S 768 Session 110 (1993-1994)
S 0768 General Bill, By Passailaigue, Bryan, Drummond, Giese, J.V. Smith,
Thomas, Waldrep and Wilson
Similar(H 4180)
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 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.
05/12/93 Senate Introduced and read first time SJ-4
05/12/93 Senate Referred to Committee on Judiciary SJ-4
03/30/94 Senate Committee report: Favorable with amendment
Judiciary SJ-17
03/31/94 Senate Amended SJ-19
03/31/94 Senate Read second time SJ-307
03/31/94 Senate Ordered to third reading with notice of
amendments SJ-307
04/12/94 Senate Read third time and sent to House SJ-20
04/13/94 House Introduced and read first time HJ-15
04/13/94 House Referred to Committee on Judiciary HJ-15
Indicates Matter Stricken
Indicates New Matter
COMMITTEE AMENDMENT ADOPTED
March 31, 1994
S. 768
Introduced by SENATORS Passailaigue, J. Verne Smith, Bryan, Wilson,
Drummond, Waldrep, Thomas and Giese
S. Printed 3/31/94--S.
Read the first time May 12, 1993.
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.
Amend Title To Conform
Be it enacted by the General Assembly of the State of South Carolina:
SECTION 1. Chapter 31, Title 33 of the 1976 Code is amended to
read:
"CHAPTER 31
South Carolina Nonprofit
Corporation Act
Article 1
General Provisions
Section33-31-101. 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
(8) Agent's statement of change of registered office for each
affected corporation $ 2.00
(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 dissolutionNo fee
(16) Application for reinstatement following administrative
dissolution $25.00
(17) Certificate of reinstatementNo fee
(18) Certificate of judicial dissolutionNo 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 corpora-
tion (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 corpora-
tion'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.
Article 2
Incorporation
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 require-
ments 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 corpora-
tion 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 corpora-
tion, 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, qualifi-
cations, 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 strin-
gent 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 unincor-
porated 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 provi-
sions, 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 Associa-
tion, 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 for-
malities 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.
Article 3
Purposes
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."
Article 4
Names
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.
Article 5
Office and Agents
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 princi-
pal 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.
Article 6
Members and Memberships
Subarticle A
Admission of Members
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.
Subarticle B
Types of Memberships --
Members' Rights and Obligations
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, dissolu-
tion, 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.
Subarticle C
Resignation and Termination
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.
Subarticle D
Derivative Suits
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.
Subarticle E
Delegates
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.
Article 7
Members Meetings and Voting
Subarticle A
Meetings and Action Without Meetings
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.
Subarticle B
Voting
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 appoint-
ment;
(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).
Subarticle C
Voting Agreements
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.
Article 8
Directors and Officers
Subarticle A
Board of Directors
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 umethod 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.
Subarticle B
Meetings and Action of the Board
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.
Subarticle C
Standards of Conduct
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.
Subarticle D
Officers
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.
Subarticle E
Indemnification
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.
Article 10
Amendment of Articles
Section 33-31-1001. Authority to amend articles of incorpora-
tion.
(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 or more classes as a result of
an amendment to the articles of a public benefit or mutual benefit
corporation, the amendment must be approved by the members of each
class that would be created by the amendment.
(e) Except as provided in the articles or bylaws of a religious
corporation, if a class vote is required to approve an amendment to the
articles of a corporation, the amendment must be approved by the
members of the class by two-thirds of the votes cast by the class or a
majority of the voting power of the class, whichever is less.
(f) A class of members of a public benefit or mutual benefit
corporation is entitled to the voting rights granted by this section
although the articles and bylaws provide that the class may not vote on
the proposed amendment.
OFFICIAL COMMENT
Section 10.04 distinguishes between public benefit, religious and
mutual benefit corporations. It requires a class vote to amend articles of
incorporation of public benefit and mutual benefit corporations
regardless of a contrary provision in the articles if the amendment would
make any of the changes specified in subsection (a) or (b).
Subsection (a) deals with public benefit corporations. A membership
in a public benefit corporation does not represent a valuable economic
right. It represents the right to vote for directors and thereby participate
in the decision as to who will control the corporation and what policies
it will follow. Consequently, class voting in regard to public benefit
corporations is only mandated for amendments that would change the
rights of members to vote. Apart from amendments that would directly
affect the right to vote, an amendment may indirectly affect the right to
vote by terminating a class of members or amending the articles to add
more members to an existing class of members or to create a new class
of members.
Where, however, the amendment would not affect the class in a
manner different than it affects another class, class voting is not
required. For example, if class A and class B each elected four
directors, the proposal to have each class elect three directors normally
would not affect either class differently and would not require class
voting. However, if the articles required a vote of three class A directors
to approve any action, a class vote would be required if the number of
class A and class B directors were reduced by one.
Subsection (b) relates to mutual benefit corporations. Members in
mutual benefit corporations, in addition to their voting rights, may have
a valuable economic interest in the corporation. Consequently,
subsection (b) specifies six types of changes that require a class vote.
These changes are more extensive than the changes that would require
a class vote in public benefit corporations and are designed to protect the
rights of class members. See section 1.40(5) for a definition of class.
Subsection (a) dealing with public benefit corporations and subsection
(b) dealing with mutual benefit corporations require class voting if
certain changes are made. There is no requirement that the change
adversely affect or directly or indirectly burden the class. If the
amendment results in the specified changes, a class vote is required.
Requiring a class vote for any change eliminates the subject and
sometimes difficult question of what is adverse and what is beneficial.
If any of the specified changes occur, a class vote is required even if the
board or members believe the change is advantageous or of no
consequence.
The Model Act does not require a class vote for members of a
religious corporation. The articles or bylaws of a religious corporation
may, however, require a class vote. See section 10.04(c) and (e). A
class vote is required for members of a religious corporation only and to
the extent required by the corporation's articles or bylaws.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is similar to the previously controlling statute, Section
33-10-104 of the South Carolina Business Corporation Act.
Consideration was given to granting each type of nonprofit corporation
the same class voting rights. This was rejected. The State of South
Carolina should not dictate how religious corporations operate.
Therefore, if a religious corporation desires to establish class voting, this
needs to be included in the articles.
Section 33-31-1005. Articles of amendment.
A corporation amending its articles shall deliver to the Secretary of
State articles of amendment setting forth:
(1) the name of the corporation;
(2) the text of each amendment adopted;
(3) the date of each amendment's adoption;
(4) if approval of members was not required, a statement to that
effect and a statement that the amendment was approved by a sufficient
vote of the board of directors or incorporators;
(5) if approval by members was required:
(i) the designation, number of memberships outstanding, number
of votes entitled to be cast by each class entitled to vote separately on
the amendment, and number of votes of each class indisputably voting
on the amendment; and
(ii) either the total number of votes cast for and against the
amendment by each class entitled to vote separately on the amendment
or the total number of undisputed votes cast for the amendment by each
class and a statement that the number cast for the amendment by each
class was sufficient for approval by that class.
(6) if approval of the amendment by some person or persons other
than the members, the board, or the incorporators is required pursuant
to Section 33-31-1030, a statement that the approval was obtained;
(7) if an amendment provides for an exchange, reclassification, or
cancellation of memberships, provisions for implementing the
amendment if not contained in the amendment itself must be included
in the articles.
OFFICIAL COMMENT
Section 10.05 sets forth the contents of the articles of amendment that
must be delivered to the secretary of state to effectuate an amendment
to the articles of incorporation. The articles of amendment must specify
that the conditions required for a valid amendment to be adopted have
been met. In some nonprofit corporations only the approximate vote in
favor of an amendment is known. Therefore section 10.05 does not
require that the exact vote be set forth in the articles of amendment. It
does require that the approximate vote be set forth together with a
statement that the number of votes cast for the amendment to the articles
was sufficient for approval. Consequently, the person submitting the
articles of amendment must be sure that the number of votes for the
amendment at least meets the minimum vote required to approve the
amendment.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is similar to the formerly applicable statute, Section
33-10-106 of the South Carolina Business Corporation Act. Item (7) is
a non-Model Act provision but similar to Section 33-10-106(3) of the
South Carolina Business Corporation Act. Consideration was given to
whether the actual vote on the amendment should be filed with the
Secretary of State. It was decided that filling this information would
keep corporations honest and was a desirable provision. Therefore, the
same detailed voting information required by the Model Act and by
Section 33-10-106(6) of the 1976 Code is required of nonprofit
corporations.
Section 33-31-1006. Restated articles of incorporation.
(a) A corporation's board of directors may restate its articles of
incorporation with or without approval by members or any other person.
(b) The restatement may include one or more amendments to the
articles. If the restatement includes an amendment requiring approval
by the members or any other person, it must be adopted as provided in
Section 33-31-1003.
(c) If the restatement includes an amendment requiring approval by
members, the board must submit the restatement to the members for
their approval.
(d) If the board seeks to have the restatement approved by the
members at the membership meeting, the corporation shall notify each
of its members of the proposed membership meeting in writing in
accordance with Section 33-31-705. The notice must also state that the
purpose, or one of the purposes, of the meeting is to consider the
proposed restatement and contain or be accompanied by a copy or
summary of the restatement that identifies any amendments or other
change it would make in the articles.
(e) If the board seeks to have the restatement approved by the
members by written ballot or written consent, the material soliciting the
approval shall contain or be accompanied by a copy or other change it
would make in the articles.
(f) A restatement requiring approval by the members must be
approved by the same vote as an amendment to articles under Section
33-31-1003.
(g) If the restatement includes an amendment requiring approval
pursuant to Section 33-31-1030, the board must submit the restatement
for such approval.
(h) A corporation restating its articles shall deliver to the Secretary
of State articles of restatement setting forth the name of the corporation
and the text of the restated articles of incorporation together with a
certificate setting forth:
(1) whether the restatement contains an amendment to the articles
requiring approval by the members or any other person other than the
board of directors and, if it does not, that the board of directors adopted
the restatement; or
(2) if the restatement contains an amendment to the articles
requiring approval by the members, the information required by Section
33-31-1005; and
(3) if the restatement contains an amendment to the articles
requiring approval by a person whose approval is required pursuant to
Section 33-31-1030, a statement that the approval was obtained.
(i) Duly adopted restated articles of incorporation supersede the
original articles of incorporation and all amendments to them.
(j) The Secretary of State may certify restated articles of
incorporation, as the articles of incorporation currently in effect, without
including the certificate information required by subsection (h).
(k) If the restatement provides for an exchange, reclassification, or
cancellation of memberships, provisions for implementing the
restatement if not contained in the restatement itself must be included in
the restated articles.
(l) Restated articles of incorporation shall include all statements
required to be included in original articles of incorporation except that
no statement is required to be made with respect to the names and
addresses of the incorporators or the initial or present registered office
or agent.
OFFICIAL COMMENT
Section 10.06 allows a corporation to restate its articles of
incorporation without a member vote. Such restate articles are often
useful, particularly where numerous amendments have been adopted
over a period of years.
Where the restated articles involve a change other than a change
authorized by section 10.02(a), they should be submitted to the
members, if any, for their approval.
In some instances, it may be necessary to make grammatical and other
minor changes between the original articles and the restated articles of
incorporation. In these instances, the restated articles of incorporation
should be submitted to the members for their approval. This approval
may also require class voting and approval by third persons. See
sections 10.04 and 10.30. Any such approval should follow the
requirements of this chapter for approving amendments to articles of
incorporation. The material seeking approval of the members should
contain or be accompanied by a copy or summary restatement of the
articles that identifies any amendments or other changes the restatement
would make in the articles. While it is not necessary to restate matters
that are, or may reasonably be viewed as, mere changes in form, other
changes should be brought to the attention of the members.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is similar to Section 33-10-107 of the South Carolina
Business Corporation Act which was previously applicable. The South
Carolina section improves on the Model Act by specifying what the
restated articles must contain.
