwise, and except as provided in subsections (b) and (c), if a vacancy occurs on a board of directors, including a vacancy resulting from an increase in the number of directors:
(1) the members, if any, may fill the vacancy; if the vacant office was held by a director elected by a class, chapter, or other organizational unit or by region or other geographic grouping, only members of the class, chapter, unit, or grouping are entitled to vote to fill the vacancy if it is filled by the members;
(2) the board of directors may fill the vacancy; or
(3) if the directors remaining in office constitute fewer than a quorum of the board, they may fill the vacancy by the affirmative vote of a majority of all the directors remaining in office.
(b) Unless the articles or bylaws provide otherwise, if a vacant office was held by an appointed director, only the person who appointed the director may fill the vacancy.
(c) If a vacant office was held by a designated director, the vacancy must be filled as provided in the articles or bylaws. In the absence of an applicable article or bylaw provision, the vacancy may not be filled by the board.
(d) A vacancy that will occur at a specific later date, by reason of a resignation effective at a later date under Section 33-31-807(b) or otherwise, may be filled before the vacancy occurs but the new director may not take office until the vacancy occurs.
OFFICIAL COMMENT
Section 8.11 sets forth the procedures for filling vacancies of elected, designated, or appointed directors and vacancies resulting from an increase in the authorized number of directors.
If a director elected by the members ceases to be a director, the vacancy may be filled by the members or the board in the absence of a contrary article or bylaw provision. Similarly vacancies arising when directors named in the original articles cease to be directors and vacancies resulting from an increase in the number of directors may be filled by the members or the board in the absence of a contrary article or bylaw provision.
Where, however, a vacancy occurs in an office held by an appointed director, only the person who appointed the director may fill the vacancy in the absence of an article or bylaw provision providing some other method of filling the vacancy. The underlying assumption is that the person who appoints the director should have the authority to pick the director's successor unless some other approach was considered and set forth in the articles or bylaws.
If the holder of a particular office is designated as a director of a nonprofit corporation and that person dies or resigns from office, a vacancy is created. In the absence of a contrary articles or bylaw provision, the person who succeeds to that office automatically becomes a director of the nonprofit corporation. For example, assume the dean of each law school in Texas is designated as a director of the Texas Law School Association and one dean resigns. The successor dean would automatically become a director of the Texas Law School Association.
Similarly, assume the executive director of a nonprofit corporation is designated as a director of the corporation. That person ceases being a director if he or she is fired as executive director. The new executive director automatically become a director of the corporation.
If the sole remaining director of directors constitute less than a quorum, section 8.11(a)(3) allows the remaining director or directors to fill the vacancy if the board is authorized to fill the vacancy. Assume a corporation has a board of eleven directors and the quorum is six. If five directors resign, section 8.11(a)(3) is not applicable as the directors remaining in office do not constitute less than a quorum. Four of the remaining six directors cannot fill the vacancies at a "meeting" attended by less than six directors. If six directors had resigned, section 8.11(a)(3) would apply and three directors, being a majority of the five directors then in office, would be able to fill the vacancies.
SOUTH CAROLINA REPORTERS' COMMENTS
Previously applicable statutory law was found at Section 33-8-110 of the South Carolina Business Corporation Act. Subsections (a) and (d) represent no significant change from prior law. Subsections (b) and (c) are new.
Section 33-31-812. Compensation of directors.
Unless the articles or bylaws provide otherwise, a board of directors may fix the compensation of directors.
OFFICIAL COMMENT
Section 8.12 is intended to overrule the common law doctrine that prohibits directors from setting their own compensation.
Most nonprofit corporations do not compensate individuals for serving as directors. In some nonprofit corporations compensation may be appropriate as a result of the time and effort needed to serve as a director, the responsibilities undertaken, the ability of the corporation to pay and other relevant factors. Section 8.11 allows the board to set directors' compensation for serving as directors. As a result of its power under section 8.01, the board also has the power to set the compensation of directors for serving as officers or in some other capacity. Section 8.12 does not authorize unreasonable levels of compensation. In setting directors' and officers' compensation, the board must comply with the standards contained in sections 8.30-8.33.
SOUTH CAROLINA REPORTERS' COMMENTS
This section represents no change from previously applicable statutory law.
Section 33-31-820. Regular and special meetings.
(a) If the date, time, and place of a directors' meeting is fixed by the bylaws or the board, the meeting is a regular meeting. All other meetings are special meetings.
(b) A board of directors may hold regular or special meetings in or out of this State.
(c) Unless the articles or bylaws provide otherwise, a board may permit any or all directors to participate in a regular or special meeting by, or conduct the meeting through the use of, any means of communication by which all directors participating may hear each other simultaneously during the meeting. A director participating in a meeting by this means is deemed to be present in person at the meeting.
OFFICIAL COMMENT
Unless the articles or bylaws provide otherwise, section 8.20 authorizes a board meeting to be conducted by any means of communication pursuant to which all participating directors may simultaneously hear each other even though no two directors are present at the same location and the meeting does not take place in any specific location.
SOUTH CAROLINA REPORTERS' COMMENTS
The distinction between "regular" and "special" meetings was found in formerly applicable statutory law at Section 33-8-220 of the South Carolina Business Corporation Act. Concerning the distinction between "regular" and "special" meetings, see Section 33-31-822.
Subsections (b) and (c) represent no substantive change from Section 33-8-200.
The word "date" in the first sentence of subsection (a) does not appear in the Model Act. It was added for clarification. Its addition does not require the use of a calendar date. A reasonable method of ascertaining a date is sufficient; for example, "The third Tuesday in January".
Section 33-31-821. Action without meeting.
(a) Unless the article or bylaws provide otherwise, action required or permitted by this chapter to be taken at a board of directors' meeting may be taken without a meeting if the action is taken by all members of the board. The action must be evidenced by one or more written consents describing the action taken, signed by each director, and included in the minutes filed with the corporate records reflecting the action taken.
(b) Action taken under this section is effective when the last director signs the consent, unless the consent specifies a different effective date.
(c) A consent signed under this section has the effect of a meeting vote and may be described as such in any document.
OFFICIAL COMMENT
Unless the articles or bylaws provide otherwise, section 8.21 allows a board of directors to take action by unanimous written consent. It allows the board to act quickly when there is a need to do so. Nonprofit corporations can act with the written consent of all the directors whether or not the board has appointed a committee of the board to act between board meetings (see section 8.25). Any director who objects may prevent action by written consent by withholding his or her consent. Thus, it would be impossible to remove a director by written consent if that director does not consent to the removal.
Many boilerplate forms require the corporate secretary to certify that a specified resolution was duly adopted at a board meeting on a certain date. Subsection (c) allows a corporation to describe an action by written consent as a "meeting vote" and subsection (b) indicates the effective date of the vote and empowers a corporate secretary to sign such a form when an action has been approved by unanimous written consent. This avoids the necessity of trying to convince a non-lawyer that approval of an action by written consent is really the same as approving an action at a meeting.
SOUTH CAROLINA REPORTERS' COMMENTS
The provisions of this section represent no change from formerly applicable statutory law, found at Section 33-8-210 of the South Carolina Business Corporation Act, except that the procedures of the second sentence of subsection (a) are made mandatory.
Section 33-31-822. Call and notice of meetings.
(a) Unless the articles, bylaws, or subsection (c) provides otherwise, regular meetings of the board may be held without notice.
(b) Unless the articles, bylaws, or this chapter provides otherwise, special meetings of the board must be preceded by at least two days' notice to each director of the date, time, and place, but not the purpose, of the meeting.
(c) In corporations without members, a board action to remove a director or to approve a matter that would require approval by the members if the corporation had members, is not valid unless each director is given at least seven days' written notice that the matter will be voted upon at a directors' meeting or unless notice is waived pursuant to Section 33-31-823.
(d) Unless the articles or bylaws provide otherwise, the presiding officer of the board, the president, or at least twenty percent of the directors then in office may call and give notice of a meeting of the board.
OFFICIAL COMMENT
1. Regular Meeting
If the time and place of a board meeting is fixed by the bylaws or by the board it is treated as a regular meeting. See section 8.20. At the beginning of the year nonprofit boards may set the time and place for a series of meetings for the entire year. If so, these meetings are regular meetings. Regular meetings of the board may be held without notice of the purpose of the meeting unless the articles, bylaws or section 8.22(c) provide otherwise. If everything had to be noticed, the ability of the board to deal with matters arising just before the meeting would be limited. In addition, absent a waiver of notice, doubt would be cast on actions taken where the notice was inadvertently omitted. While notice of agenda items is not required, good practice usually results in directors' receiving prior notice of matters that will be considered at a regular directors' meeting. An alert director should anticipate that any matter may be raised at a regular directors' meeting.
2. Special Meeting
If the time and place of a directors' meeting is not fixed by the bylaws or the board, it is a special meeting. Unless the articles, bylaws or subsection (c) applies, special meetings must be preceded by at least two days' notice of the date, time, and place, but not the purpose of the meeting. The underlying policy is the same as that of regular meetings. Directors given notice of the time and location of the meeting should be prepared to discuss any matter that is raised at the meeting. This allows directors to act expeditiously when the need to do so arises.
3. Special Notice Requirements
Nonprofit corporations, unlike business corporations, frequently operate with self-perpetuating board of directors. In many instances the need for speed and flexibility requires directors to consider matters that were not anticipated at the time the meeting was called. However, in corporations without members directors can approve certain fundamental corporate changes that are significant to the corporation. These changes include amendment of articles, amendment of certain bylaws provisions, mergers, sale of all or substantially all of the assets of a corporation, and dissolution. Such corporate changes usually require significant considered action and a period of time during which the directors can reflect on the wisdom of proceeding. Where there are no members, these matters can be approved by the board alone, without subsequent member action. To allow a time for consideration and reflection the Model Act requires that the directors be given at least seven days' written notice that these matters will be voted upon at a directors' meeting.
Nonprofit corporations with self-perpetuating boards differ in another way form nonprofit corporations with members and business corporations. In nonprofit corporations with self-perpetuating boards, the directors can be removed by a vote of the board. Section 8.08(h). (In addition, in the limited circumstances set forth in section 8.08(i), a board may remove a director elected by the members.) Due process as well as sections 8.08(e) and 8.22(c) require that notice of any proposed removal be given to all directors.
The notice requirements of section 8.22 can be waived pursuant to section 8.23. Moreover, the directors can approve any of these actions by unanimous written consent. See section 8.21.
SOUTH CAROLINA REPORTERS' COMMENTS
Subsections (a) and (b) do not differ in substance from formerly applicable statutory law, which was found at Section 33-8-220 of the South Carolina Business Corporation Act. Subsections (c) and (d) are new.