Section 33-31-1007. Amendment pursuant to judicial reorgani-
zation.
(a) A corporation's articles may be amended without board approval
or approval by the members or approval required pursuant to Section
33-31-1030 to carry out a plan of reorganization ordered or decreed by
a court of competent jurisdiction under federal statute if the articles after
amendment contain only provisions required or permitted by Section
33-31-202.
(b) A corporation's articles may be amended in a proceeding brought
by the Attorney General in the court of common pleas for Richland
County to correct the statement in the articles of incorporation with
regard to whether the corporation is a public benefit or mutual benefit
corporation or, subject to the provisions of Section 33-31-180, a
religious corporation.
(c) Any individual designated by the court shall deliver to the
Secretary of State articles of amendment setting forth:
(1) the name of the corporation;
(2) the text of each amendment approved by the court;
(3) the date of the court's order or decree approving the articles of
amendment;
(4) the title of the reorganization proceeding in which the order
or decree was entered; and
(5) a statement that the court had jurisdiction of the proceeding
under federal statute.
(d) Subsection (a) does not apply after entry of a final decree in the
reorganization proceeding even though the court retains jurisdiction of
the proceeding for limited purposes unrelated to consummation of the
reorganization plan.
OFFICIAL COMMENT
Section 10.07 is based on section 10.08 of the Model Business
Corporation Act. Section 10.08 "provides a simplified method of
conforming corporate documents filed under state law with the federal
statutes relating to corporate reorganization. If a federal court confirms
a plan of reorganization that requires articles of amendment to be filed,
those amendments may be prepared and filed by the persons designated
by the court and the approval of neither directors nor [members] is
required. . . . This section only applies to amendments in articles of
incorporation approved prior to the entry of a final decree in the reorga-
nization plan." Official Comment to Section 10.08 of the Model
Business Corporation Act.
SOUTH CAROLINA REPORTERS' COMMENTS
Subsection (a), (b), and (d) of this section are essentially identical to
formerly applicable statute, Section 33-10-108 of the South Carolina
Business Corporation Act. Subsection (b) is not a Model Act provision
and has no counterpart in the South Carolina Business Corporation Act.
This provision gives the Attorney General some limited policing power
to change a corporation from one type to another if the corporation has
wrongly designated itself. For example, a corporation which in actuality
is a mutual benefit corporation might designate itself as a public benefit
corporation. In such a situation, the Attorney General can ask that the
articles be amended to properly designate the corporation as a mutual
benefit corporation.
Section 33-31-1008. Effect of amendment and restatement.
An amendment to articles of incorporation does not affect a cause of
action existing against or in favor of the corporation, a proceeding to
which the corporation is a party, any requirement or limitation imposed
upon the corporation, or any property held by it by virtue of any trust
upon which such property is held by the corporation or the existing
rights of persons other than members of the corporation. An amendment
changing a corporation's name does not abate a proceeding brought by
or against the corporation in its former name.
OFFICIAL COMMENT
An amendment or restatement of the article does not affect an existing
cause of action involving the corporation even if the amendment
changes the corporate name. Moreover, an amendment does not affect
any requirement or limitation imposed upon the corporation or any
property held by it by virtue of any trust upon which such property is
held by the corporation. If a public benefit or religious corporation
amends its articles to change its purposes, property held by the
corporation immediately prior to the effective date of the amendment
may remain subject to a limitation based on the prior articles or to
restrictions imposed by the donor of the property.
Members may have contract or other legal rights that cannot be
altered or eliminated by amendments to the articles.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is identical to Section 33-10-109 of the South Carolina
Business Corporation Act. Prior to the adoption of this South Carolina
Nonprofit Corporation Act, this Business Corporation Act section was
applicable to nonprofit corporations and thus there is no change.
Section 33-31-1020. Amendment of bylaws by directors.
If a corporation has no members, or has no members entitled to vote
on an amendment to the bylaws its incorporators, until directors have
been chosen, and thereafter its board of directors, may adopt one or
more amendments to the corporation's bylaws subject to any approval
required pursuant to Section 33-31-1030. The corporation shall provide
notice of any meeting of directors at which an amendment is to be
approved. The notice shall 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 bylaws 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 10.20 allows directors in a corporation without members to
amend the corporate bylaws subject to any approval required of third
persons pursuant to section 10.30. The section also sets forth certain
notice requirements that must be met to adopt an amendment to the
bylaws.
If a corporation does not have members, its incorporators, until
directors have been chosen, may exercise the power of the directors in
amending articles or bylaws. 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. Notice of a directors'
meeting may be waived pursuant to section 8.23.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is entirely new. There is no similar provision in the
South Carolina Business Corporation Act since all South Carolina
business corporations must have shareholders.
Section 33-31-1021. Amendment of the bylaws by directors
and members.
(a) A corporation's board of directors may amend or repeal the
corporation's bylaws unless:
(1) the articles of incorporation or this chapter reserves this power
exclusively to the members in whole or part or requires the consent of
someone pursuant to Section 33-31-1030; or
(2) the members in adopting, amending, or repealing a particular
bylaw provide expressly that the board of directors may not adopt,
amend, or repeal that bylaw or any bylaw on that subject.
(b) A corporation's members may amend or repeal the corporation's
bylaws even though the bylaws also may be amended or repealed by its
board of directors.
(c) A notice of a meeting for members at which bylaws are to be
adopted, amended, or repealed shall state that the purpose, or one of the
purposes, of the meeting is to consider the adoption, amendment, or
repeal of bylaws and contain or be accompanied by a copy or summary
of the proposal.
(d) Unless otherwise provided in the articles, an amendment to the
bylaws which relates solely to the dues required for membership and
which establishes or changes an amount for, or method of computation
of, dues, must be approved by the members.
OFFICIAL COMMENT
Bylaws of nonprofit corporations, like bylaws of business
corporations, govern and regulate the activities and affairs of the
corporation. Bylaw provisions often parrot provisions of state statutes
governing a myriad of matters from the corporate seal to voting and
quorum requirements. They serve as a roadmap for members and
directors who want to know what procedures to follow or what rules are
applicable to the board or the members.
The bylaws of a nonprofit corporation serve an additional function
that is not analogous to the bylaws of a business corporation. The
bylaws of a nonprofit corporation set forth the rights and duties of
members. They are analogous to provisions of preferred stock which set
forth the rights, privileges and preferences of preferred shareholders. As
the basic rights of members are usually set forth in a nonprofit
corporation's bylaws and not its articles, the Model Act requires the
same vote to amend bylaws as to amend articles. See Official Comment
to Section 10.03.
SOUTH CAROLINA REPORTERS' COMMENTS
In place of the proposed Model Act form, this section has been
adopted in a form similar to that of Section 33-10-200 of the South
Carolina Business Corporation Act, the previously applicable statute,
with the addition of subparagraph (d).
Note that there are restrictions on the power of the directors to adopt
bylaws. Section 33-31-1023 provides that if the bylaw amendment is to
increase the voting requirement or quorum of members that a very
special procedure must be followed in approving the bylaw. Only the
members may approve such a bylaw. Section 33-31-1023(b)
specifically says that directors have no power to adopt or modify such
a bylaw.
Section 33-31-1022. Class voting on bylaw amendment by
members.
(a) The members of a class in a public benefit corporation are
entitled to vote as a class on a proposed amendment to the bylaws 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 bylaws 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 membership authorized for
that class;
(4) increase the number of membership 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 bylaws only if a class
vote is provided for in the articles or bylaws.
(d) If a class is to be divided into two more classes as a result of an
amendment to the bylaws of a public benefit or mutual benefit
corporation, the amendment must be approved by the members of each
class that would be created by the amendment.
(e) If a class vote is required to approve an amendment to the
bylaws, the amendment must be approved by the members of the class
by two-thirds of the votes cast by the class or a majority of the voting
power of the class, whichever is less.
(f) A class of members is entitled to the voting rights granted by this
section although the articles and bylaws provide that the class may not
vote on the proposed amendment.
OFFICIAL COMMENT
See Official Comment to Comment 10.04.
SOUTH CAROLINA REPORTERS' COMMENTS
This section follows the provision for class voting on amendments to
the articles, Section 33-31-1004. It is essentially the same as that
section.
Section 33-31-1023. Bylaw increasing quorum or voting
requirement for members.
(a) The members may adopt or amend a bylaw that fixes a greater
quorum or voting requirement for the members, or any class of
members, than is required by this chapter. The adoption or amendment
of a bylaw that adds, changes, or deletes a greater quorum or voting
requirement for members, if required, must be approved as provided in
Section 33-31-1030 and must meet the same quorum requirement and
be adopted by the same vote and class vote required to take action under
the quorum and voting requirement then in effect or proposed to be
adopted, whichever is greater.
(b) A bylaw that fixes a greater quorum or voting requirement for
members under subsection (a) may not be adopted, amended, or repealed
by the board of directors.
SOUTH CAROLINA REPORTERS' COMMENTS
This is not a Model Act provision. However, it is essentially the same
as the formerly applicable statute, Section 33-10-210 in the South
Carolina Business Corporation Act.
Section 33-31-1024. Bylaw increasing quorum or voting re-
quirement for directors.
(a) Subject to any additional approval required by Section
33-31-1030, a bylaw that fixes a greater quorum or voting requirement
for the board of directors may be amended or repealed:
(1) if originally adopted by the members, only by the members;
(2) if originally adopted by the board of directors, either by the
members or by the board of directors.
(b) A bylaw adopted or amended by the members that fixes a
greater quorum or voting requirement for the board of directors may
provide that it may be amended or repealed, subject to any additional
approval required by Section 33-31-1030, only by a specified vote of
either the members or the board of directors.
(c) Action by the board of directors under subsection (a)(2) to adopt
or amend a bylaw that changes the quorum or voting requirement for the
board of directors must meet the same quorum requirement and be
adopted by the same vote required to take action under the quorum and
voting requirement then in effect or proposed to be adopted, whichever
is greater.
SOUTH CAROLINA REPORTERS' COMMENTS
This is not a Model Act section. It is, however, essentially identical
to the formerly applicable statute, Section 33-10-220 of the South
Carolina Business Corporation Act.
Section 33-31-1030. Approval of the articles of incorporation
and bylaws by third persons.
The articles of only a religious corporation or public benefit
corporation may require an amendment to the articles or bylaws to be
approved in writing by a specified person or person other than the board.
The article provision may be amended only with the approval in writing
of such person.
OFFICIAL COMMENT
Section 10.30 validates an article provision that requires a specified
person or persons to approve changes in the articles or bylaws. Section
10.390 provides flexibility in control over article and bylaws
amendments by allowing parent or affiliated corporations, governmental
bodies and others to exercise a veto power over such amendments. It
also allows corporations with delegates to require that article or bylaw
amendments be approved by the delegates. Due to the broad definition
of the word "person" even a member or members may be
given the right to disapprove an amendment to the articles or bylaws.
The Model Act also provides that a person whose approval must be
obtained to amend articles or bylaws must consent to a merger, or a sale
of all, or substantially all, of the property of a corporation other than in
the regular course of its activities. Sections 11.01, 11.03 and 12.02.