Section 33-31-823. Waiver of notice.
(a) A director may waive any notice required by this chapter, the articles, or bylaws. Except as provided in subsection (b), the waiver must be in writing, signed by the director entitled to the notice, and filed with the minutes or the corporate records.
(b) A director's attendance at or participation in a meeting waives any required notice of the meeting unless the director, upon arriving at the meeting or prior to the vote on a matter not noticed in conformity with this chapter, the articles, or bylaws, objects to lack of notice and does not thereafter vote for or assent to the objected to action.
OFFICIAL COMMENT
A director may waive notice either before or after a meeting. The directors may even waive failure to give a notice. Waiver may not be oral but must be in writing, signed by the director who did not receive notice. A waiver should be delivered to the secretary for inclusion in the corporate records.
A director waives his or her right to object to the required notice by attending a meeting without objecting to the improper notice. A director who wishes to attend a meeting but preserve the right to object to improper notice must object upon arriving at the meeting or prior to voting on a matter improperly noticed and not thereafter vote for or assent to the objected-to matter.
SOUTH CAROLINA REPORTERS' COMMENTS
This section represents no change in substance from formerly applicable statutory law, found at Section 33-8-230 of the South Carolina Business Corporation Act.
Section 33-31-824. Quorum and voting.
(a) Except as otherwise provided in this chapter, the articles, or bylaws, a quorum of a board of directors consists of a majority of the directors in office immediately before a meeting begins. In no event may the articles or bylaws authorize a quorum of fewer than the greater of one-third of the number of directors in office or two directors.
(b) If a quorum is present when a vote is taken, the affirmative vote of a majority of directors present is the act of the board unless this chapter, the articles, or bylaws require the vote of a greater number of directors.
(c) A director who is present at a meeting of the board of directors or a committee of the board of directors when corporate action is taken is considered to have assented to the action taken unless:
(1) the director objects at the beginning of the meeting, or promptly upon arrival, to holding the meeting or transacting business at the meeting;
(2) the director votes against the action and the vote is entered in the minutes of the meeting;
(3) the director's dissent or abstention from the action taken is entered in the minutes of the meeting; or
(4) the director delivers written notice of dissent or abstention to the presiding officer of the meeting before its adjournment or to the corporation immediately after adjournment of the meeting. The right of dissent or abstention is not available to a director who votes in favor of the action.
OFFICIAL COMMENT
In the absence of a contrary provision in the articles or bylaws, a quorum of the board of directors consists of a majority of the directors in office immediately before a board meeting begins. Except as otherwise provided in the Model Act, the articles or the bylaws, if a quorum is present, the affirmative vote of a majority of directors present is the act of the board. See section 8.31(e). The articles or bylaws may set a higher quorum or mandate a greater vote to approve an action. The quorum or vote may be set as high as 100 percent of the directors.
The Model Act prohibits the quorum from being fewer than the greater of one-third of the directors in office or two directors. For example, if a corporation has five directors and two resign, the quorum could not be less than two of the remaining three directors.
Some nonprofit corporations have categories of directors. For example, a trade association may have some directors elected by members from different geographic regions of a state. Section 8.24 allow the articles or bylaws to require that a certain number or percent of directors form each region be present and vote for a proposal before it is adopted.
Section 8.24(b) authorizes quorum breaking by requiring a quorum to be present when a vote is taken. Assume, for example, that a corporation has seven directors, the quorum is four, and four directors are present. If a director is about to lose a vote, he or she can leave the meeting before the vote is taken thereby breaking the quorum and preventing the remaining three directors from acting on behalf of the corporation. Prior to breaking a quorum, particularly if serious harm is done to the operations or assets of a corporation, the quorum-breaking director should consider his or her duties of care and loyalty.
The Model Act describes a quorum in terms of the number of directors in office, not the number of directors authorized. This is because nonprofit corporations frequently operate with significantly fewer directors than the number authorized. However, individual nonprofit corporations are free to base their quorum requirements on the authorized number of directors.
SOUTH CAROLINA REPORTERS' COMMENTS
This section simplifies formerly applicable statutory law, which was found at Section 33-8-240 of the South Carolina Business Corporation Act. The rules found in prior law distinguished between fixed and variable boards; this section treats both the same.
Subsection (c), which, with changes in wording not intended to make changes in meaning, is identical to Section 33-8-240(d) of the South Carolina Business Corporation Act, was not a part of the recommendation of the Revised Model Act, but was added to preserve former law.
Corporations making quorum changes should not overlook that Section 33-31-1024 imposes special rules governing bylaw amendments which change either the quorum or voting requirements for directors.
Section 33-31-825. Committees.
(a) Unless prohibited or limited by the articles or bylaws, a board of directors may create one or more committees of the board and appoint members of the board to serve on them. Each committee shall have two or more directors who serve at the pleasure of the board.
(b) The creation of a committee and appointment of members to it must be approved by the greater of:
(1) a majority of all the directors in office when the action is taken; or
(2) the number of directors required by the articles or bylaws to take action under Section 33-31-824.
(c) Sections 33-31-820 through 33-31-824, which govern meetings, action without meetings, notice and waiver of notice, and quorum and voting requirements of the board, apply to committees of the board and their members as well.
(d) To the extent specified by the board of directors or in the articles or bylaws, each committee of the board may exercise the board's authority under Section 33-31-801.
(e) A committee of the board, however, may not:
(1) authorize distributions;
(2) approve or recommend to members dissolution, merger, or the sale, pledge, or transfer of all or substantially all of the corporation's assets;
(3) elect, appoint, or remove directors or fill vacancies on the board or on any of its committees; or
(4) adopt, amend, or repeal the articles or bylaws.
(f) The creation of, delegation of authority to, or action by a committee does not alone constitute compliance by a director with the standards of conduct described in Section 33-31-830.
OFFICIAL COMMENT
Section 8.25 deals with committees of the board of directors that exercise the powers of the board. The provisions of sections 8.20-8.24 govern action and procedures of board committees as these committees are exercising the powers of the board.
The board may delegate non-board functions to committees or individuals apart from the provisions of section 8.25. As these committees and individuals are not exercising board powers, the provisions of section 8.25 do not apply to them. The directors must meet their duties under sections 8.30 and 8.31 when delegating board or non-board functions.
Board committees may be established in the absence of an article or bylaw provision prohibiting them or limiting their scope. To ensure there is a broad consensus in appointing a board committee and its members, section 8.25(b) requires a greater vote than would normally be required for board action. The vote required is the greater of the majority of the directors in office or such higher number as the articles or bylaws require to take action under section 8.24.
Except as limited by the articles, bylaws or subsection (e), a board committee may exercise the board's authority under section 8.01 to the extent specified by the board in the resolution establishing the committee or to the extent set forth in the articles or bylaws. Nonprofit corporations frequently make use of committees and delegate responsibility to them for developing long-term plans, supervising investments, raising money, making grants, and evaluating management. Section 8.30 recognizes the diverse purposes that committees may serve and provides that a board member may rely on information and reports of these committees if the director is not a member of the committee and if the director reasonably believes the committee merits confidence.
Section 8.25(f) makes clear that although the board of directors may delegate to a committee the authority to take action, the designation of the committee, the delegation of authority to it, and action by the committee will not alone constitute compliance by a non-committee board member with his responsibility under section 8.30. On the other hand, a non-committee director also will automatically incur liability should the action of the particular committee fail to meet the standard of care set out in section 8.30. The non-committee member's liability in these cases will depend upon whether he failed to comply with section 8.30(b)(3). Factors to be considered in this regard will include the care used in the delegation to and supervision over the committee, and the amount of knowledge regarding the particular matter which the non-committee director has available to him. Care in delegation and supervision includes appraisal of the capabilities and diligence of the committee directors in light of the subject and its relative importance and receipt of other reports concerning committee activities. The enumeration of these factors is intended to emphasize that directors may not abdicate their responsibilities and secure exoneration from liability simply by delegating authority to board committees. Rather, a director against whom liability is asserted based upon acts of a committee of which he is not a member avoids liability if the standards contained in section 8.30 are met.
Section 8.25(f) has no application to a member of the committee itself. The standard applicable to a committee member is set forth in section 8.30(a). Official Comment to Model Business Corporation Act Section 8.25.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is as similar as possible to formerly applicable statutory law, found at Section 33-8-250 of the South Carolina Business Corporation Act, omitting only provisions relating to mergers and share issuance inapplicable to nonprofit corporations. This section is not intended to prevent creation by the board of, or provision in the articles or bylaws for, committees not complying with subsections (a) and (b) of this section. Such noncomplying committees would not, however, be empowered to exercise board's authority, nor would they be "committees of the board" for purposes of other provisions of this Chapter. An example of a permissible, non-complying committee would be a board-appointed planning committee including as members non-director consultants and staff.
Section 33-31-830. General standards for directors.
(a) A director shall discharge his duties as a director, including his duties as a member of a committee:
(1) in good faith;
(2) with the care an ordinarily prudent person in a like position would exercise under similar circumstances; and
(3) in a manner the director reasonably believes to be in the best interests of the corporation.
(b) In discharging his or her duties, a director is entitled to rely on information, opinions, reports, or statements, including financial statements and other financial data, if prepared or presented by:
(1) one or more officers or employees of the corporation who the director reasonably believes is reliable and competent in the matters presented;
(2) legal counsel, public accountants, or other persons as to matters the director reasonably believes are within the person's professional or expert competence;
(3) a committee of the board of which the director is not a member, as to matters within its jurisdiction, if the director reasonably believes the committee merits confidence; or
(4) in the case of religious corporations, religious authorities and ministers, priests, rabbis, or other persons whose position or duties in the religion organization the director believes justify reliance and confidence and who the director believes is reliable and competent in the matters presented.
(c) A director is not acting in good faith if the director has knowledge concerning the matter in question that makes reliance otherwise permitted by subsection (b) unwarranted.
(d) A director is not liable to the corporation, a member, or any other person for any action taken or not taken as a director, if the director acted in compliance with this section.
(e) A director shall not be deemed to be a trustee with respect to the corporation or with respect to any property held or administered by the corporation, including without limit, property that may be subject to restrictions imposed by the donor or transferror of the property.
(f) An action against a director asserting the director's failure to act in compliance with this section and consequent liability must be commenced before the sooner of (i) three years after the failure complained of or (ii) two years after the harm complained of is, or reasonably should have been, discovered. This limitations period does not apply if the failure to act in compliance with this section has been fraudulently concealed.
OFFICIAL COMMENT
1. General Standards of Conduct
Section 8.30(a) sets forth the general standards of conduct for directors of nonprofit corporations. It settles the dispute as to whether directors of nonprofit corporations should meet the general business standards or the trustee standards. See "Duties of Charitable Trust, Trustee and Charitable Corporation Directors," Real Property, Probate and Trust Journal 545 (1967); Stern v. Lucy Webb Hayes National Training School for Deaconesses and Missionaries, 381 F. Supp. 1003 (D.D.C. 1974). Also see Official Comment to Section 8.30 of the Model Business Corporation Act.
Depending on the status of state law, section 8.30 will replace, modify, clarify or set forth the basic standards that govern the conduct of directors of nonprofit corporations. The standards set forth in section 8.30 are the exclusive standards that govern such conduct. While the exact meaning and application of these standards is left to court decisions, section 8.30 provides the basis upon which these decisions can be made. Except in subsection (e), the Model Act adopts the language used in the Model Business Corporation Act.
States adopting the Model Act may have statutory or common law rules that might apply a trust rule to director conduct covered by section 8.30. Section 8.30 preempts these rules even though the corporation, as distinguished from its director, may hold or be deemed to hold property in trust or subject to restrictions.
While the same language is used, the language is so broad and the differences between public benefit, mutual benefit, religious and business corporations so significant that different factors are relevant in determining whether the standards have been met. A business corporation operates to maximize profits and to economically benefit shareholders. The object of mutual benefit corporations is to provide benefits to and services for members, not to maximize profits. Members may have an economic or noneconomic interest in mutual benefit corporations. Public benefit and religious corporations are quite different. They operate for a public, charitable or religious purpose, not to maximize profits. Their members' interest is not economic but directed toward the corporations' public, charitable or religious purposes. Due to the different nature and objectives of nonprofit corporations, directors of public benefit, mutual benefit, religious and business corporations are not in like positions or operating under similar circumstances.
2. Duty of Care
Section 8.30(a) requires that a director in discharging his or her duties act with the care of an ordinarily prudent person in a like position under similar circumstances. This familiar language allows directors of nonprofit corporations to exercise their judgment with due regard to the nature, operations, finances, and objectives of their organizations. The "ordinarily prudent person" concept is used in various contexts. In the context of nonprofit corporations it applies to directors who balance potential risks and rewards in exercising their duties as directors. It is intended to protect directors who innovate and take informed risks to carry out the corporate goals and objectives. The directors need not be right, but they must act with common sense and informed judgment. The duty of care recognizes that directors are not guarantors of the success of investments, activities, programs or grants. It allows leeway and discretion in exercising judgment.
Directors must spend enough time on the corporation's affairs to be reasonably acquainted with matters demanding their attention. Such attention involves attendance at meetings and review and understanding of material submitted to the board. It also requires directors to request and receive sufficient information so that they may carry out their responsibilities as directors.
In appropriate circumstances the duty of care requires reasonable inquiry. Where a problem exists or a report on its face does not make sense, a director has a duty to inquire into the surrounding facts and circumstances. The inquiry required is the inquiry an ordinarily prudent person in a like position would make under similar circumstances.
The concept of "in a like position" takes into account the fact that directors of nonprofit and business corporations are not in like positions, but have different goals, objectives and resources. For example, many nonprofit corporations operate with little financial backing. Their directors might reasonably conclude that more risks or less risks were justified due to the precarious financial condition of the corporation. Similarly, foundation directors could reasonably conclude that all or a certain percent of the foundation's grants should go to untried and innovative programs with little chance of success, but that would result in significant benefits if successful.
Two distinguishing factors of nonprofit corporations are that their directors may be serving without compensation and are attempting to promote the public good. Courts may take these factors into consideration in determining whether directors are liable with respect to performance of their duties. This does not mean that directors can ignore their responsibilities because they are volunteers or have no economic interest in the corporation or its operations.
The concept of "under similar circumstances" relates not only to the circumstances of the corporation but to the special background, qualifications, and management experience of the individual director and the role the director plays in the corporation. In many public benefit corporations an important role of directors is fund-raising. Many directors are elected to the board to raise money or because of financial contributions they have made to the corporation. These individuals may have no particular skill or background that otherwise would be helpful to the corporation. No special skill or expertise should be expected from such directors unless their background or knowledge evidences some special ability. Such individuals upon becoming directors are obligated to act as directors and may not simply act as figureheads ignoring problems. However, their role should be considered in determining whether they have met their obligations under section 8.30.
Similarly the role of employee-directors should be considered in determining liability under section 8.30. They are the individuals upon whom volunteer directors should be able to rely. See discussion of "Reliance" infra. Their role is crucial to the functioning of many nonprofit corporations. They should be expected to have a more complete grasp of the corporation's activities and should be expected to play an active role in monitoring, problem solving, and decision-making.
A court should not be harsh in second-guessing directors who in good faith make a judgment that proves incorrect. "Although some decisions turn out to be unwise or the result of a mistake of judgment, it is unreasonable to reexamine these decisions with the benefit of hindsight. Therefore, a director is not liable for injury or damage caused by his decision, no matter how unwise or mistaken it may turn out to be, if in performing his duties he met the requirements of section 8.30." Official Comment to Section 8.30 of the Model Business Corporation Act.
3. The Business Judgment Rule
Although it may seem anomalous to apply the business judgment rule to nonprofit corporations, a few courts have so applied it. Yarnall Warehouse & Transfer Inc. v. The Three Ivory Brothers Moving Company, 226 So. 2d 887 (Fla. Dist. Ct. App. 1969). See Beard v. Achenbach Memorial Hospital, 170 F.2d 859 (10th Cir. 1948).
While the application of the business judgment rule to directors of nonprofit corporations is not firmly established by the case law, its use is consistent with section 8.30. Moreover, in the nonprofit context the business judgment rule should apply to discretionary matters voted upon by the board of directors and not just those that can be characterized as "business" decisions. Decisions relating to funding a project or organization, determining what play to produce or what animals to have in a zoo could all fall within the business judgment rule.
If a director has met the standards of section 8.30, there is no need to apply the business judgment rule. If the rule applies it would be operative only if compliance with section 8.30 has not been established.
4. Duty of Loyalty
The general duty of loyalty of directors of nonprofit corporations is set forth in the mandate of section 8.30 that directors act in good faith in a manner they reasonably believe to be in the best interests of the corporation. Development of standards in this area is left to judicial resolution. See Mile-O-Mo Fishing Club, Inc. v. Noble, 62 Ill. App. 2d 50, 210 N.E.2d 12 (1965).
Sections 8.31-8.33 deal with particular aspects of the general duty of loyalty. In setting forth the general standards in section 8.30 and particular standards in sections 8.31-8.33, it is the intent of the Model Act to reject the strict trustee standards and to set forth the exclusive standards under which courts should resolve duty of loyalty questions. In some states it may be necessary to negate the application of various code sections that might otherwise improperly be applied to nonprofit corporations.
5. Good Faith
A precondition to a director discharging his or her duties is that the director act in good faith. While this is a subjective requirement, a court will look to objective facts and circumstances to determine whether the good faith requirement is met. A court generally will look to the director's state of mind to see if it is evidenced honesty and faithfulness to the director's duties and obligations, or whether there was an intent to take advantage of the corporation. A director of a religious corporation in making a good faith determination may consider what the director believes to be: (1) the religious purpose of the corporation; and (2) applicable religious tenets, canons, laws, policies and authority.
6. Reasonable Belief That Action Is in the Best Interests of the Corporation
The requirement that the director act in a manner the director reasonably believes is in the best interests of the corporation is both objective and subjective. It is objective in that the director must reasonably believe the action is in the best interests of the corporation. It is subjective in that the director must in fact believe the action is in the best interests of the corporation. As with the good faith requirement, a court is likely to look to objective facts to determine whether a director's state of mind appears unreasonable and whether the director really believed that the action was in the best interests of the corporation.
7. Reliance
So long as a director does not have knowledge that would make reliance unwarranted, a director may rely on information, opinions, reports, and statements prepared and presented by the individuals and committees specified in section 8.30(b). The right to rely is based on the practical need of directors of nonprofit corporations to rely on experts, staff, committees composed in whole or part of non-board members and committees of the board. With one exception a director may only rely on information from individuals or committees who the director believes to be competent. See section 8.30(b)(1) and (2). Under section 8.30(b)(3) in relying on committees of the board of which the director is not a member, the director must believe that the committee merits "confidence," not that it is "competent." "In section 8.30(b)(3), the concept of `confidence' is substituted for `competence' in order to avoid any inference that technical skills are a prerequisite." Official Comment to Section 8.30 of the Model Business Corporation Act. The requirement that a director must not have knowledge that would cause reliance to be unwarranted means that a director cannot rely on that which he or she knows to be unreliable.
In most circumstances a director is entitled to rely on reports prepared by the individuals or committees specified in subsection (b). Where, however, a director has a reasonable basis to be suspicious or is in fact suspicious, the general duty of care set forth in section 8.30 requires the director to make further inquiry. In addition to the requirement that a director must reasonably believe that the material is reliable, the director must in fact rely on the material. In order to rely on a report a director must have read it, been present at a meeting where it was presented or otherwise have evaluated it.
8. Delegation
Directors of a nonprofit corporation may delegate authority to officers, employees or agents of the corporation so long as the affairs of the corporation are managed under the direction of the board. See section 8.01(b). "Since the board may delegate or assign to appropriate officers of the corporation the authority or duty to exercise powers that section 8.01 does not require the board to retain, directors are not personally responsible under section 8.30 for actions or omissions of officers, employees, or agents of the corporation so long as the directors, complying with the standard of care set forth in section 8.30, have acted reasonably in delegating responsibility." Official Comment to Section 8.30 of the Model Business Corporation Act.
9. Exoneration
Section 8.30(d) is based in part upon section 8.30(d) of the Model Business Corporation Act which was based on section 35 of the prior Model Business Corporation Act. Section 8.30(d) is "self-executing, and the individual director's exoneration from liability is automatic . . . .
Section 8.30(d) makes clear that the section will apply whether or not affirmative action was in fact taken. If the board of directors or a committee considers an issue (such as a recommendation of independent auditors concerning the corporation's internal accounting controls) and determines not to take action, the determination not to act is protected by section 8.30. Similarly, if the board of directors or committee delegates responsibility for handling a matter to subordinates, the delegation constitutes `action' under section 8.30. Section 8.30(d) applies (assuming its requirements are satisfied) to any conscious consideration of matters involving the affairs of the corporation. It also applies to the determination by the board of directors of which matters to address and which not to address. Section 8.30(d) does not apply only when the director has failed to consider taking action which under the circumstances he is obliged to consider taking." Official Comment to Section 8.30 of the Model Business Corporation Act.