SOUTH CAROLINA REPORTERS' COMMENTS
This provision permits the articles of religious corporations and public
benefit corporations to include a provision which grants a veto power to
a third party over future bylaws or article amendments. There are
various nonprofit corporations, particularly church related, where a
bishop or other authority is given certain veto powers.
Consideration was given to the fact that similar provisions have
caused problems in the mutual benefit corporate area. Real estate
developers have given themselves veto powers over homeowner
corporations which they set up to manage developments. If the
developer goes bankrupt or merely vanishes before he is out of the
project and relinquishes his rights, there may be substantial confusion as
to how the corporation is to act.
Consideration was given to providing that mutual benefit corporations
could adopt non-member veto powers which would be null and void if
the appointed person could not be found, or was bankrupt and did not
appoint a successor. However, such a provision was deemed to create
more problems than it might solve.
Therefore, it was ultimately determined that the best solution was to
prohibit mutual benefit corporations from being able to grant a veto
power to a third party.
Section 33-31-1031. Amendment terminating members or
redeeming or canceling memberships.
(a) An amendment to the articles or bylaws of a public benefit or
mutual benefit corporation that would terminate all members or a class
of members or redeem or cancel all memberships or a class of
memberships must meet the requirements of this chapter.
(b) Before adopting a resolution proposing the amendment, the
board of a mutual benefit corporation shall give notice of the general
nature of the amendment to the members.
(c) After adopting a resolution proposing such an amendment, the
notice to members proposing the amendment shall include one statement
of up to five hundred words opposing the proposed amendment if the
statement is submitted by any five members or members having three
percent or more of the voting power, whichever is less, not later than
twenty days after the board has voted to submit the amendment to the
members for their approval. In public benefit corporations, the
production and mailing costs must be paid by the requesting members.
In mutual benefit corporations, the production and mailing costs must be
paid by the corporation.
(d) Any such amendment must be approved by the members by
two-thirds of the votes cast by each class.
(e) The provisions of Section 33-31-621 do not apply to any
amendment meeting the requirements of this chapter.
OFFICIAL COMMENT
Section 10.31 sets forth the procedures that must be followed to
amend articles or bylaws to terminate all members or any class of
members or redeem or cancel all memberships or any class of
memberships. The procedures are in addition to the normal
requirements for amending articles or bylaws and are required due to the
extraordinary nature of the amendment. See section 1.40(5) for the
definition of "class."
Some public benefit corporations may decide that the benefits of
having members are outweighed by the costs, possible harassment, or
lack of contribution by members. If so, section 10.31 provides a method
of amending articles or bylaws to convert from a membership
corporation to a corporation with a self-perpetuating board of directors.
The board in proposing such an amendment must meet its fiduciary
obligations under section 8.30. While there is no requirement that the
board notify the members before it adopts such a resolution, some
boards may wish to do so to avoid conflict and determine the attitude of
members at an early stage. After adopting the proposed amendment, the
board must wait twenty days before sending a notice to the members
proposing the amendment. If during the twenty-day period a written
statement of up to 500 words opposing the proposed amendment is
submitted by any five members or members having three percent or
more of the voting power, whichever is less, and the members pay the
production and mailing costs of the statement, the board must mail the
statement with the notice to members proposing the amendment. The
board is only obligated to mail one statement. If more than one
statement is proposed, the board usually should use the statement
presented by the most members.
An amendment proposing to convert from a membership corporation
to a corporation with a self-perpetuating board has a different
significance in a mutual benefit corporation. Mutual benefit
corporations should operate for the benefit of their members. While
there was considerable sentiment on the Committee to require mutual
benefit corporations to have members, on balance it was believed that
the disadvantages of such a rigid requirement outweighed its advantages.
Once a mutual benefit corporation has members, the Committee
believed that it should be required to provide the fullest and fairest
forum possible before terminating those members. Therefore, mutual
benefit corporations must inform their members of a proposed
amendment to eliminate members or any class of members prior to the
time the board adopts a resolution proposing such an amendment. In
addition, the production and mailing costs of a statement in opposition
submitted by members must be paid for by the corporation. Of course,
if the terminated members have any contractual rights, these rights
continue and are not terminated by the amendment. If the memberships
in a mutual benefit corporation have some economic value, it is almost
impossible for an amendment to terminate the members without
providing adequate compensation. The result of an amendment
terminating members would be to shift the economic benefits of the
terminated members to the directors or some other person or persons.
If the benefits were shifted to the board, the directors would have an
inherent conflict of interest in proposing an amendment to terminate the
members. If the benefits were shifted to some other person, the board
might not have a conflict of interest, but the members could still
complain of the inherent unfairness.
The provisions of section 10.31 are not applicable to situations in
which the board desires to terminate a certain person or a small group of
persons without affording them their rights under sections 6.21 and 6.22.
An amendment proposed for such a reason would breach the board's
duties under section 8.30.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is entirely new and has no counterpart in either the
former Chapter 31, Title 33 or the South Carolina Business Corporation
Act.
Article 11
Merger
Section 33-31-1101. Approval of plan of merger.
(a) Subject to the limitations set forth in Section 33-31-1102, one or
more nonprofit corporations may merge into a business or nonprofit
corporation, and one or more business corporations may merge into a
nonprofit corporation to the extent permitted in Section 33-11-101, if the
plan of merger is approved as provided in Section 33-31-1103.
(b) The plan of merger must set forth:
(1) the name of each corporation planning to merge and the name
of the surviving corporation into which each plans to merge;
(2) the terms and conditions of the planned merger;
(3) the manner and basis, if any, of converting the members of
each public benefit or religious corporation into members of the
surviving corporation;
(4) if the merger involves a mutual benefit corporation, the
manner and basis, if any, of converting membership of each merging
corporation into membership, obligations, or securities of the surviving
or any other corporation or into cash or other property in whole or part;
and
(c) The plan of merger may set forth:
(1) any amendments to the articles of incorporation or bylaws of
the surviving corporation to be effected by the planned merger; and,
(2) other provisions relating to the planned merger.
OFFICIAL COMMENT
Chapter 11 authorizes mergers involving nonprofit corporations if
specified conditions are met. In a merger one or more corporations
merge and disappear into a surviving corporation. The surviving
corporation continues and owns all the property of each party to the
merger and is liable for the liabilities and obligations of each party to the
merger. See sections 11.05 and 11.07.
As it is usually more advantageous for one of the parties to a merger
to survive, the Model Act does not provide for "consolida-
tions" in which all the parties merge and disappear into a new
corporation. If two or more corporations desire to merge their activities,
but do not desire to continue one of the existing corporations, a new
corporation can be incorporated and the existing corporations merged
into it. By following this approach a "consolidation" of
existing corporations can be achieved.
The Model Act does not provide for dissenters' rights. As members
of a public benefit or religious corporation have no economic interest in
their corporation they cannot be given cash as the result of a merger.
Therefore they cannot have dissenters' rights. While members of a
mutual benefit corporation may have an economic interest in their
corporation, the concept of dissenters' rights seems inappropriate in the
nonprofit context. While memberships in mutual benefit corporations
may be valuable, most memberships do not represent an investment that
will generate a profit on their sale. Consequently it is inappropriate to
give a member an automatic right to cash by exercising dissenters' rights
and in effect "selling" a membership.
A member of a nonprofit corporation may file a proceeding to enjoin
or rescind a merger. A member of a mutual benefit corporation may
also sue for damages. Where the provisions of this chapter have been
complied with and the board has met its statutory duties of care and
loyalty, a court should uphold a merger. Where a merger is improperly
approved, the Model Act does not specify the remedy, if any. A court
may consider all relevant facts including the good faith of the parties,
the fairness of the merger, the effect of the merger, the nature of any
omission or misstatement of fact, whether the failure to comply with the
provisions of this chapter was serious and substantive or technical and
unimportant, the reasons and need for the merger, and whether the
merger would have been approved in any event. After considering all
relevant facts a court may rescind the merger, order the payment of
damages or other remedy or find that a remedy is inappropriate and
uphold a merger even though the provisions of this chapter have not
been met.
The Model Act does not authorize short form mergers or the nonprofit
equivalent of a reorganization by share exchange. These procedures are
appropriate in the business, but not the nonprofit, context.
SOUTH CAROLINA REPORTERS' COMMENTS
Except as to churches, the former nonprofit statute, Chapter 31, Title
33 made no specific provision for the merger of nonprofit corporations.
The former Chapter 33 did provide that churches could consolidate:
Any two or more church corporation, having no
capital stock, existing under the laws of this State for
religious purposes may consolidate into a single
corporation which may be any one of such
consolidated corporations or a new corporation to be
formed by means of such consolidation. (Former
Section 33-33-10)
Although the language in part differs, much of this section is identical
with Section 33-11-101 of the South Carolina Business Corporation Act
which was previously applicable to non-church mergers.
If the nonprofit corporation intends to merge with a business
corporation, Sections 33-1-400(5), 33-20-103, and 33-11-101 likewise
permit the business corporation to be a party to the merger. However,
if a nonprofit and business corporation merge, the plan must include the
requirements of both Sections 33-31-1101 and 33-11-101.
The terms and conditions of the planned merger shall include the
manner and basis, if any, of converting the securities of each business
corporation into membership or obligations of the surviving or any other
corporation or into cash or other property in whole or in part.
Under certain limited circumstances, Section 33-31-1104(a)(4)
permits a public benefit corporation (or religious corporation) to merge
into either a business corporation or a mutual benefit corporation.
Section 33-31-1101(a)(3) does not seem to specify what interest the
members of the public benefit or religious corporation would receive in
such a merger with a business corporation. This "omission"
is intentional. The members are not permitted to receive anything in
such a merger. Section 33-31-1104(c) provides that no member of a
public benefit or religious corporation may receive anything other than
another membership. To permit otherwise would be to provide a
method whereby public or religious assets might be diverted to private
uses.
Since the members of the public benefit and religious corporations
cannot receive anything from the merger and since the value of all the
nonprofit corporation's assets must be transferred to another charity prior
to the merger, the "merging-in" nonprofit corporation will
merely be the corporate shell. It is likely that this will rarely, if ever,
happen. However, it is noted that if the former nonprofit corporation
had franchise rights, owned favorable leases, had long-term employees,
had favorable insurance, or compensation ratings, that it might be
desirable to actually merge the shell thereby transferring these
operational rights into the business corporation (assuming, of course,
that full value for these rights had previously been distributed by the
acquiring corporation to another charity).
Assume this example. A hospital is operated at a particular location
by a public benefit corporation. The hospital corporation has a very
favorable lease which runs only to the corporation and cannot be sublet
or assigned. The hospital wants to move to a different location. A
for-profit corporation desires to obtain the old location for a store. If as
part of the merger, the hospital receives full value for the value of the
lease it would be profitable for the hospital to merge and be able to
transfer the valuable lease to the business corporation. If merger were
not allowed, the hospital could not transfer this valuable leasehold and
thus would not get as much money when it moves to the new location.
It is desirable to maximize the dollar value which is available for the
charitable work, and the merger in this situation permits the hospital to
realize more value.
Section 33-31-1102. Limitations on mergers by public benefit
or religious corporations.