Subsection (d) deals with one area of potential liability that is not explicitly dealt with by section 8.30 of the Model Business Corporation Act. It provides that a director who has acted in compliance with section 8.30 "is not liable to the corporation, any member or any other person for any action taken or not taken as a director. . . ." This provision protects directors from claims by third persons. It rejects the holding in Frances T. v. Village Green Owners Ass'n., 43 Cal. 3d 490 (1986). However, a director who personally commits a tort is not protected by the provisions of section 8.30.
Subsection (e) deals with another area of potential liability that is not explicitly dealt with by section 8.30 of the Model Business Corporation Act. Subsection (e) provides that a director is not a trustee with respect to the corporation or any property held by it. Absent subsection (e), it would be possible to argue that a director meeting his or her duties under section 8.30 was liable for a breach of trust by improperly using, disposing of, or otherwise dealing with assets held by the corporation in trust. As a result of subsection (e) this argument has no vitality. A director who meets the standard of section 8.30, but improperly acts or fails to act in regard to property held in trust, will not be liable. Depending on state law, the corporation may be liable for breach of trust. However, the corporation may not seek indemnification or contribution from the director.
10. Investments
Numerous states have adopted the Uniform Management of Institutional Funds Act. That act deals with the way in which nonprofit organizations hold, manage, and invest their assets. In adopting the Model Act states should consider the applicability of the Uniform Management of Institutional Funds Act to the standards set forth in sections 8.30-8.33.
SOUTH CAROLINA REPORTERS' COMMENTS
This section replaces formerly applicable statutory law found at Section 33-8-300 of the South Carolina Business Corporation Act and changes prior law in several ways.
Subsection (a)(3) omits the words "and its shareholders" found in the Business Corporation Act. The function of this section is solely to establish the standard of care with which directors must act in fulfilling their duties, in order to avoid personal liability. To whom duties are owed by directors is a matter of common law. That directors owe duties to shareholders and members of corporations is well established in South Carolina by common law, reviewed in the South Carolina's Reporter's Comments to Section 33-8-300.
Subsection (b)(3) differs slightly in wording from the analogous provision of Section 33-8-300. This difference is intended for clarification and not to make any substantive change in meaning.
Subsection (b)(4) is new, adding an additional category of reliable expert for religious organizations.
Subsection (d) differs slightly in wording from the analogous provision of Section 33-8-300. The new wording is intended to make clear that directors who, acting as directors, comply with the standard of care of this section, are shielded from liability to any person to whom a court might find that the director, acting as a director, owed a duty. See paragraph 9 of the Official Comment. Subsection (d) is not intended to create any duty which did not previously exist or to suggest that such a duty should exist.
Subsection (e) is new. Its intent is to make clear that directors are not trustees by virtue of their directorships alone. This is true even if corporate governance documents refer to the directors as trustees. Directors may otherwise be made trustees in connection with their directorships, however. Concerning the statutory duty of a trustee versus that of a director, compare Section 62-7-302(a) with Section 33-8-300.
This section does not address the business judgment rule. The business judgment rule would be available to a director as a defense notwithstanding such director's inability to establish a defense under this section. In South Carolina, the business judgment rule has been applied to nonprofit corporations. See Dockside Association, Inc., v. Detyens, 291 S.C. 214, 352 S.E. 2d 714, (Ct. App. 1987), aff'd, 294 S.C. 86, 362 S.E.2d 874 (1987).
Subsection (f), which was not proposed in the Model Act, was added to correspond to former law found at Section 33-8-300(d) of the South Carolina Business Corporation Act. Subsection (f) is intended to provide for limitations periods similar to those found in Section 33-8-300(d), but has been altered in substance to reflect the absence of the concept of duty from this section.
Concerning the power of corporations to limit the personal liabilities of their directors, see Section 33-31-202(b).
Section 33-31-831. Director conflict of interest.
(a) A conflict of interest transaction is a transaction with the corporation in which a director of the corporation has a direct or indirect interest. A conflict of interest transaction is not voidable or the basis for imposing liability on the director if the transaction was fair to the corporation at the time it was entered into or is approved as provided in subsections (b) or (c).
(b) A transaction in which a director of a public benefit or religious corporation has a conflict of interest may be:
(1) authorized, approved, or ratified by the vote of the board of directors or a committee of the board if:
(i) the material facts of the transaction and the director's interest are disclosed or known to the board or committee of the board; and
(ii) the directors approving the transaction in good faith reasonably believe that the transaction is fair to the corporation; or
(2) approved before or after it is consummated by obtaining approval of the:
(i) Attorney General; or
(ii) the circuit court for Richland County in an action in which the Attorney General is joined as a party; or
(c) A transaction in which a director of a mutual benefit corporation has a conflict of interest may be approved if:
(1) the material facts of the transaction and the director's interest were disclosed or known to the board of directors or a committee of the board and the board or committee of the board authorized, approved, or ratified the transaction; or
(2) the material facts of the transaction and the director's interest were disclosed or known to the members and they authorized, approved, or ratified the transaction.
(d) For purposes of this section, a director of the corporation has an indirect interest in a transaction if:
(1) another entity in which the director has a material interest or in which the director is a general partner is a party to the transaction; or (2) another entity of which the director is a director, officer, or trustee is a party to the transaction.
(e) for purposes of subsections (b) and (c) a conflict of interest transaction is authorized, approved, or ratified if it receives the affirmative vote of a majority of the directors on the board or on the committee who have no direct or indirect interest in the transaction, but a transaction may not be authorized, approved, or ratified under this section by a single director. If a majority of the directors on the board who have no direct or indirect interest in the transaction vote to authorize, approve, or ratify the transaction, a quorum is present for the purpose of taking action under this section. The presence of, or a vote cast by, a director with a direct or indirect interest in the transaction does not affect the validity of any action taken under subsections (b)(1) or (c)(1) if the transaction is otherwise approved as provided in subsection (b) or (c).
(f) For purposes of subsection (c)(2), a conflict of interest transaction is authorized, approved, or ratified by the members if it receives a majority of the votes entitled to be counted under this subsection. Votes cast by or voted under the control of a director who has a direct or indirect interest in the transaction, and votes cast by or voted under the control of an entity described in subsection (d)(1), may not be counted in a vote of members to determine whether to authorize, approve, or ratify a conflict of interest transaction under subsection (c)(2). The vote of these members, however, is counted in determining whether the transaction is approved under other sections of this chapter. A majority of the voting power, whether or not present, that are entitled to be counted in a vote on the transaction under this subsection constitutes a quorum for the purpose of taking action under this section.
(g) The articles, bylaws, or a resolution of the board may impose additional requirements on conflict of interest transactions.
OFFICIAL COMMENTS
1. Applicability of Section 8.31
Section 8.31 applies to a limited category of conflict of interest transactions. Section 8.31 applies to a transaction if a director: (1) has a direct interest in the transaction; (2) is a general partner in a partnership or a director, officer or trustee of another entity that has an interest in the transaction; or (3) has a material interest in an entity that has an interest in the transaction. A director has an interest in a transaction if his or her immediate family members have an interest in the transaction.
Even if section 8.31 does not apply to a transaction, section 8.30 may be applicable. For example, a director of a nonprofit corporation may have an immaterial interest in an entity that has a contract with the director's nonprofit corporation. Section 8.31 would not apply as the director's only interest in the transaction is an immaterial interest. However, the general duty of loyalty set forth in section 8.30 would apply. The director would have to act "in good faith . . . in a manner the director reasonably believes to be in the best interests of the corporation." Section 8.30(a)(1) and (3).
Section 8.31, like section 8.30, rejects the trust standard. That standard prohibits any transaction between a trust and a trustee. Section 8.31 also rejects the concept that director may not obtain any profit from a transaction involving his or her corporation. If the requirements of section 8.31 are met, a director can make a profit from a transaction involving his or her corporation.
The Model Act recognizes that many individuals are elected to nonprofit boards because of their ability to enter into or cause an affiliate to enter into a transaction with and for the benefit of the corporation. Often landlords, lawyers, bankers, and suppliers are added to a board so the corporation can obtain reduced rent, free or low-cost legal services, loans, and bargain purchases. Ideally, nonprofit corporations would have sufficient money to carry out their purposes and would not have to rely on or plead for favorable treatment. As a practical matter this does not often concur. Therefore the Model Act attempts to provide a tolerable accommodation between the needs of nonprofit organizations and the potential abuses of directors or officers.
2. Ways to Comply With Section 8.31
a. Public Benefit and Religious Corporations
There are four ways in which a transaction involving a public benefit or religious corporation may meet the requirements of section 8.31.
First, a transaction that is fair to the corporation at the time it is authorized or is entered into does not violate the provisions of section 8.31. Consequently an interested director may always defend a claim that a transaction violates section 8.31 by showing it was fair to the corporation.
The essence of the fairness test is set forth in Pepper v. Litton, 308 U.S. 295, 306 (1939), where the Court stated that in evaluating the fairness of transactions entered into by a corporation and its directors or controlling persons:
Their dealings with the corporation are subjected to rigorous scrutiny . . . The essence of the test is whether or not under all the circumstances the transaction carries the earmarks of an arm's length bargain.
Second, if a transaction is approved in advance by the vote of the board of directors or a committee of the board the transaction will not violate section 8.31 if:
(a) the material facts of the transaction and the director's interest in the transaction were disclosed or known to the board or committee. Although not required, good practice would result in a written record of the facts disclosed or known to the directors. Even if there are no such records and no disclosure was made, this information requirement can be met if the directors at the time they approved the transaction knew the material facts of the transaction and the director's interest in the transaction; and
(b) the directors approving the transaction reasonably believed the transaction was fair to the corporation. It is not necessary to prove that the transaction was in fact fair to the corporation, just that the directors believed it was fair and had a reasonable basis upon which to form this opinion. See discussion of Reasonable Belief, Good Faith, and Reliance in Official Comment to Section 8.30. Even if the directors were wrong in believing that it was fair, the transaction will not violate section 8.31 so long as the directors approved it in conformity with section 8.31; and
(c) the transaction was approved before it was consummated.
Third and fourth, court or attorney general approval of the transaction may be obtained before or after the transaction was consummated. The Model Act does not specify the method of obtaining attorney general approval. This matter is left to the individual states. Nor does the Model Act specify the grounds upon which a court should approve a transaction. Presumably, however, a court will evaluate the fairness of the transaction after consideration of all relevant facts. If court or attorney general approval is obtained, the transaction cannot be challenged on the ground that it violates section 8.31.
b. Mutual Benefit Corporations
There are three ways in which a conflict of interest transaction may meet the requirements of section 8.31 for a mutual benefit corporation.