(a) Without the prior approval of the court of common pleas of
Richland County in a proceeding in which the Attorney General has
been given written notice, a public benefit or religious corporation may
merge only with:
(1) a public benefit or religious corporation;
(2) a foreign corporation that would qualify under this chapter as
a public benefit or religious corporation;
(3) a foreign or domestic business; mutual benefit corporation; or
a corporation chartered directly by special act of the General Assembly,
a city, county, or other governmental unit other than the Secretary of
State, provided the public benefit or religious corporation is the
surviving corporation and continues to be a public benefit or religious
corporation after the merger; or,
(4) a foreign or domestic business or mutual benefit corporation,
provided that:
(i) on or before the effective date of the merger, assets with a
value equal to the greater of the fair market value of the net tangible and
intangible assets, including goodwill, of the public benefit corporation
or religious corporation or the fair market value of the public benefit
corporation or religious corporation if it were to be operated as a
business concern are transferred or conveyed to one or more persons
who would have received its assets under Section 33-31-1406(a)(5) and
(6) had it dissolved;
(ii) it shall return, transfer, or convey any assets held by it upon
condition requiring return, transfer, or conveyance, which condition
occurs by reason of the merger, in accordance with such condition; and,
(iii) the merger is approved by a majority of directors of the
public benefit or religious corporation who are not and will not become
members or shareholder in or officers, employees, agents, or consultants
of the surviving corporation.
(b) At least twenty days before consummation of a merger of a
public benefit corporation or a religious corporation pursuant to
subsection (a)(4), notice, including a copy of the proposed plan of
merger, must be delivered to the Attorney General.
(c) No member of a public benefit or religious corporation may
receive or keep anything as a result of a merger other than a membership
or membership in the surviving public benefit or religious corporation.
(d) Where approval or consent is required by this section, it must be
given if the transaction is consistent with the purposes of the public
benefit or religious corporation or is otherwise in the public interest.
OFFICIAL COMMENT
The provisions of section 11.02 are designed to prevent the assets of
public benefit or religious corporations from being diverted from their
intended charitable or public purposes as a result of a merger.
Consequently section 11.02 provides that public benefit and religious
corporations can merge only under specified conditions with specified
types of corporations without court approval in a proceeding in which
the attorney general has been given written notice. In addition, members
of public benefit and religious corporations may only receive or keep
memberships in the surviving corporation unless they obtain court or
attorney general approval.
If the requirements of section 11.02(a)(4) are met, a public benefit or
religious corporation may merge with a business or mutual benefit
corporation that is the surviving entity. However, those in control of the
public benefit or religious corporation may not enter into a sweetheart
merger in which they acquire the assets of the corporation for less than
its fair market value. Two requirements of subsection (a)(4) address this
problem. The first is that the fair market value of the public benefit or
religious corporation must be established and paid for the assets of the
corporation. Fair market value is defined as the greater of the value of
the net tangible and intangible assets (including goodwill) of the public
benefit corporation or its value if it were an ongoing business concern.
These figures could be different. A public benefit or religious
corporation might have a small net worth, but significant earning
potential if it were operated as a business corporation. Consequently the
ongoing concern value would be higher than the net asset value. To
avoid any dispute, the Model Act requires that the higher
"value" be paid for the corporation.
The second requirement deals with the fact that value is often
subjective and difficult to determine. Subdivision (a)(4)(iii) requires
that the merger must be approved by a majority of the public benefit or
religious corporation's directors who will not be shareholders in or
officers, employees, agents or consultants of the surviving corporation.
This diminishes a possible conflict of interest with the attendant pressure
on the directors to value the public benefit or religious corporation at
less than its true fair market value.
Apart from the specific limitations of subdivision (a)(4), the directors
and officers must meet their duties of care and loyalty under sections
8.30, 8.31 and 8.40. They must determine that the merger is in the best
interest of the public benefit corporation. Moreover the directors and
officers cannot engage in any side deals or receive any incentives to
favor or not to object to the merger if the incentives violate their duty of
loyalty.
Once the value of the public benefit or religious corporation has been
determined, that value must be transferred to an appropriate entity. The
distributee must be an entity or entities that would have received the
assets under section 14.06(a)(5) and (6) had the corporation dissolved.
See the Official Comment to Section 14.06. Any assets held upon
condition requiring return, transfer or conveyance, which condition
occurs by reason of the merger, must be returned in accordance with
such condition. See section 14.06(a)(4) and Official Comment to
Section 14.06.
A court in approving a merger may allow members of a public benefit
or religious corporation to receive something of value only if it is in the
public interest for them to do so. For example, the members may invest
in a business corporation that is the surviving corporation in a merger
with the public benefit corporation. A court should closely scrutinize
the merger to make sure the conditions of section 11.02 have been met.
In addition, it must find that the merger is in the public interest.
SOUTH CAROLINA REPORTERS' COMMENTS
This section has no counterpart in the former provisions of Chapter
31, Title 33 nor in the formerly applicable South Carolina Business
Corporation Act. Certain technical additions were made to the Model
Act, including a clarification that if a religious corporation merges with
a business or mutual benefit corporation that its assets must be
distributed pursuant to its articles or to another charitable entity. The
Model Act provision permitting distributions to members from a public
benefit or religious corporation with court or Attorney General approval
was deleted. Consideration was given as to whether the twenty-day
period was too short and a determination was made that this was reason-
able in these circumstances. This section also permits existing old
legislatively chartered corporations to merge into new public benefit or
religious corporations. This will permit these corporations to be
governed by the provision of this chapter. See also section 33-31-1701
which specifically grants such entities the authority to merge.
Section 33-31-1103. Action on plan by board, members, and
third persons.
(a) Unless this chapter, the articles, or bylaws require a greater vote
or voting by class, a plan of merger to be adopted must be approved:
(1) by the board;
(2) by the members, if any, by two-thirds of the votes cast or a
majority of the voting power, whichever is less; and
(3) in writing by any person whose approval is required by a
provision of the articles authorized by Section 33-31-1030 for an
amendment to the articles or bylaws.
(b) If the corporation does not have members, or does not have
members entitled to vote on the merger, the merger must be approved by
a majority of the directors in office at the time the merger is approved.
In addition, the corporation shall provide notice of any directors'
meeting at which such approval is to be obtained 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 the proposed merger.
(c) If the board seeks to have the plan approved by the members at
a membership meeting, the corporation shall give notice to its members
of the proposed membership meeting in accordance with Section
33-31-705. The notice also must state that the purpose, or one of the
purposes, of the meeting is to consider the plan of merger and contain
or be accompanied by a copy or summary of the plan. The copy or
summary of the plan for members of the surviving corporation shall
include any provision that, if contained in a proposed amendment to the
articles of incorporation or bylaws, would entitle members to vote on the
provision. The copy or summary of the plan for members of the
disappearing corporation shall include a copy or summary of the articles
and bylaws that will be in effect immediately after the merger takes
effect.
(d) If the board seeks to have the plan 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 plan. The
copy or summary of the plan for members of the surviving corporation
shall include any provision that, if contained in a proposed amendment
to the articles of incorporation or bylaws, would entitle members to vote
on the provision. The copy or summary of the plan for members of the
disappearing corporation shall include a copy or summary of the articles
and bylaws that will be in effect immediately after the merger takes
effect.
(e) Approval by a class of members is required on a plan of merger
if the plan contains a provision that, if contained in a proposed amend-
ment to articles of incorporation or bylaws, would entitle the class of
members to vote as a class on the proposed amendment under Section
33-31-1004 or 33-31-1022. The plan is approved by a class of members
by two-thirds of the votes cast by the class or a majority of the voting
power of the class, whichever is less. (f) After a merger is adopted,
and at any time before articles of merger are filed, the planned merger
may be abandoned, subject to any contractual rights, without further
action by members or other persons who approved the plan in
accordance with the procedure set forth in the plan of merger or, if none
is set forth, in the manner determined by the board of directors.
(g) A plan of merger involving either a public benefit or mutual
benefit corporation that would terminate all members or any class of
members or redeem or cancel all memberships or any class of
memberships must meet all the requirements of this chapter and
specifically this subsection (g):
(i) Before adopting a resolution proposing a plan of merger, the
board of a mutual benefit corporation shall give notice of the general
nature of the amendment to the members.
(ii) After adopting a resolution proposing such a plan of merger,
the notice to members proposing the merger shall include one statement
of up to five hundred words opposing the proposed plan of merger if the
statement is submitted by any five members or members having three
percent or more of the voting power, whichever is less, not later than
twenty days after the board has voted to submit such to the members for
their approval. In public benefit corporations, the production and
mailing costs must be paid by the requesting members. In mutual benefit
corporations, the production and mailing costs must be paid by the
corporation.
(iii) Any such plan of merger must be approved by the members
by two-thirds of the votes cast by each class.
(iv) The provisions of Section 33-31-621 do not apply to any
amendment meeting the requirements of this chapter.
OFFICIAL COMMENT
Section 11.03 sets forth the requirements for approving a merger.
If a corporation does not have members, unless the Model Act, the
articles or bylaws require a greater vote, the plan of merger must be
approved by a majority of the directors in office at the time the merger
is approved. While it is usually not necessary to give directors notice of
matters that will be considered at directors' meetings, subdivision (b)(4)
requires that corporations without members not only notify the directors
of the meeting but that the notice indicate that one of the matters to be
considered at the meeting is the proposed merger.
If a corporation has members, the board must adopt the plan of
merger and submit it to the members for their approval. Unless the
Model Act, the articles or bylaws require a greater vote or voting by
class, voting by class is required if the plan contains a provision that
would require a class vote if it were contained in amendment to the
articles or bylaws. The members must approve the plan of merger by a
two-thirds vote of the votes cast or a majority of the voting power,
whichever is less. The affirmative votes must also constitute a majority
of the required quorum. See section 1.40(1). Class voting is required
if the plan contains a provision that would require a class vote if it were
contained in a bylaw or article amendment.
The notice of the meeting or material soliciting the approval must set
forth the material facts concerning the merger. For example, if the
members of the surviving corporation become subject to an article or
bylaw provision that would normally require a vote of the members,
they must be given a copy or summary of the provision prior to voting
on the proposed merger. See subsections 12.03(d) and (e). Members of
the disappearing corporation must receive a coy or summary of the
complete articles and bylaws of the surviving corporation prior to voting
on the merger. See subsections 12.03(d) and (e). Members of the disap-
pearing corporation are entitled to the additional material because they
were not subject to the articles and bylaws of the surviving corporation
prior to the merger.
If a plan of merger contains a provision that, if contained in an
amendment to articles or bylaws, would entitle members of that class to
vote as a class, the merger is not approved unless it is approved by that
class of members. Each class entitled to vote must approve the plan by
two-thirds of the votes cast or a majority of the voting power of the
class, whichever is less. The affirmative votes also must constitute a
majority of the required quorum. See section 1.40(1).
To provide flexibility, subsection (c) allows the board or the members
in approving the merger to condition approval of the merger upon its
receiving a higher percent of votes than would normally be required or
on any other basis.
If the consent of a person is required pursuant to section 10.30 to
approve an amendment to the articles or bylaws of a constituent
corporation, that person's consent is also needed to approve a plan of
merger. This requirement prevents the corporation from eliminating the
person's right to approve an amendment by merging with a wholly
owned subsidiary.