First, a transaction that is fair at the time it is entered into meets the requirements of section 8.31. Second and third, the board of directors or members may approve the transaction either before or after it is consummated. If it is approved by the board or members in conformity with section 8.31, the person seeking to uphold the transaction does not have to prove it was fair. In each case the directors or members must know or there must have been disclosure of all material facts including the director's interest in the transaction. Member approval is not available to public benefit corporations as members of public benefit corporations have no economic interest in their corporation and in this respect are not analogous to shareholders of business corporations.
3. Vote and Quorum
Subsection (e) sets a special quorum and vote requirement when the board votes on a conflict of interest transaction. A quorum is present and a transaction is approved by the board when a majority of the directors on the board who have no direct or indirect interest in the transaction vote to authorize the transaction. The articles or bylaws may impose a higher quorum or vote requirement. See sections 7.22 and 7.23. In no event may one director approve a conflict of interest transaction.
An interested director may be present when the vote is taken. In some instances good practice requires the director's presence at a meeting to answer questions about the transaction. While it might be desirable to request an interested director to leave prior to the vote, the Model Act does not require the director or officer to leave during the discussion or the vote. In fact the interested director may vote on the transaction if the transaction is otherwise approved as provided in subsection (b) or (c).
4. Materiality
Section 8.31 applies to transactions between a nonprofit corporation and an entity in which the director of the nonprofit corporation has a "material" interest.
Not every transaction in which a director has an interest will involve a material interest. Some transactions will involve an immaterial interest. An interest is material if there is a substantial likelihood that a reasonable person would consider it important in deciding what action to take. See TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976). The richer the director and the smaller the transaction the less likely it is that the transaction will be material.
Section 8.31(c) requires disclosure or knowledge of the "material" facts of a conflict of interest transaction prior to approval of the transaction by the directors or members. A fact is material if there is a substantial likelihood that a reasonable person would consider it important in deciding how to vote. See TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976).
5. Additional Requirements
Nonprofit corporations may prohibit or impose additional requirements for approval of transactions involving interested directors or officers. A supermajority vote, board and not just committee approval, and other specified procedures may be required. Subsection (g) allows these additional requirements to be set forth in the articles, bylaws or a resolution of the board.
6. Remedies
Section 8.31 does not specify remedies for a violation of section 8.31. However the underlying philosophy of sections 8.30 and 8.31 is contrary to the strict trust concept that interested directors can never obtain a profit when dealing with their corporation.
A court should enter an order that provides an equitable and fair remedy to the corporation taking into account any benefits the corporation received. A court should determine whether the breach of section 8.31 was technical or substantive, whether there was an attempt to deal openly and fairly with the corporation and to act in good faith in furthering the corporation's best interests. In particularly egregious cases involving fraudulent and malicious conduct, a court may grant exemplary damages.
Courts may wish to distinguish between transactions that only involve an interested director and transactions in which an interested director or officer has an indirect material interest. In the latter case it may be unfair to invalidate a transaction between a nonprofit corporation and a third party or to order the third party to pay damages. The nature of the remedy is left to the discretion of the courts.
SOUTH CAROLINA REPORTERS' COMMENTS
Formerly applicable statutory law relating to director conflicts of interest was found at Section 33-8-310 of the South Carolina Business Corporation Act. Present law works several changes, described below.
Section 33-8-310 refers to officers in its title. Its provisions, however, make no reference to officers. Similarly, this section makes no reference to officers. Rules of conflicts of interest of officers are found in the common law of agency.
Prior statutory law addressed only whether a conflict-of-interest transaction was voidable "by the corporation". The present statute omits the reference to the corporation, and provides instead that a conflict-of-interest transaction complying with the section "is not voidable" (without limitation as to by whom) "or the basis for imposing liability upon the director".
Under prior statutory law, conflict-of-interest transactions were not wrongful if (i) approved by the board while in possession of all material facts, (ii) approved by the shareholders while in possession of all material facts or (iii) regardless of (i) or (ii), fair to the corporation. Under subsection (a) of the present section, a conflict-of-interest transaction is not wrongful so long as it was "fair at the time it was entered into", or is approved as provided elsewhere in the section. Prior law is changed in subsection (a) only as to the clear timing of the fairness inquiry ("at the time it was entered into"). The Model Act proposed deleting from this subsection the words, "fair to the corporation", but these words have been retained to preserve prior law so far as possible.
Except as described above, the present statute preserves the tests of the formerly applicable statute virtually unchanged as to mutual benefit corporations. As to religious and public benefit corporations, the alternative tests to fairness are quite different. They are found at subsections (b)(1) and (2).
The Model Act proposed that transactions in which directors of public interest or religious corporations were interested could be approved only in advance. This has been changed to permit ratification by the board.
Subsections (d), (e) and (f), which are definitional and administrative, are substantially similar to the analogous provisions of the formerly applicable statute, and therefore represent no significant change, with one exception: Subsection (d) omits the qualifying words, "and the transaction is or should be considered by the board of directors of the corporation." These words substantially narrow the scope of prior law. Their omission from subsection (d) indicates that every conflict-of-interest transaction falls within the section.
Subsection (g) explicitly permits corporations to do something probably permissible by implication under prior law -- adopt conflict-of-interest requirements more stringent than those of the statute.
Section 33-31-832. Loans or guarantees for directors and officers.
(a) A public benefit or religious corporation may not directly or indirectly lend money to or guarantee the obligation of a director or officer of the corporation.
(b) A mutual benefit corporation may not directly or indirectly lend money to or guarantee the obligation of a director of the corporation unless:
(1) the loan or guarantee is approved by a majority of all classes of members, except the votes of the affected director, if a member, and any votes controlled directly or indirectly by the affected director shall not be counted; or
(2) the corporation's board of directors determines that the loan or guarantee benefits the corporation and either approves the specific loan or guarantee or a general plan authorizing loans and guarantees or either of them; and
(3) the approving action taken pursuant to (1) or (2) is authorized by the corporation's articles or bylaws.
(c) The fact that a loan or guarantee is made in violation of this section does not affect the borrower's liability on the loan.
OFFICIAL COMMENT
Section 8.32 prohibits all loans to and guaranties for officers and directors. As potential abuse in this area is great and statutorily distinguishing between appropriate and inappropriate loans is difficult, the Model Act continues the policy of the prior Model Act by prohibiting loans and guaranties. Advances of money from petty cash and for travel and other corporate purposes are not loans within the meaning of section 8.32 and consequently are not prohibited.
SOUTH CAROLINA REPORTERS' COMMENTS
The formerly applicable statute, Section 33-8-320 of the South Carolina Business Corporation Act, permitted loans to officers and directors when approved under certain circumstances by the board or the membership. As to religious and public purpose corporations, the present section constitutes a flat prohibition, representing a distinct change from prior law. As to mutual benefit corporations, the prior law has been retained to the extent permitted by a corporation's articles or bylaws. This constitutes a change from the recommendation of the Model Act. Actions taken pursuant to this section are subject to the standard of Section 33-31-830.
As mentioned in the Official Comment, this section is not intended to make unlawful such practices as travel loans or split-dollar life insurance policies.
This section applies only to transactions taking place on or after the effective date of this statute.
There was strong backing on the committee for omitting religious corporations from the prohibition of subsection (1). Religious corporations were retained within the prohibition largely on the basis of their essential nonfinancial nature. Permitting religious corporations to serve, in effect, as lending institutions appeared to the majority of the committee to be inconsistent with the many privileges accorded to such organizations. Again, attention is drawn to the Official Comment to this section, and to Section 33-31-180.
Section 33-31-833. Liability for unlawful distributions.
(a) Unless a director complies with the applicable standards for conduct described in Section 33-31-830, a director who votes for or assents to a distribution made in violation of this chapter or the articles of incorporation is personally liable to the corporation for the amount of the distribution that exceeds what could have been distributed without violating this chapter.
(b) A director held liable for an unlawful distribution under subsection (a) is entitled to contribution:
(1) from every other director who voted for or assented to the distribution without complying with the applicable standards of conduct described in Section 33-31-830; and
(2) from each person who received an unlawful distribution for the amount of the distribution whether or not the person receiving the distribution knew it was made in violation of this chapter.
OFFICIAL COMMENT
Section 13.01 prohibits distributions except those authorized by section 13.02. See section 1.40(10). Section 8.33(a) provides that a director who votes for or assents to a prohibited distribution is not liable for such action if the director complies with the standards of conduct set forth in section 8.30. Of course, a director who receives a distribution prohibited by section 13.01 is obligated to return the distribution to the corporation.
A director who breaches his or her duties under section 8.30 in voting for or assenting to a prohibited distribution is liable to the corporation for the amount of the improper distribution.
Section 8.33(b) allows a director who is liable for an unlawful distribution to receive contribution from the directors, if any, who voted for or assented to the distribution without complying with section 8.30 and from each person who received the unlawful distribution. These persons may include members, directors, officers and controlling persons of the corporation. See section 13.01. The exact amount each will have to contribute is left to the equitable powers of the courts.
SOUTH CAROLINA REPORTERS' COMMENTS
Previously applicable statutory law was found at Section 33-8-330 of the South Carolina Business Corporation Act. As does the present statute, Section 33-8-330 makes clear that directors are not personally liable for an unlawful distribution unless there is established, in addition to the unlawfulness of the distribution, the director's failure to comply with the standards of Section 33-31-300.
This section applies to distributions which are in violation of the articles of incorporation, as well as those which are in violation of law. This is a change from the proposal of the Model Act, intended to provide uniformity with the analogous provision of the South Carolina Business Corporation Act.
Section 33-31-834. Immunity from suit.
(a) All directors, trustees, or members of the governing bodies of not-for-profit cooperatives, corporations, associations, and organizations described in subsection (b) are immune from suit arising from the conduct of the affairs of these cooperatives, corporations, associations, or organizations. This immunity from suit is removed when the conduct amounts to wilful, wanton, or gross negligence. Nothing in this section may be construed to grant immunity to the not-for-profit cooperatives, corporations, associations, or organizations.
(b) Subsection (a) applies to the following:
(1) electric cooperatives organized under Chapter 49, Title 33;
(2) not-for-profit corporations, associations, and organizations, as recognized in and exempted from taxation under Federal Income Tax Code Section 501(c)(3), (c)(6), or (c)(12).
OFFICIAL COMMENT
None
SOUTH CAROLINA REPORTERS' COMMENTS
This provision relating to immunity from liability was formerly contained in Section 33-31-180 and has been renumbered as Section 33-31-834 to come within the scheme of this revised act.
Section 33-31-840. Required officers.
(a) Unless otherwise provided in the articles or bylaws, a corporation shall have a president, a secretary, a treasurer, and such other officers as are appointed by the board.
(b) The bylaws or the board shall delegate to one of the officers responsibility for preparing minutes of the directors' and members' meetings and for authenticating records of the corporation.
(c) The same individual may simultaneously hold more than one office in a corporation.
OFFICIAL COMMENT
Unless otherwise provided in the articles or bylaws, a corporation shall have a president, secretary, treasurer and such other officers as are appointed by the board. The bylaws may do away with the traditional titles for officers and provide a series of unique titles for those who serve as corporate officers. The board shall appoint all corporate officers. Even if an individual is not designated as "secretary" of the corporation, section 8.40(b) requires the bylaws or the board to delegate to an officer responsibility for preparing minutes of the directors' and members' meetings and for authenticating corporate records. The Model Act treats this individual as the "secretary" of the corporation regardless of his or her corporate title. See Section 1.40(31).
In many instances nonprofit corporations are run by and day-to-day responsibility is vested in an employee who is an officer of the corporation, whether called executive director, administrator, chief administrator or by some other name. The president, if any, is a volunteer who is given the title of president in recognition of the significant contributions he or she has made or is making to the organization. The president is not involved in the day-to-day activities of the organization, and may or may not be the most significant member of its board of directors. Under these circumstances the title of "president" may be misleading. The term is certainly not analogous to the president of a business corporation.
In many nonprofit organizations substantial authority rests in an executive director, a full-time officer who runs the day-to-day activities of the corporation and makes basic decisions relating to corporate activities. In such instances the bylaws or a resolution of the board should specify the power and authority of the executive director consistent with the requirement that the affairs of the corporation be managed under the director of the board.
SOUTH CAROLINA REPORTERS' COMMENTS
Unlike previously applicable statutory law, found at Section 33-8-400 of the South carolina Business Corporation Act, this section requires each corporation to have traditional officers. Otherwise, there is no significant change from prior law.
Section 33-31-841. Duties and authority of officers.
Each officer has the authority and shall perform the duties set forth in the bylaws or, to the extent consistent with the bylaws, the duties and authority prescribed in a resolution of the board or by direction of an officer authorized by the board to prescribe the duties and authority of other officers.
OFFICIAL COMMENT
Section 8.41 deals with the authority (sometimes called "actual authority") of corporate officers. It provides that these officers shall have the authority set forth in the bylaws, in the resolutions of the board, or that which is delegated to them by an officer authorized to do so by the board.
In addition, certain officers may have limited authority as a result of a particular office they hold. For example, the executive director of a nonprofit organization may have considerable authority as a result of being executive director. Cases dealing with the inherent authority of the president or other officers of a business corporation are not necessarily consistent with the nature of these offices in the nonprofit context. For example, in some nonprofit organizations the president may not be involved in the day-to-day activities or decision-making. If not, the president's role is different than that of the president of a business corporation.
Officers may also have the power to bind the corporation. See Section 8 of the Restatement of the Law of Agency, Second. Also see section 8.45.
SOUTH CAROLINA REPORTERS' COMMENTS
This section makes no change from previously applicable statutory law, found at Section 33-8-410 of the South Carolina Business Corporation Act.
Organizations which at the time of adoption of this section prescribed officers' duties in some document other than the bylaws (or the equivalent, regardless of name; see the definition of bylaws at Section 33-31-140(4)) should restate those duties in a manner consistent with this section.
Section 33-31-842. Standards of conduct for officers.
(a) An officer with discretionary authority shall discharge his duties under that authority:
(1) in good faith;
(2) with the care an ordinarily prudent person in a like position would exercise under similar circumstances; and
(3) in a manner the officer reasonably believes to be in the best interests of the corporation, and its members, if any.
(b) In discharging his duties, an officer is entitled to rely on information, opinions, reports, or statements, including financial statements and other financial data, if prepared or presented by:
(1) one or more officers or employees of the corporation who the officer reasonably believes to be reliable and competent in the matters presented;
(2) legal counsel, public accountants, or other persons as to matters the officer reasonably believes are within the person's professional or expert competence; or
(3) in the case of religious corporations, religious authorities and ministers, priests, rabbis, or other persons whose position or duties in the religious organization the officer believes justify reliance and confidence and who the officer believes to be reliable and competent in the matters presented.
(c) An officer is not acting in good faith if the officer has knowledge concerning the matter in question that makes reliance otherwise permitted by subsection (b) unwarranted.
(d) An officer is not liable to the corporation, any member, or other person for any action taken or not taken as an officer, if the officer acted in compliance with this section.
(e) An action against an officer asserting the officer's failure to act in compliance with this section and consequent liability must be commenced before the sooner of (i) three years after the failure complained of or (ii) two years after the harm complained of is, or reasonably should have been, discovered. This limitations period does not apply if the failure to act in compliance with this section has been fraudulently concealed.
OFFICIAL COMMENT
Section 8.42 provides that nondirector officers with discretionary authority have the same general duty of care and loyalty as that of directors set forth in section 8.30. In nonprofit corporations, particularly public benefit or religious corporations where the board of directors is usually composed of volunteers, full-time paid officers have important and significant duties and responsibilities. Nondirector officers with more limited discretionary authority may be judged by a narrower standard, though every corporate officer or agent owes duties of fidelity, honesty, good faith, and fair dealing to the corporation. Official Comment to Model Business Corporation Act Section 8.42.
Section 8.42 allows nondirector officers to rely on certain information, opinions, reports and statements when they do not have knowledge concerning the matter that would make that reliance unwarranted. In the absence of actual knowledge that records presented by the secretary are not truthful or accurate, third persons may rely on the truthfulness and accuracy of such records.
Officers, particularly those who are paid, have a responsibility to actively carry out their duties and obtain information relevant to their position. This information may require the officers to make further inquiries and prevent them from relying on reports that could be relied upon by directors.
In general, the Official Comment to Section 8.30 is applicable to nondirector officers.
SOUTH CAROLINA REPORTERS' COMMENTS
With the exception of new subsection (b)(3), this section represents no substantive change from previously applicable statutory law, found at Section 33-8-420 of the South Carolina Business Corporation Act. With respect to the statute of limitations of subsection (e), see the South Carolina Reporters' Comment to Section 33-31-830.
Section 33-31-843. Resignation and removal of officers.
(a) An officer may resign at any time by delivering notice to the corporation. A resignation is effective when the notice is effective unless the notice specifies a future effective date. If a resignation is made effective at a future date and the corporation accepts the future effective date, its board of directors may fill the pending vacancy before the effective date if the board provides that the successor does not take office until the effective date.
(b) A board may remove an officer at any time with or without cause.
OFFICIAL COMMENT
Section 8.43 allows an officer to resign by giving written or oral notice to the corporation and specifies when the resignation is effective.
Section 8.43(b) provides that the board may remove any officer, at any time, with or without cause. An officer so removed may not sue for specific performance of any contract or agreement to be employed as an officer. Such removal is without prejudice to the former officer's right to bring an action for damages for breach of contract. See section 8.44.
SOUTH CAROLINA REPORTERS' COMMENTS
Previously applicable statutory law, found at Section 33-8-430 of the South Carolina Business Corporation Act, contemplated that officers might be appointed by the shareholders pursuant to provisions in shareholder agreements or the articles. Such officers are protected under Section 33-8-430 from removal by the board without cause. No such protection exists in the present section, which permits the board to remove any officer without cause. However, as noted in the South Carolina Reporters' Comments to section 33-31-801, if the articles also give the members the exclusive power to remove officers, this article provision would divest the board of its power to remove officers. Although the board has the authority so to remove officers, removal might violate officers' contract rights, for which they could have an action. See Section 33-31-844.
Section 33-31-844. Contract rights of officers.
(a) The appointment of an officer does not itself create contract rights.
(b) An officer's removal does not affect the officer's contract rights, if any, with the corporation. An officer's resignation does not affect the corporation's contract rights, if any, with the officer.
OFFICIAL COMMENT
Section 8.43 makes clear that the appointment of an officer does not itself create contract rights in the officer. The removal of an officer with contract rights is without prejudice to his later enforcement of contract rights in a suit for damages for breach of contract. See the Official Comment to section 8.43. Similarly, an officer with an employment contract. The mere appointment of an officer for a term does not create a contractual obligation on his part to complete the term. Official Comment to Model Business Corporation Act Section 8.44.
SOUTH CAROLINA REPORTERS' COMMENTS
This section represents no change from previously applicable statutory law, found at Section 33-8-440 of the South Carolina Business Corporation Act.
Section 33-31-850. Definitions.
In this subarticle:
(1) `Corporation' includes any domestic or foreign predecessor entity of a corporation in a merger or other transaction in which the predecessor's existence ceased upon consummation of the transaction.
(2) `Director' means an individual who is or was a director of a corporation or an individual who, while a director of a corporation, is or was serving at the corporation's request as a director, officer, partner, trustee, employee, or agent of another foreign or domestic business or nonprofit corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise. A director is considered to be serving an employee benefit plan at the corporation's request if the director's duties to the corporation also impose duties on, or otherwise involve services by, the director to the plan or to participants in or beneficiaries of the plan. `Director' includes, unless the context requires otherwise, the estate or personal representative of a director.
(3) `Expenses' include counsel fees.
(4) `Liability' means the obligation to pay a judgment, settlement, penalty, fine, including an excise tax assessed with respect to an employee benefit plan, or reasonable expenses actually incurred with respect to a proceeding.
(5) `Official capacity' means: (i) when used with respect to a director, the office of director in a corporation; and (ii) when used with respect to an individual other than a director, as contemplated in Section 33-31-856, the office in a corporation held by the officer or the employment or agency relationship undertaken by the employee or agent on behalf of the corporation. `Official capacity' does not include service for any other foreign or domestic business or nonprofit corporation or any partnership, joint venture, trust, employee benefit plan, or other enterprise.
(6) `Party' includes an individual who was, is, or is threatened to be made a named defendant or respondent in a proceeding.
(7) `Proceeding' means a threatened, pending, or completed action, suit, or proceeding whether civil, criminal, administrative, or investigative and whether formal or informal.
SOUTH CAROLINA REPORTERS' COMMENTS
This section makes no substantive change from the previously applicable statute, Section 33-8-500 of the South Carolina Business Corporation Act. Subsection (2) has been altered slightly to make clear that this section applies to directors of nonprofit corporations.
Section 33-31-851. Authority to indemnify.