SOUTH CAROLINA REPORTERS' COMMENTS
1. Compared to former sections
Previously applicable law included provisions for the consolidation
of churches. The former Sections 33-33-20 and 33-33-30 provided:
Whenever a consolidation of two or more such [church] corporations is
proposed, identical plans for consolidation, which must include the
name of the proposed consolidated corporation, shall be submitted to the
congregations of such church corporations proposed to be consolidated
at separate meetings of each congregation, held after being called upon
notice in the manner customary under the practice, bylaws, rules or
regulation of the respective church corporations for the calling of
business meetings. Such notices of the calling of such meetings shall
advise the members of the respective congregations that a consolidation
of the church corporations shall be considered and passed upon at the
meeting. If at the meetings of the respective congregations so held, two
thirds of the members present at each meeting eligible to vote at
business meetings under the practice, bylaws, rules or regulations of the
respective church corporations vote in favor of the consolidation, the
consolidation shall become effective upon the filing with the Secretary
of State of a written copy of the plan of consolidation adopted, certified
under oath by an officer of each corporation as a copy of the plan of
consolidation adopted by the congregation of each of such corporations
at meetings thereof called and held as provided herein, and upon the
filing for record of a copy of the plan, certified to by the Secretary of
State, in the office of the register of mesne conveyances or of the clerk
of court in counties which do not have a register of mesne conveyances
of the county of this State in which the principal office of the consoli-
dated corporation is to be established and of the counties in which the
respective corporations so consolidating shall have their original charters
recorded, or, if any of the corporations shall have been created by
special act of the General Assembly, in the county in which such
corporation shall have had its principal office.
The present statute is different from the merger procedures required
of business corporations in Section 33-11-103. (Prior to the adoption of
this South Carolina Nonprofit Corporation Act, this section would have
applied to nonprofit corporations.) South Carolina subsection (b) also
differs slightly from the Model Act. Action is taken under (b) even if
the corporation has members but they are not entitled to vote on the
merger. Any modification to what votes are required to approve the
merger must be provided in the bylaws (or articles). This differs from
the Model Act.
2. Non-Model Act provisions
This section differs from Model Act in the following manner:
a. The directors have the sole power to approve the merger as
provided in subsection (b) if the corporation does not have members or,
different from the Model Act, if the members do not have voting rights
regarding the merger. This change is in conformity with changes made
in other sections. A nonprofit corporation might have members but the
articles might specify that they do not vote on mergers.
b. The Model Act includes a provision which permits both the
board and members to condition this approval on the receipt of a higher
vote. Although this language does not appear in the South Carolina
section, South Carolina corporations have the power to condition the
approval on a higher vote but must do so in the articles or bylaws. This
change is in keeping with the changes to Sections 33-31-1003 and
33-31-1202. It was determined that all voting modifications belong in
the articles or bylaws. In increasing the vote required of either directors
or members, consideration also must 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.
c. Section 33-31-1103(g) is not a Model Act provision. However, it
is essentially the same as Section 33-31-1031. This paragraph prevents
a corporation from eliminating all or a class of members through a
merger without complying with the same rigorous requirements imposed
in Section 33-31-1031 relating to an amendment to the articles which
eliminates all or a class of members. See the Official Comments
following Section 33-31-1031 for an explanation of this paragraph (g).
Section 33-31-1104. Articles of merger.
After a plan of merger is approved by the board of directors of each
merging corporation and if required by Section 33-31-1103 by the
members and any other persons, the surviving corporation shall deliver
to the Secretary of State articles of merger setting forth:
(1) the plan of merger;
(2) if approval of members was not required, a statement to that
effect and a statement that the plan was approved by a sufficient vote of
the board of directors of each corporation;
(3) if approval by the members of one or more corporations was
required:
(i) the designation, number of memberships outstanding, number
of votes entitled to be cast by each class entitled to vote separately on
the plan, and number of votes of each class indisputably voting on the
plan; and
(ii) either the total number of votes cast for and against the plan
by each class entitled to vote separately on the plan or the total number
of undisputed votes cast for the plan by each class and a statement that
the number cast for the plan by each class was sufficient for approval
by that class;
(4) If approval of the plan by some person or persons other than the
members of the board is required pursuant to Section 33-31-1103(a)(3),
a statement that the approval was obtained.
(5) Unless a delayed effective date is specified, a merger takes effect
when the articles of merger are filed.
OFFICIAL COMMENT
Upon filing the articles of merger with the secretary of state, the
transaction becomes a matter of public record as the articles of merger
set forth the plan of merger. A merger becomes effective when the
articles of merger are filed with the secretary of state unless a delayed
effective date is requested. See section 1.23.
SOUTH CAROLINA REPORTERS' COMMENTS
Other than with respect to church corporations, this provision has no
counterpart in the former Chapter 31, Title 33 (see the South Carolina
Reporters' Comments to Section 33-31-1103). This section is very
similar to Section 33-11-105 in the South Carolina Business Corporation
Act which previously governed non-church nonprofit corporations. The
Model Act language has been clarified in certain respects. Paragraph (5)
is not a Model Act provision and paragraph (3) notes that approval of
one corporation's members may be required but not of the other one.
Section 33-31-1105. Effect of merger.
When a merger takes effect:
(1) every other corporation party to the merger merges into the
surviving corporation and the separate existence of every corporation
except the surviving corporation ceases;
(2) the title to all real estate and other property owned by each
corporation party to the merger is vested in the surviving corporation
without reversion or impairment, subject to any and all conditions to
which the property was subject before the merger;
(3) the surviving corporation has all liabilities and obligations of
each corporation party to the merger;
(4) a proceeding pending against a corporation party to the merger
may be continued as if the merger did not occur or the surviving
corporation may be substituted in the proceeding for the corporation
whose existence ceased;
(5) the articles of incorporation and bylaws of the surviving
corporation are amended to the extent provided in the plan of merger;
and
(6) the memberships or shares of each nonprofit or business
corporation party to the merger that are to be converted into
memberships, obligations, shares or other securities of the surviving or
any other corporation or into cash or the other property are converted
and the former holders of the memberships or shares are entitled only to
the rights provided in the articles of merger.
OFFICIAL COMMENT
Section 11.05 sets forth the legal effects of a merger. On the effective
date of the merger the disappearing corporation merges and disappears
into the surviving corporation. The surviving corporation owns all the
property owned by each constituent corporation and is liable for all
liabilities and obligations (contingent or otherwise) of each constituent
corporation. Trust obligations on property of a disappearing corporation
are limited to the property affected thereby immediately prior to the time
the merger is effective. If the surviving corporation receives property
that would have gone to a disappearing corporation, the property is
subject to the same restrictions that would have applied had the property
been received by the disappearing corporation. Where the property is
given on the condition that it be used for specified purposes, that
condition is not removed as a result of the merger. See section 11.07.
SOUTH CAROLINA REPORTERS' COMMENTS
Other than as to church consolidations, the former Chapter 33, Title
33 had no provisions for mergers. The former church statutes found in
the former Chapter 33 read as follows:
When the plan of consolidation adopted is certified
to, filed and recorded as in Section 33-33-30
required, the separate existence of the constituent
corporations shall cease and the consolidating
corporations shall become a single corporation, in
accordance with the plan, possessing all of the
powers of church corporations provided in Section
33-31-100, and all property, real, personal and
mixed, all debts due on whatever account and all
other things in action belonging to each of such
corporations shall be vested in the consolidated
corporation. And all property, rights, privileges and
powers and every other interest shall be thereafter as
effectually the property of the consolidated corpora-
tion as they were of the several and respective former
corporations and the title to any real estate, whether
by deed or otherwise under the laws of this State
vested in either of such corporations, shall not revert
or be in any way impaired by reason of the
provisions herein. But all rights of creditors and all
liens upon the property of either of such former
corporations shall be preserved unimpaired, limited
in lien to the property affected by such liens at the
time of the consolidation, and all debts, liabilities
and duties of the respective former corporations shall
thenceforth attach to the consolidated corporation
and may be enforced against it to the same extent as
if such debts, liabilities and duties had been incurred
or contracted by it.
Any action or proceeding pending by or against
either of the corporations consolidated may be
prosecuted to judgment, as if such consolidation had
not taken place, or the new corporation may be
substituted in its place.
The existing South Carolina Business Corporation Act contains a
provision that is very similar to this new Section 33-31-1105. It is
Section 33-11-106 and was applicable to non-church nonprofit corpora-
tions prior to the adoption of this South Carolina Nonprofit Corporation
Act. Note that any trust obligations upon property of a disappearing
corporation shall be limited to the property affected thereby immediately
prior to the time the merger is effective. A version of paragraph (6), a
non-Model Act paragraph, appears in the South Carolina Business
Corporation Act as Section 33-11-106(b).
Section 33-31-1106. Merger with foreign corporation.
(a) Except as provided in Section 33-31-1102, one or more foreign
business or nonprofit corporations may merge with one or more
domestic nonprofit corporations if:
(1) the merger is permitted by the law of the state or country
under whose law each foreign corporation is incorporated and each
foreign corporation complies with that law in effecting the merger;
(2) the foreign corporation complies with Section 33-31-1104 if
it is the surviving corporation of the merger; and
(3) each domestic nonprofit corporation complies with the
applicable provisions of Sections 33-31-1101 through 33-31-1103 and,
if it is the surviving corporation of the merger, with Section 33-31-1104.
(b) Upon the merger taking effect, the surviving foreign business or
nonprofit corporation is deemed to have irrevocably appointed the
Secretary of State as its agent for service of process in any proceeding
brought against it.
OFFICIAL COMMENT
Section 11.06 authorizes foreign nonprofit and business corporations
to merge with nonprofit corporations if there is an applicable law in their
respective states of incorporation and the law's provisions are met. Of
course, the provisions of the Model Act must also be complied with in
carrying out the merger.
If the surviving corporation is a foreign corporation, the merger
results in its irrevocably appointing the secretary of state as its agent for
service of process in any proceeding brought against it. This
appointment is not limited to matters arising out of or relating to the
merger, but applies to any and all claims that might be made against the
foreign corporation.
SOUTH CAROLINA REPORTERS' COMMENTS
The formerly applicable statute, Section 33-11-107 of the South
Carolina Business Corporation Act, is parallel to this provision, although
the language and mechanics are very different.
Section 33-31-1107. Bequests, devises, and gifts not affected
by merger.
Any bequest, devise, gift, grant, or promise contained in a will or
other instrument of donation, subscription, or conveyance, that is made
to a constituent corporation and that takes effect or remains payable after
the merger, inures to the surviving corporation unless the will or other
instrument otherwise specifically provides.
OFFICIAL COMMENT
Bequests, devise, gifts and grants to a disappearing corporation that
take effect or remain payable after a merger inure to the benefit of the
surviving corporation in a merger. Where, however, the will or other
instrument otherwise specifically provides, the specific provisions will
control.
A provisions in a will or other instrument requiring that a bequest or
gift be used for a specified purpose is not negated by a merger even if
the surviving corporation is not engaged in the same activities as the
disappearing corporation. It can only use the property for the specified
purposes. If the surviving corporation cannot or does not want to use the
bequest or gift for the purposes specified, it must seek court approval for
a variance. The question of whether a variance will be granted is left to
the cy pres doctrine or other applicable state law.
Section 11.07 only applies to bequests, devises, gifts and grants that
take effect or remain payable after a merger. Section 11.05 applies to
transfers that take effect prior to the merger.
SOUTH CAROLINA REPORTERS' COMMENTS
This is an entirely new provision. It has no counterpart in the former
Chapter 31, Title 33 or in the South Carolina Business Corporation Act.
Article 12
Sale and Distribution of Assets
Section 33-31-1201. Sale of assets in regular course of
activities and mortgage of assets.
(a) A corporation, on the terms and conditions and for the
consideration determined by the board of directors, may:
(1) sell, lease, exchange, or otherwise dispose of all, or
substantially all, of its property in the usual and regular course of its
activities; or
(2) mortgage, pledge, dedicate to the repayment of indebtedness,
whether with or without recourse, or otherwise encumber any or all of
its property whether or not in the usual and regular course of its
activities.
(b) Unless the articles require it, approval of the members or any
other person of a transaction described in subsection (a) is not required.
OFFICIAL COMMENT
Section 12.01 deals with two types of transactions. In the first type
a nonprofit corporation sells or otherwise disposes of all, or substantially
all, of its property in the usual and regular course of its activities. While
such a sale or disposition would normally not be in the regular course of
its activities, if it is, it may be approved by the board alone unless the
articles require approval of the members or some other person.
The second type of transaction is one in which a nonprofit corporation
mortgages pledges or dedicates to the repayment of indebtedness any or
all of its property whether or not in the usual and regular course of its
activities. This type of transaction would normally arise when a bank or
some other lender requires a corporation to pledge its property as
collateral for a loan. Subject to a contrary provision in a corporation's
articles, such a mortgage, pledge or dedication can be authorized by the
board alone.
The question of what is "substantially all" of a corpora-
tion's property is a factual question to be determined after an examina-
tion of all relevant facts. "The phrase `substantially all' is
synonymous with `nearly all' and was added merely to make it clear that
the statutory requirements could not be avoided by retention of some
minimal or nominal residue of the original assets. A sale of all the
corporate assets other than cash or cash equivalents is normally the sale
of `all or substantially all' of the corporation's property." Official
Comment to Section 12.01 of the Model Business Corporation Act.
Moreover, a series of related transactions that in total amount to the sale
of all, or substantially all, of a corporation's property may be treated as
a single transaction if they are part of an overall plan to dispose of all,
or substantially all, of the corporation's property.
The board in approving a transaction under section 12.01 must meet
its fiduciary obligations under sections 8.30 and 8.31.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is almost identical to Section 33-12-101 of the South
Carolina Business Corporation Act, the formerly applicable statute. It
has no counterpart in the former Chapter 31, Title 33.
Section 33-31-1202. Sale of assets other than in regular course
of activities.
(a) A corporation may sell, lease, exchange, or otherwise dispose of
all, or substantially all, of its property, with or without the goodwill,
other than in the usual and regular course of its activities on the terms
and conditions and for the consideration determined by the corporation's
board if the proposed transaction is authorized by subsection (b).
(b) Unless this chapter, the articles, or bylaws, require a greater vote
or voting by class, the proposed transaction to be authorized must be
approved:
(1) by the board;
(2) 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 whose approval is required by a
provision of the articles authorized by Section 33-31-1030 for an
amendment to the articles or bylaws.
(c) If the corporation does not have members, or does not have
members entitled to vote on the transaction, the transaction must be
approved by a vote of a majority of the directors in office at the time the
transaction is approved. In addition, the corporation shall provide notice
of any directors' meeting at which such approval is to be obtained 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 the
sale, lease, exchange, or other disposition of all, or substantially all, of
the property or assets of the corporation and contain or be accompanied
by a copy or summary of a description of the transaction.
(d) If the corporation seeks to have the transaction approved by the
members at a membership meeting, the corporation shall give notice to
its members of the proposed membership meeting in accordance with
Section 33-31-705. The notice also must state that the purpose, or one
of the purposes, of the meeting is to consider the sale, lease, exchange,
or other disposition of all, or substantially all, of the property or assets
of the corporation and contain or be accompanied by a copy or summary
of a description of the transaction.
(e) If the board needs to have the transaction 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 a
description of the transaction.
(f) A public benefit or religious corporation must give written notice
to the Attorney General twenty days before it sells, leases, exchanges,
or otherwise disposes of all, or substantially all, of its property if the
transaction is not in the usual and regular course of its activities unless
the Attorney General has given the corporation a written waiver of this
subsection.
(g) After a sale, lease, exchange, or other disposition of property is
authorized, the transaction may be abandoned, subject to any contractual
rights, without further action by the members or any other person who
approved the transaction in accordance with the procedure set forth in
the resolution proposing the transaction or, if none is set forth, in the
manner determined by the board of directors.
OFFICIAL COMMENT
A sale or other disposition of all, or substantially all, of a
corporation's property other than in the usual and regular course of its
activities must meet the requirements set forth in section 12.02. See the
Official Comment to Section 12.01 for a discussion of the meaning of
the phrase "all or substantially all". The notice requirements
are similar to the approval and notice requirements for a merger. See the
Official Comment to Section 11.03.
Unless the resolution proposing the transaction provides to the
contrary, the board acting alone may abandon a sale or other disposition
of property after the transaction has been authorized. The abandonment,
however, does not negate contractual rights of third persons.
SOUTH CAROLINA REPORTERS' COMMENTS
1. New provision, similar to Section 33-12-102
This is an entirely new provision for Chapter 31, Title 33, but it is
similar to the language of the previously applicable Section 33-12-102
in the South Carolina Business Corporation Act.
2. Non-Model Act provisions
This South Carolina section differs from Model Act in the following
manner:
a. The directors have the sole power to sell the assets as provided
in subsection (c) if the corporation does not have members or, different
from the Model Act, if the members do not have voting rights regarding
the sale of assets. This change is in conformity with changes made in
other sections. A nonprofit corporation might have members but the
articles might specify that they do not vote on the sale of assets.
b. The Model Act includes a provision which permits both the
board and members to condition this approval on the receipt of a higher
vote. Although this language does not appear in the South Carolina
section, the corporation still reserves this power to condition the
approval on the receipt of a higher vote, but must do so in the articles or
bylaws. This change is in keeping with the changes to Section
33-31-1003 and other sections. It was determined that all voting
modifications belong in the articles or bylaws. In increasing the vote
required 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.
Note that in the Business Corporation Section 33-12-102 the
following language is found:
(c) The board of directors may condition its submission of the
proposed transaction on any basis.
(e) Unless the articles of incorporation require a different vote or the
board of directors (acting pursuant to subsection (c)) requires a greater
vote than that specified by this subsection or the articles of incorporation
or a vote by voting groups, the transaction to be authorized must be
approved by two-thirds of all the votes entitled to be cast on the
transaction.
c. Consideration was given to whether churches and other religious
corporations should be required to notify the Attorney General before
selling or otherwise disposing of all, or substantially all, of their
property other than in the usual and regular course of their activities.
For example, if a church were to sell its building in order to move to a
new location, it is likely that this Section 33-31-1202 would require it
to notify the Attorney General. If notification were not given, the buyer
or later owner of the property might question whether it was receiving,
or had received, good title. It was determined that requiring notification
is not a significant obligation to place on legitimate religious
organizations, particularly since a waiver could be routinely obtained
when the corporation is formed or at any later time. See subsection (g).
Retaining this notification requirement will prevent public benefit
corporations from organizing as religious corporations in order to get
around the reporting requirement and will be a good check on entities
whose religious orientation is questionable.
Article 13
Prohibited Distributions
Section 33-31-1301. Prohibited distributions.
Except as authorized by Section 33-31-1302, a corporation may not
make any distributions.
OFFICIAL COMMENT
Section 13.01 sets forth the basic rule that a corporation is prohibited
from making any distributions. The term "distributions" is
defined in section 1.40(10) as the "payment of a dividend or of
any part of the income or profit of a corporation to its members,
directors or officers." See Official Comment to Section 1.40,
Comment 5.
Section 13.01 does not prohibit the transfer of property to members
of nonprofit corporations under any and all circumstances. However,
the prohibition on payment of dividends is quite broad. If a transfer is
a direct payment to a member as a result of his or her interest in the
nonprofit corporation, it is prohibited. Cash dividends from whatever
source are the clearest example of prohibited dividends. See Kubik
v. American Alliance, Inc., 54 N.Y.S.2d 764 (1945).
The question arises as to what a corporation can do with profits it
generates as it cannot use the profits to pay dividends. Public benefit
and religious corporations typically use profits to further their public,
charitable or religious purposes. Mutual benefit corporations usually use
profits to improve their facilities and services. In Burton Potter Post
No. 185, American Legion v. Epstein, 219 N.Y.S.2d 224 (1961), a
nonprofit club generated profits from its activities. The funds were used
to improve the club facilities. The court found that the corporation was
"not organized for pecuniary profit as long as it devotes its income
to club purposes." Id. at 227.
While the members benefit from the use of funds for club purposes,
that benefit is not a dividend and is not considered a distribution because
the corporation is conferring benefits upon its members in conformity
with its purposes.
A payment that is not derived from "any part of the income or
profit of a corporation to its members, directors or officers" is not
a distribution. Thus the return of an overcharge or the providing of
services for which members have paid is not a distribution. Nor is the
payment of reasonable compensation for services rendered.
SOUTH CAROLINA REPORTERS' COMMENTS
This provision has no counterpart in the former Chapter 31, Title 33
nor does it have any direct counterpart in the South Carolina Business
Corporation Act.
South Carolina does have a non-Model Act definition of the term
"distribution" found in Section 33-31-140 which reads:
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 confor-
mity with its purposes; or,
(C) repayment of debt obligations in the normal and
ordinary course of conducting activities.
Section 33-31-1302. Authorized distributions.
(a) A mutual benefit corporation may purchase its memberships if
after the purchase is completed:
(1) the corporation would be able to pay its debts as they become
due in the usual course of its activities; and
(2) the corporation's total assets would at least equal the sum of
its total liabilities.
(b) Corporations may make distributions upon dissolution in
conformity with Sections 33-31-1401 through 33-31-1440 of this
chapter.
(c) The board of directors may base a determination that a
distribution is not prohibited under subsection (a) either on financial
statements prepared on the basis of accounting practices and principals
that are reasonable in the circumstances or on a fair valuation or other
method that is reasonable in the circumstances.
OFFICIAL COMMENT
Section 13.02(a) is new, but is not inconsistent with section 26 of the
prior version of the Model Nonprofit Corporation Act. It is based in part
on section 6.40 of the Model Business Corporation Act. Section
13.02(b) is based upon and represents no substantive change from
section 26.
1. Purchase of Memberships
Mutual benefit corporations may purchase their memberships if the
two test of section 13.02(a) are met. Each test is designed to protect
creditors.
The first test is that after the purchase of a membership the
corporation "would be able to pay its debts as they become due in
the usual course of its activities." Section 13.02(a)(1). A
determination of whether this test is met requires the directors to form
"a conclusion that known obligations of the corporation can
reasonably be expected to be satisfied over the period of time that they
will mature. It is not sufficient simply to measure current assets against
current liabilities, or determine that the present estimated `liquidation'
value of the corporation's assets would produce sufficient funds to
satisfy the corporation's existing liabilities." Official Comment to
Section 6.40 of the Model Business Corporation Act.
In determining whether the first test is met the directors must exercise
their duty of care under section 8.30, and are entitled to rely on
information or reports they receive. See section 8.30(b).
The second test requires that after the purchase of a membership the
corporation's "total assets would at least equal the sum of its total
liabilities." Section 13.02(a)(2). If the corporation uses generally
accepted accounting principles and the directors rely on corporate
officers or accountants under section 8.30(b), it should be easy to
determine if the second test is met. If generally accepted accounting
principles are not used, the corporation should use practices and
principles that are reasonable under the circumstances.
2. Payments Upon Dissolution
Section 13.02 allows public benefit, mutual benefit and religious
corporations to make distributions to their members if the provisions of
Chapter 14 are met.