(a) Except as provided in subsection (d), a corporation may indemnify an individual made a party to a proceeding because the individual is or was a director against liability incurred in the proceeding if the individual:
(1) conducted himself in good faith; and
(2) reasonably believed:
(i) in the case of conduct in his official capacity with the corporation, that his conduct was in its best interests; and
(ii) in all other cases, that his conduct was at least not opposed to its best interests; and
(3) in the case of a criminal proceeding, had no reasonable cause to believe his conduct was unlawful.
(b) A director's conduct with respect to an employee benefit plan for a purpose the director reasonably believed to be in the interests of the participants in and beneficiaries of the plan is conduct that satisfies the requirements of subsection (a)(2)(ii).
(c) The termination of a proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent is not, of itself, determinative that the director did not meet the standard of conduct described in this section.
(d) A corporation may not indemnify a director under this section:
(1) in connection with a proceeding by or in the right of the corporation in which the director was adjudged liable to the corporation; or
(2) in connection with any other proceeding charging improper personal benefit to the director, whether or not involving action in his official capacity, in which the director was adjudged liable on the basis that personal benefit was improperly received by the director.
(e) Indemnification permitted under this section in connection with a proceeding by or in the right of the corporation is limited to reasonable expenses incurred in connection with the proceeding.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is in substance identical to the previously applicable statute, Section 33-8-510 of the South Carolina Business Corporation Act.
Section 33-31-852. Mandatory indemnification.
Unless limited by its articles of incorporation, a corporation shall indemnify a director who was wholly successful, on the merits or otherwise, in the defense of a proceeding to which the director was a party because he is or was a director of the corporation against reasonable expenses actually incurred by the director in connection with the proceeding.
SOUTH CAROLINA REPORTERS' COMMENTS
This section made no change from the previously applicable statute, Section 33-8-520 of the South Carolina Business Corporation Act.
Section 33-31-853. Advances for expenses.
(a) A corporation may pay for or reimburse the reasonable expenses incurred by a director who is a party to a proceeding in advance of final disposition of the proceeding if:
(1) the director furnishes the corporation a written affirmation of his good faith belief that he has met the standards of conduct described in Section 33-31-851;
(2) the director furnishes the corporation a written undertaking, executed personally or on the director's behalf, to repay the advance if it is ultimately determined that the director did not meet the standard of conduct; and
(3) a determination is made that the facts then known to those making the determination would not preclude indemnification under this chapter.
(b) The undertaking required by subsection (a)(2) must be an unlimited general obligation of the director but need not be secured and may be accepted without reference to financial ability to make repayment.
(c) Determinations and authorizations of payments under this section must be made in the manner specified in Section 33-31-855.
SOUTH CAROLINA REPORTERS' COMMENTS
This section does not change previously applicable statutory law, found at Section 33-8-530 of the South Carolina Business Corporation Act.
Section 33-31-854. Court-ordered indemnification.
Unless limited by a corporation's articles of incorporation, a director of the corporation who is a party to a proceeding may apply for indemnification to the court conducting the proceeding or to another court of competent jurisdiction. On receipt of an application, the court after giving any notice the court considers necessary may order indemnification in the amount it considers proper if it determines:
(1) the director is entitled to mandatory indemnification under Section 33-31-852, in which case the court also shall order the corporation to pay the director's reasonable expenses incurred to obtain court-ordered indemnification; or
(2) the director is fairly and reasonably entitled to indemnification in view of all the relevant circumstances, whether or not the director met the standard of conduct set forth in Section 33-31-851(a) or was adjudged liable as described in Section 833-31-851(d), but if the director was adjudged so liable indemnification is limited to reasonable expenses incurred.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is very similar to the previously applicable statute, Section 33-8-540 of the South Carolina Business Corporation Act. The first phrase of Section 33-8-540 reads: "Unless a corporation's articles of incorporation provide otherwise". The change from prior law makes clear that, as to nonprofit corporations, the articles are not permitted to provide greater scope for court-ordered indemnification than does the statute.
Section 33-31-855. Determination and authorization of indemnification.
(a) A corporation may not indemnify a director under Section 33-31-851 unless authorized in the specific case after a determination has been made that indemnification of the director is permissible in the circumstances because the director has met the standard of conduct set forth in Section 33-31-851.
(b) The determination must be made:
(1) by the board of directors by majority vote of a quorum consisting of directors not at the time parties to the proceeding;
(2) if a quorum cannot be obtained under item (1), by majority vote of a committee duly designated by the board of directors, in which designation directors who are parties may participate, consisting solely of two or more directors not at the time parties to the proceeding;
(3) by special legal counsel:
(i) selected by the board of directors or its committee in the manner prescribed in item (1) or (2); or
(ii) if a quorum of the board cannot be obtained under item (1) and a committee cannot be designated under item (2), selected by majority vote of the full board, in which selection directors who are parties may participate; or
(4) by the members of a mutual benefit corporation.
Directors who are at the time parties to the proceeding may not vote on the determination.
(c) Authorization of indemnification and evaluation as to reasonableness of expenses must be made in the same manner as the determination that indemnification is permissible, except that if the determination is made by special legal counsel, authorization of indemnification and evaluation as to reasonableness of expenses must be made by those entitled under subsection (b)(3) to select counsel.
(d) A director of a public benefit corporation may not be indemnified until twenty days after the effective date of written notice to the Attorney General of the proposed indemnification.
SOUTH CAROLINA REPORTERS' COMMENTS
This section makes two changes from the previously applicable statute, Section 33-8-550 of the South Carolina Business Corporation Act. The first is to limit the operation of item (4) to mutual benefit corporations only, and to take account in item (4) of the absence of shareholders and directors elected by shareholders. The second change is the addition of subsection (d).
Section 33-31-856. Indemnification of officers, employees, and agents.
Unless limited by a corporation's articles of incorporation:
(1) an officer of the corporation who is not a director is entitled to mandatory indemnification under Section 33-31-852 and is entitled to apply for court-ordered indemnification under Section 33-31-854 in each case, to the same extent as a director;
(2) the corporation may indemnify and advance expenses under this chapter to an officer, employee, or agent of the corporation who is not a director to the same extent as to a director; and
(3) a corporation also may indemnify and advance expenses to an officer, employee, or agent who is not a director to the extent, consistent with public policy, that may be provided by its articles of incorporation, bylaws, general or specific action of its board of directors, or contract.
SOUTH CAROLINA REPORTERS' COMMENTS
This section retains the previously applicable statutory law found at Section 33-8-560, except that the first phrase of that section is as follows: Unless a corporation's articles of incorporation provide otherwise. The change was made to make clear that the articles cannot provide for indemnification of officers more generous than that found in the statute.
Section 33-31-857. Insurance.
A corporation may purchase and maintain insurance on behalf of an individual who is or was a director, officer, employee, or agent of the corporation, or who, while a director, officer, employee, or agent of the corporation, is or was serving at the request of the corporation as a director, officer, partner, trustee, employee, or agent of another foreign or domestic business or nonprofit corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise, against liability asserted against or incurred by him in that capacity or arising from his status as a director, officer, employee, or agent, whether or not the corporation would have power to indemnify the person against the same liability under Section 33-31-851 or 33-31-852.
SOUTH CAROLINA REPORTERS' COMMENTS
This section made no change from the previously applicable statute, Section 33-8-560 of the South Carolina Business Corporation Act.
Section 33-31-858. Application of article.
(a) A provision treating a corporation's indemnification of or advance for expenses to directors that is contained in its articles of incorporation, bylaws, a resolution of its members or board of directors, or in a contract or otherwise, is valid only if and to the extent the provision is consistent with this subchapter. If articles of incorporation limit indemnification or advance for expenses, indemnification and advance for expenses are valid only to the extent consistent with the articles.
(b) This chapter does not limit a corporation's power to pay or reimburse expenses incurred by a director in connection with appearing as a witness in a proceeding at a time when the director has not been made a named defendant or respondent to the proceeding.
SOUTH CAROLINA REPORTERS' COMMENTS
This section represents no substantive change from the previously applicable statute, Section 33-8-580 of the South Carolina Business Corporation Act.
Section 33-31-1001. Authority to amend articles of incorporation.
(a) A corporation may amend its articles of incorporation to add or change a provision that is required or permitted in the articles or to delete a provision not required in the articles. Whether a provision is required or permitted in the articles is determined as of the effective date of the amendment.
(b) A corporation either designated on the records of the Office of the Secretary of State as a public benefit or religious corporation, or which qualifies as such pursuant to Section 33-31-1707, may amend or restate its articles of incorporation so that it becomes designated as a mutual benefit corporation only if notice, including a copy of the proposed amendment or restatement, has been delivered to the Attorney General at least twenty days before consummation of the amendment or restatement.
(c) Except as provided in Section 33-31-611(c), a member of the corporation does not have a vested property right resulting from any provision in the articles of incorporation or bylaws.
OFFICIAL COMMENT
Section 10.01 authorizes amendments to a corporation's articles of incorporation. The amendments may modify, delete, change or add provisions to a corporation's articles.
An amendment may be adopted if it: (1) results in provisions permitted in the articles (see sections 2.02 and 2.06(b)); (2) does not contravene or delete provisions the Model Act requires the articles to contain (see section 2.02(a)); and (3) is adopted pursuant to the provisions of chapter 10.
Whether the first two tests are met is determined as of the effective date of the amendment. The third test is determined as of the time the amendment is adopted.
Members' rights are protected by: (1) the right to vote on amendments, including the right to vote by class in appropriate cases (sections 10.03 and 10.04); (2) the duty of the board to approve amendments consistent with its obligations under section 8.30; and (3) contractual commitments made by the corporation.
A corporation may have entered into some oral or written contractual relationship with its members. A person may, for example, have joined an organization based in part on the representation that certain benefits would be provided under specified conditions. If so, the corporation's obligations may be enforced apart from any provisions contained in the articles. The articles may require an amendment to be approved by a specified person or persons. See section 10.30. If so, that approval must be obtained prior to amending the articles.
As section 10.01 provides broad power to amend a corporation's articles, the Model Act does not enumerate the myriad of possible amendments or require the articles to include an express power of amendment.
SOUTH CAROLINA REPORTERS' COMMENTS
1. Compared to former law
This section has a counterpart in the former Chapter 31, Title 33. Prior Section 33-31-130 provided that the Secretary of State could amend the charter of the corporation if notice had been given by newspaper publication or directly to the members and there was a majority vote of the members present at a meeting. A "corporation sole's" charter could be similarly amended; however, this required a three-week public notice. This new provision places the responsibility for amendment with the corporation. The Secretary of State merely files the change. This nonprofit section is similar, other than paragraph (b), to Section 33-10-101 of the South Carolina Business Corporation Act.