Chapter 14 sets forth provisions governing the disposition of assets
upon dissolution. Normally the members of a mutual benefit
corporation will receive its "net worth" upon dissolution.
Members of a public benefit or religious corporation normally will not
share in its "net worth" upon dissolution. This is because
they do not have any economic interest in its assets. However, under the
very limited circumstances set forth in section 14.06, a public benefit or
religious corporation may distribute its assets to its members if those
members are recognized as exempt under section 501(c)(3) of the
Internal Revenue Code or its members are themselves public benefit or
religious corporations.
SOUTH CAROLINA REPORTERS' COMMENTS
1. New provision similar to Section 33-6-400
This section has no counterpart in the former Chapter 31, Title 33 but
is similar to formerly applicable statute, Section 33-6-400(b) of the
South Carolina Business Corporation Act. Both statutes prohibit
distributions if the corporation thereafter would be unable to pay its
debts or if the assets would be less that its liabilities.
2. Distributions do not include "contributions"
It should be noted that the term "distributions" does not
include "conferring benefits on its members in conformity with its
purposes." See Section 33-31-140. Therefore, if the corporation
has members who themselves are nonprofit corporations, the
"parent" corporation might be permitted to make a payment
to one of its members. For example, if the Boy Scouts as a corporate
entity is deemed to be a member of United Way, United Way could
make a payment to the Boy Scouts.
3. Non-Model Act provision
Paragraph (c) is not a Model Act provision. However, identical
language is found in the previously applicable statute, South Carolina
Business Corporation Act, Section 33-6-400.
Article 14
Dissolution
Section 33-31-1401. Dissolution by incorporators.
(a) The incorporators of a corporation that has no members and that
does not yet have initial directors, upon written consents signed by a
majority of the incorporators, or through a vote of a majority of the
incorporators at a meeting of the incorporators, subject to any approval
required by the articles or bylaws, may dissolve the corporation by
delivering to the Secretary of State articles of dissolution.
(b) The incorporators in approving dissolution shall adopt a plan of
dissolution indicating to whom the assets owned or held by the
corporation will be distributed after all creditors have been paid.
OFFICIAL COMMENT
Section 14.01 allows a majority of the incorporators or directors of
corporations that have no members to dissolve the corporation by
delivering articles of dissolution to the Secretary of State. [In South
Carolina, this section only applies to incorporators.] See section 14.04
which specifies the information that must be contained in articles of
dissolution.
When approving dissolution, the incorporators or directors must adopt
a plan of dissolution indicting to whom the assets owned or held by the
corporation will be distributed after creditors have been paid. This
requirement allows corporate assets to be traced to the individuals or
entities to whom they have been distributed. A record that is sufficient
to satisfy this purpose will meet the requirements of section 14.01(c).
Section 14.01 requires a majority of the incorporators or directors to
vote for dissolution, not just a majority of a quorum. This
higher-than-normal vote is required because dissolution is a basic
corporate change. The articles, bylaws or some other state law may
require an even higher vote or approval of a third person or
governmental entity. See sections 14.01(a) and 8.24.
As dissolution is a fundamental corporate change, subsection (b)
requires the corporation to notify each director or incorporator of a
meeting at which dissolution will be approved. The notice must state
that dissolution will be considered at the meeting.
SOUTH CAROLINA REPORTERS' COMMENTS
1. Comparable statutes
This section is similar to Section 33-14-101 of the South Carolina
Business Corporation Act which governed nonprofit corporations prior
to the adoption of this South Carolina Nonprofit Corporation Act.
2. Differences from Model Act
Different from the Model Act, this section only provides for
dissolution by incorporators. (The Model Act also permits directors to
dissolve under this section.) Director dissolution in South Carolina is
dealt with in Section 33-31-1402(b).
Section 33-31-1402. Dissolution by directors, members, and
third persons.
(a) Unless this chapter, the articles, or bylaws require a greater vote
or voting by class, dissolution is authorized if it is approved:
(1) by the board;
(2) by the members, if any, by two-thirds of the votes cast or a
majority of the voting power, whichever is less; and
(3) in writing by any person whose approval is required by a
provision of the articles authorized by Section 33-31-1030 for an
amendment to the articles or bylaws.
(b) If the corporation does not have members or has no members
entitled to vote on dissolution, dissolution must be approved by a vote
of a majority of the directors in office at the time the transaction is
approved. In addition, the corporation shall provide notice of any
directors' meeting at which approval is to be obtained 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 dissolution of the
corporation and contain or be accompanied by a copy or summary of the
plan of dissolution.
(c) If the board seeks to have dissolution approved by the members
at a membership meeting, the corporation shall give notice to its
members of the proposed membership meeting in accordance with
Section 33-31-705. The notice also must state that the purpose, or one
of the purposes, of the meeting is to consider dissolving the corporation
and contain or be accompanied by a copy or summary of the plan of
dissolution.
(d) If the board seeks to have dissolution 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 plan of
dissolution.
(e) The plan of dissolution shall indicate to whom the assets owned
or held by the corporation will be distributed after all creditors have
been paid.
OFFICIAL COMMENT
Section 14.02 allows the board to propose and the members to
authorize dissolution of a nonprofit corporation. The board in proposing
dissolution must submit a plan of dissolution to the members. The plan
must indicate to whom the assets owned or held by the corporation will
be distributed after creditors have been paid. If the assets will be
distributed to the members, it should be sufficient to so indicate without
setting forth the name of each member. If the board has determined that
assets will be distributed to other organizations and the names of the
organizations are known, the names should be specified. If the board
has discretion in distributing the assets, the board should indicate that
the assets shall be distributed to such individuals and entities as it
subsequently decides.
In seeking member approval, the board must give written notice of a
membership meeting pursuant to section 7.05 and indicate that
dissolution will be considered at the meting. In the alternative, the board
may seek member approval by written consent pursuant to section 7.04
or written ballot pursuant to section 7.08. If approval by written consent
or written ballot is sought, the material soliciting the approval must
contain or be accompanied by a copy or summary of the plan of
dissolution.
Approval of dissolution at a membership meeting normally requires
two-thirds of the votes cast or a majority of the voting power, whichever
is less. The articles, bylaws, board or members may require a greater
vote or voting by class. If approval is sought by written consent
pursuant to section 7.04 or written ballot pursuant to section 7.08, any
additional requirements of those sections must be met.
Public benefit corporations must give the attorney general the written
notice required by section 14.03(a). The attorney general is authorized
to take appropriate action to protect the public interest and assets held
in trust. See section 1.70.
SOUTH CAROLINA REPORTERS' COMMENTS
1. Comparable sections
This provision is comparable to both Sections 33-31-1103 (dealing
with mergers of nonprofit corporations) and 33-31-1202 (dealing with
sale of assets). The similar provision in the South Carolina Business
Corporation Act is Section 33-14-102.
2. Non-Model Act provisions
This is the only section which provides for directors by themselves to
dissolve a corporation. (Section 14.01 of the Model Act also includes
director dissolution.) This section notes that the corporation might have
members who are not entitled to vote on dissolution. If so, the directors
dissolve the corporation. This is left unclear in the Model Act. The
shareholders or directors may condition their approval on a higher
percentage of votes but only if so provided in the articles or bylaws.
The Model Act also includes a provision which permits both the
board and members to condition this approval on the receipt of a higher
vote or any other basis. Although this language does
not appear in this South Carolina section, the board or members could
reserve the power to condition this approval on the receipt of a higher
vote, but must do so in the articles or bylaws. This change is in keeping
with the changes to Sections 33-31-1003 and 33-31-1202. It was deter-
mined that all voting modifications belong in the articles or bylaws. In
increasing the vote required of either directors or members,
consideration also must 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 33-31-1403. Notices to the Attorney General.
(a) A public benefit or religious corporation shall give the Attorney
General written notice that it intends to dissolve at or before the time it
delivers articles of dissolution to the Secretary of State. The notice shall
include a copy or summary of the plan of dissolution.
(b) No assets may be transferred or conveyed by a public benefit or
religious corporation as part of the dissolution process until twenty days
after it has given the written notice required by subsection (a) to the
Attorney General or until the Attorney General has consented in writing
to the dissolution, or indicated in writing that he will take no action in
respect to the transfer or conveyance, whichever is earlier.
(c) When all or substantially all of the assets of a public benefit
corporation have been transferred or conveyed following approval of
dissolution, the board shall deliver to the Attorney General a list
showing those, other than creditors, to whom the assets were transferred
or conveyed. The list shall indicate the addresses of each person, other
than creditors, who received assets and indicate what assets each
received.
OFFICIAL COMMENT
Section 14.03 requires public benefit and religious corporations to
give the attorney general written notice that they intend to dissolve at the
same time as or before delivering articles of dissolution to the secretary
of state. The notice must include a copy or summary of the plan of
dissolution. The corporation may not transfer any assets as part of the
dissolution process until twenty days after it has given this notice to the
attorney general. The attorney general may waive this twenty-day
period by consenting in writing to the dissolution or indicating in writing
that he or she will take no action in respect to the transfer. The prohibi-
tion on transfers applies only to transfers made as part of the dissolution
process. Transfers in the regular course of a corporation's activities are
not affected by the notice requirement of section 14.03.
Subsection (c) requires the board of a public benefit corporation to
deliver to the attorney general a list of those to whom the corporate
assets have been transferred. The list must show the name and address
of each person (other than creditors) who received assets and state what
assets each received. The list must be given to the attorney general
when substantially all of the assets have been transferred. This list
provides a record should there be a question as to the propriety of any
transfer. No such requirement is imposed on mutual benefit or religious
corporations.
SOUTH CAROLINA REPORTERS' COMMENTS
This section has no counterpart in the former nonprofit statutes and
no counterpart in the South Carolina Business Corporation Act.
In keeping with the provisions dealing with sale of assets, this section
requires even religious corporations (along with public benefit
corporations) to notify the Attorney General before dissolving.
Consideration was given as to whether twenty days was too long or too
short. It was determined that this was an appropriate time.
Section 33-31-1404. Articles of dissolution.
(a) At any time after dissolution is authorized, the corporation may
dissolve by delivering to the Secretary of State articles of dissolution
setting forth:
(1) the name of the corporation;
(2) the date dissolution was authorized;
(3) a statement that dissolution was approved by a sufficient vote
of the board, or incorporators if dissolution is pursuant to Section
33-31-1401;
(4) if approval of members was not required, a statement to that
effect and a statement that dissolution was approved by a sufficient vote
of the board of directors or incorporators;
(5) if approval by members was required:
(i) the designation, number of memberships outstanding,
number of votes entitled to be cast by each class entitled to vote
separately on dissolution, and number of votes of each class indisputably
voting on dissolution; and
(ii) either the total number of votes cast for and against dissolu-
tion by each class entitled to vote separately on dissolution or the total
number of undisputed votes cast for dissolution by each class and a
statement that the number cast for dissolution by each class was
sufficient for approval by that class.
(6) if approval of dissolution by some person or persons other
than the members, the board, or the incorporators is required pursuant
to Section 33-31-1402(a)(3), a statement that the approval was obtained;
and
(7) if the corporation is a public benefit or religious corporation,
that the notice to the Attorney General required by Section
33-31-1403(a) has been given.
(b) A corporation is dissolved upon the effective date of its articles
of dissolution.
OFFICIAL COMMENT
Unless the articles of dissolution specify a later effective date a
corporation is dissolved upon filing articles of dissolution with the
secretary of state. Thereafter the corporation is a "dissolved
corporation," although its corporate existence continues for
purposes of winding up under section 14.06.