2. Non-Model Act provisions
Paragraphs (b) and (c) of the section are not Model Act provisions. Paragraph (b) helps protect against a wrongful privatization of a public benefit corporation. If, after notice, the Attorney General is concerned about a "public" charity "going private" he can take appropriate action pursuant to Section 33-31-170. Both a corporation formally designated as, or one which merely qualifies as, either a public benefit or religious corporation must notify the Attorney General before amending the articles.
Paragraph (c) is comparable to Section 33-10-101(b) of the South Carolina Business Corporation Act. The exemption of Section 33-31-611(c) relates to transfer rights. The articles of a mutual benefit corporation (only) may permit a member to transfer his membership rights. If these rights exist they cannot be deleted without the holder's consent.
Section 33-31-1002. Amendment of articles by directors.
(a) Unless the articles provide otherwise, a corporation's board of directors may adopt one or more amendments to the corporation's articles without member approval:
(1) to extend the duration of the corporation if it was incorporated at a time when limited duration was required by law;
(2) to delete the names and addresses of the initial directors;
(3) to delete the name and address of the initial registered agent or registered office, if a statement of change is on file with the Secretary of State;
(4) to change the corporate name by substituting the word `corporation', `incorporated', `company', `limited', or the abbreviation `corp.', `inc.', `co.', or `ltd.', for a similar word or abbreviation in the name, or by adding, deleting, or changing a geographical attribution to the name; or
(5) to make any other change expressly permitted by this chapter to be made by director action.
(6) with respect to a corporation incorporated before the effective date of this chapter, to include, consistent with its purpose, a statement of whether the corporation is a public benefit, mutual benefit, or religious corporation.
(b) If a corporation has no members, or has no members entitled to vote on the amendment to the articles, its incorporators, until directors are chosen, and thereafter its board of directors, may adopt one or more amendments to the corporation's articles subject to any approval required pursuant to Section 33-31-1030. The corporation shall provide notice of any meeting at which an amendment is to be voted upon. The notice must be in accordance with Section 33-31-822(c). The notice also must state that the purpose, or one of the purposes, of the meeting is to consider a proposed amendment to the articles and contain or be accompanied by a copy or summary of the amendment or state the general nature of the amendment. The amendment must be approved by a majority of the directors in office at the time the amendment is adopted.
OFFICIAL COMMENT
Section 10.02 distinguishes between corporations with members and those without members. If a corporation has members, subsection (a) allows directors to approve specified amendments, as the amendments do not adversely affect members' substantive rights.
If a corporation does not have members, subsection (b) allows the board to amend the articles by a vote of a majority of the directors in office at the time the amendment is adopted. The notice of the meeting to approve the amendment must be in accordance with section 8.22 and state that one purpose of the meting is to consider an amendment to the articles.
It is not necessary that the directors be provided with a copy or summary of the amendment prior to the meeting so long as the meeting notice states the general nature of the amendment. Failure to give proper notice may be waived under the conditions set forth in section 8.23.
Even if a corporation does not have members, an amendment to the articles may require the approval of a specified person or persons. Section 10.30. The articles may, for example, require the approval of a related organization, governmental entity, specified individual or group of delegates.
If a corporation does not have members, its incorporators, until directors have been chosen, may exercise the power of the directors in amending articles. The incorporators must follow the rules applicable to directors.
Amendments may be adopted by incorporators or by the directors by unanimous written consent. See section 8.21.
SOUTH CAROLINA REPORTERS' COMMENTS
1. Prior law
Subsection (a) is similar to Section 33-10-103 of the South Carolina Business Corporation Act. (However, the provision for adding perpetual existence and the type of corporation do not exist in the Business Corporation Act.)
2. Non-Model Act provisions
The first non-Model Act provision is subparagraph (a)(6) which permits the directors (but only in respect to corporations formed before the effective date of this Act) to adopt amended articles specifying the type of nonprofit corporation. Note that this does not give the directors the right to change the purpose of the corporation. They must be careful to correctly determine which type of corporation the entity is and only list this on the articles. (Any person filing a false certificate with the Secretary of State is subject to the liabilities set forth in Section 33-31-129.) The first sentence of subsection (b) gives directors the exclusive right to amend the articles if the corporation has members but the members are prohibited from voting on the amendment.
Section 33-31-1003. Amendment of articles by directors and members.
(a) If the corporation has members entitled to vote on the amendment, unless this chapter, the articles, or bylaws require a greater vote or voting by class, an amendment to a corporation's articles to be adopted must be approved:
(1) by the board if the corporation is a public benefit or religious corporation and the amendment does not relate to the number of directors, the composition of the board, the term of office of directors, or the method or way in which directors are elected or selected;
(2) except as provided in Section 33-31-1002(a), by the members by two-thirds of the votes cast or a majority of the voting power, whichever is less; and,
(3) in writing by any person or person whose approval is required by a provision of the articles authorized by Section 33-31-1030.
(b) If the board or the members seek to have the amendment approved by the members at a membership meeting, the corporation shall give notice to its members of the proposed membership meeting in writing in accordance with Section 33-31-205. The notice must state that the purpose, or one of the purposes, of the meeting is to consider the proposed amendment and contain or be accompanied by a copy or summary of the amendment.
(c) If the board or the members seek to have the amendment approved by the members by written consent or written ballot, the material soliciting the approval shall contain or be accompanied by a copy or summary of the amendment.
OFFICIAL COMMENT
If a corporation has members, section 10.03 requires that an amendment to its articles be approved by the members by two-thirds of those voting or a majority of the voting power, whichever is less. See section 1.40(1). Section 10.04 may require a class vote.
An amendment may be approved by the members at a membership meeting, by written ballot or by written consent. See sections 7.01, 7.02, 7.04 and 7.08. The notice of the meeting or the materials soliciting the approval must contain or be accompanied by a copy or summary of the amendment. This is to insure that the members will be informed prior to voting on the amendment.
While the board may propose an amendment for adoption by members, board approval is not required for certain amendments. Board approval is not required for amendments relating to the number of directors, the composition of the board, the terms of office of directors, or the method by which directors are elected or selected. When board approval is not required, the board may propose amendments to the articles.
Subdivision (b) allows adoption of an amendment to be conditioned on some higher vote than would normally be reburied or upon the happening of an event or events. This ability to conditionally approve amendments provides flexibility to the corporation and allows more than the simple alternative of approving or disapproving.
An amendment must also receive any approval required by section 10.30. Section 10.30 may, for example, require an amendment to be approved by a related organization, governmental entity, specified individual, or group of delegates.
If the board initiates an amendment, it will normally recommend the amendment to the members. However, in some instances the board may have a conflict of interest and be unable to make a recommendation or for some reason believe it is inappropriate to do more than present the amendment to the members for their approval. If so, the board may simply submit the amendment to the members for their approval. The board may indicate why it is unable to present a recommendation, but this is not required.
SOUTH CAROLINA REPORTERS' COMMENTS
1. Comparison to former statute
In voting on amendments to the articles, this section normally requires the approval of both the directors and shareholders for public benefit and religious corporations (unless one of the exceptions applies). In contrast, only member approval is required to amend the articles of mutual benefit corporations. As to religious and public benefit corporations, if so required by Section 33-31-1030, the approval of a third party may be required. The former statute, found in the prior provisions of Chapter 31, Title 33, did not categorize the types of nonprofit corporations and put the power to amend the articles exclusively in the hands of the members. The former statute provided:
Any corporation organized for the purposes aforesaid [nonprofit] may have its charter amended in any particular by the Secretary of State by a majority vote of its members present at a meeting held after notice stating the time, place and purposes thereof, given by publication one time in newspaper published in the county in which the corporation is located or be sending by registered mail such notice to each members not less than five days before the meeting.
Substantial consideration was given to whether there were existing nonprofit corporations which at the effective date of this Act would not formally have directors. Was there a risk that by not having formal directors any such existing corporations would be unable to amend their articles? The answer is "no." The definition of directors in Section 33-31-140 is broad enough so that someone in every nonprofit corporation will meet the definition of a "director" and thus will be able to vote on an amendment. It should also be noted that a key policy of this Act is to require all nonprofit corporations to have someone who will fulfill the role of directors, regardless that they might be called deacons, trustees, managers, etc. Therefore, the vote of directors is required for most all amendments to the articles. (To the extent that the Official Comments suggest that in some instances the vote of the directors would not be required, this would only apply in the limited circumstances set forth in subsection (a)(1).)
Under the former statute special rules applied to "corporations sole".
Any corporation sole may have the charter of the corporation of such corporation amended in any particular by the Secretary of State after publishing notice of such proposed amendment in any newspaper in the county in which the holder of the charter resides once a week for three weeks.
This procedure is not continued in the new law. However, the new law does require notice to the Attorney General before any public benefit or religious corporation converts to a mutual benefit corporation.
2. Comparison to South Carolina Business Corporation Act
This section is consistent with the philosophy of the South Carolina Business Corporation Act, Section 33-10-103. (Because of the prior specific provisions in Chapter 31, Title 33, this section did not apply to nonprofit corporations.) In the South Carolina Business Corporation Act, the directors and shareholders likewise both are usually required to approve any article amendment. However, if ten percent of any class of shareholders so demands, a proposed change must be put to the vote of the shareholders. The South Carolina Business Corporation Act also requires a greater vote to approve the amendment.
3. Comparison to Model Act
This South Carolina provision differs from the Model Act. Any increase in the vote required to amend the articles must be specified in the articles or bylaws. In order to increase the vote of either directors or members, consideration must also be given to Sections 33-31-1023 and 33-31-1024. These provisions require that before raising the vote required to adopt certain issues, the resolution to increase the vote must pass by the same greater quorum or vote.
Section 33-31-1004. Class voting by members on amendments.
(a) The members of a class in a public benefit corporation are entitled to vote as a class on a proposed amendment to the articles if the amendment would change the rights of that class as to voting in a manner different than such amendment affects another class or members of another class.
(b) The members of a class in a mutual benefit corporation are entitled to vote as a class on a proposed amendment to the articles if the amendment would:
(1) affect the rights, privileges, preferences, restrictions, or conditions of that class as to voting, dissolution, redemption, or transfer of membership in a manner different than such amendment would affect another class;
(2) change the rights, privileges, preferences, restrictions, or conditions of that class as to voting, dissolution, redemption, or transfer of membership in a manner different than such amendment would affect another class;
(3) increase or decrease the number of memberships authorized for that class;
(4) increase the number of memberships authorized for another class;
(5) effect an exchange, reclassification, or termination of the memberships of that class; or,
(6) authorize a new class of memberships.
(c) The members of a class of a religious corporation are entitled to a vote as a class on a proposed amendment to the articles only if a class vote is provided for in the articles or bylaws.
(d) If a class is to be divided into two