The articles of dissolution may be filed at any time after dissolution
is authorized. A corporation may file articles of dissolution immediately
after dissolution is authorized so that dissolution becomes a matter of
public record. Alternatively, it may wait and file articles at or near the
end of the winding up process. After dissolution is authorized, the
corporation may commence the winding up process even though it has
not filed the articles of dissolution.
SOUTH CAROLINA REPORTERS' COMMENTS
1. Comparable provisions
This section is similar to the formerly applicable statute, Section
33-14-103 of the South Carolina Business Corporation Act.
2. Non-Model Act provisions
Subsection "(a)(3)" was reworded to define the contents
of the articles of dissolution if dissolution is pursuant to Section
33-31-1401, dissolution by the incorporators.
3. Delayed effective date
The articles of dissolution are permitted to provide a delayed effective
date. This is provided in Section 33-31-123.
Section 33-31-1405. Revocation of dissolution.
(a) A corporation may revoke its dissolution within one hundred
twenty days of its effective date.
(b) Revocation of dissolution must be authorized in the same
manner as the dissolution was authorized unless that authorization
permitted revocation by action of the board of directors alone, in which
event the board of directors may revoke the dissolution without action
by the members or any other person.
(c) After the revocation of dissolution is authorized, the corporation
may revoke the dissolution by delivering to the Secretary of State for
filing articles of revocation of dissolution, together with a copy of its
articles of dissolution, that set forth:
(1) the name of the corporation;
(2) the effective date of the dissolution that was revoked;
(3) the date that the revocation of dissolution was authorized;
(4) if the corporation's board of directors, or incorporators,
revoked the dissolution, a statement to that effect;
(5) if the corporation's board of directors revoked a dissolution
authorized by the members alone or in conjunction with another person,
a statement that revocation was permitted by action by the board of
directors alone pursuant to that authorization; and
(6) if member or third person action was required to revoke the
dissolution, the information required by Section 33-31-1404(a)(5) and
(6).
(d) Revocation of dissolution is effective upon the effective date of
the articles of revocation of dissolution.
(e) When the revocation of dissolution is effective, it relates back to
and takes effect as of the effective date of the dissolution and the
corporation resumes carrying on its activities as if dissolution had never
occurred.
OFFICIAL COMMENT
Section 14.05 allows the corporation to revoke dissolution within 120
days after its effective date. Normally revocation must be authorized in
the same manner as the dissolution was authorized. Consequently if
member or third person approval was required for dissolution, member
or third person approval is required for revocation. Where, however,
those authorizing the dissolution authorize the directors acting alone to
revoke the dissolution, the directors may revoke the dissolution without
the consent of any other person.
Dissolution is revoked when the corporation delivers articles of
revocation of dissolution together with a copy of its articles of
dissolution to the secretary of state. The winding up process ceases
upon filing the articles of revocation of dissolution; the corporation is no
longer a "dissolved corporation," and normal corporate
activities recommence.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is very similar to Section 33-14-104 of the South
Carolina Business Corporation Act. The South Carolina Business
Corporation Act requires reporting the votes of any voting group, and
this nonprofit statute requires disclosure as to the approval required of
any third party.
Section 33-31-1406. Effect of dissolution.
(a) A dissolved corporation continues its corporate existence but
may not carry on any activities except those appropriate to wind up and
liquidate its affairs, including:
(1) preserving and protecting its assets and minimizing its
liabilities;
(2) discharging or making provision for discharging its liabilities
and obligations;
(3) disposing of its properties that will not be distributed in kind;
(4) returning, transferring, or conveying assets held by the
corporation upon a condition requiring return, transfer, or conveyance,
which condition occurs by reason of the dissolution, in accordance with
such condition;
(5) transferring, subject to any contractual or legal requirements,
its assets as provided in or authorized by its articles of incorporation or
bylaws;
(6) if the corporation is a public benefit or religious corporation,
and no provision has been made in its articles or bylaws for distribution
of assets on dissolution, transferring, subject to any contractual or legal
requirement, its assets:
(i) to one or more entities described in Section 501(c)(3) of the
Internal Revenue Code, to the United States, to a state, or to a political
subdivision of the United States or a state, for a public purpose, or
pursuant to court order to another organization to be used in such
manner as in the judgment of the court will accomplish the general
purposes for which the dissolved corporation was organized, for one or
more exempt purposes; or
(ii) if the dissolved corporation is not described in Section
501(c)(3) of the Internal Revenue Code, to one or more public benefit
or religious corporations or to one or more of the entities described in (i)
above;
(7) if the corporation is a mutual benefit corporation and no
provision has been made in its articles or bylaws for distribution of
assets on dissolution, transferring its assets to its members or, if it has no
members, to those persons whom the corporation holds itself out as
benefitting or serving; and
(8) doing every other act necessary to wind up and liquidate its
assets and affairs.
(b) Dissolution of a corporation does not:
(1) transfer title to the corporation's property;
(2) subject its directors or officers to standards of conduct
different from those prescribed in Sections 33-31-801 through
33-31-858;
(3) change quorum or voting requirements for its board or
members; change provisions for selection, resignation, or removal of its
directors or officers or both; or change provisions for amending its
bylaws;
(4) prevent commencement of a proceeding by or against the
corporation in its corporate name;
(5) abate or suspend a proceeding pending by or against the
corporation on the effective date of dissolution; or
(6) terminate the authority of the registered agent.
OFFICIAL COMMENT
Section 14.06 spells out the effect of filing articles of dissolution. A
corporation is a "dissolved corporation" after it has filed
articles of dissolution. It continues its existence, but may only carry on
activities necessary or desirable to wind up and liquidate its affairs.
Subsection (a) spells out some, but not all, of the activities in which a
dissolved corporation may engage.
In general, the corporation is charged with preserving and protecting
its assets and discharging or making provision for discharging its
liabilities and obligations. In some instances it may not be possible or
desirable to discharge obligations immediately. For example, if a debt
is due over a period of time it may be desirable to set up a fund that will
pay the debt as it matures. When all corporate debts and obligations
have been discharged or adequately provided for, a nonprofit
corporation may dispose of its remaining assets in an orderly fashion.
If it holds assets on a condition requiring their return, the assets must
be returned pursuant to the condition. For example, some charities hold
assets that they may use so long as they operate. Upon dissolution these
charities may have to return the assets to their donor or transfer the
assets to another charity.
Where a corporation has an article or bylaw specifying the
distribution of assets upon dissolution, that article or bylaw should be
followed subject to any legal or contractual limitations.
All nonprofit corporations formed under the present version of the
Model Act are required to indicate in their articles how they assets will
be distributed upon dissolution. See section 2.02(a)(7). However, the
articles may simply authorize the board to distribute the assets to an
organization recognized as exempt under section 501(c)(3) of the
Internal Revenue Code. The articles may not specify the particular
organization that is to receive the assets, but leave the ultimate decision
to the discretion of the board. The articles and bylaws of nonprofit
organizations formed before the present version of the Model Act may
not specify the disposition of assets upon dissolution.
Where there is no article or bylaw provision specifying to whom
assets should be distributed upon dissolution, section 14.06 distinguishes
among public benefit, mutual benefit and religious corporations. For
public benefit and religious corporations section 14.06(a)(6) requires
assets to be distributed to one or more persons described in section
501(c)(3) of the Internal Revenue Code [or a governmental entity] or, if
the dissolved corporation is not described in section 501(c)(3), to one or
more public benefit or religious corporations. In no event may the assets
be distributed to members of a public benefit or religious corporation
unless they are entities authorized to receive assets by section 14.06.
They might, for example, be recognized as exempt under section
501(c)(3) of the Internal Revenue Code. All distributions are subject to
contractual and other legal requirements upon the corporation.
The limitations on distributions by public benefit and religious
corporations are essential elements of the nondistribution constraint. It
assures that the assets of a public benefit or religious corporation cannot
be accumulated and then distributed for the private benefit of members
upon the corporation's dissolution.
While members of a mutual benefit corporation are not entitled to
distributions while their corporation is operating, they may receive
corporate assets upon dissolution. Consequently, if no provision has
been made in a mutual benefit corporation's articles or bylaws for
distribution of assets on dissolution, section 14.06(a)(7) provides that the
assets shall be distributed to its members. (Contractual or other legal
requirements may prevent the members from receiving the assets.) In
those rare instances in which the articles or bylaws do not specify the
individuals to whom the assets of a mutual benefit corporation will be
distributed and the mutual benefit corporation has no members, the
assets should be distributed to those persons whom the corporation holds
itself out as benefitting or serving. While this may present some
practical problems, these problems can be avoided by amending the
articles or bylaws prior to dissolution to specify the individuals or
entities to whom the assets will be distributed upon dissolution. The
directors must meet their duties under sections 8.30 and 8.31 in adopting
any such article or bylaw provision.
As a result of section 14.06(b) the rights, powers and obligations of
the directors and members of a dissolved corporation do not change
during the winding up process and suits involving the corporation are
not affected by the dissolution.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is only somewhat similar to the formerly applicable
statute, Section 33-14-105 of the South Carolina Business Corporation
Act.
If a corporation intends to be a public benefit or religious corporation
that comes within the exemptions provided by Section 501(c)(3) of the
Internal Revenue Code, it must make provision in its governance
documents, normally in its articles or bylaws, that upon dissolution its
assets will be distributed for one or more exempt purposes within the
meaning of Section 501(c)(3) of the Internal Revenue Code, or to the
federal, state, or local government, for a public purpose.
The class of entities to which assets may be distributed on dissolution
has been expanded to negate any implication in Section 33-31-1406 that
only Section 501(c)(3) organizations are eligible recipients of liquidating
distributions. An organization wishing to be recognized as tax exempt
should include specific provisions in its articles to meet the requirements
of tax exemption. See South Carolina Reporters' Comment 4 to Section
33-31-202.
Section 33-31-1407. Known claims against dissolved corpora-
tion.
(a) A dissolved corporation may dispose of the known claims
against it by following the procedure described in this section.
(b) The dissolved corporation shall notify its known claimants in
writing of the dissolution at any time after its effective date. The written
notice must:
(1) describe information that must be included in a claim;
(2) provide a mailing address where a claim may be sent;
(3) state the deadline, which may not be fewer than one hundred
twenty days from the effective date of the written notice, by which the
dissolved corporation must receive the claim; and
(4) state that the claim will be barred if not received by the
deadline.
(c) A claim against the dissolved corporation is barred:
(1) if a claimant who was given written notice under subsection
(b) does not deliver the claim to the dissolved corporation by the
deadline;
(2) if a claimant whose claim was rejected by the dissolved
corporation does not commence a proceeding to enforce the claim within
ninety days from the effective date of the rejection notice and the
rejection notice stated that a proceeding to enforce the claim must be
commenced within ninety days.
(d) For purposes of this section `claim' does not include a contingent
liability or a claim based on an event occurring after the effective date
of dissolution.
OFFICIAL COMMENT
Section 14.07 and 14.08 provide a new and simplified system for
handling known and unknown claims against a dissolved corporation,
including claims based on events that occur after the dissolution of the
corporation. Section 14.07 deals solely with known claims while section
14.08 deals with unknown or subsequently arising claims. A claim is a
`known' claim even if this is unliquidated (see section 14.07(d)); a claim
that is contingent or has not matured so that there is no immediate right
to bring suit is not a `known' claim.
Known claims are handled in section 14.07 through a process of
written notice to claimants; the written notice must contain the
information described in section 14.07(b). Section 14.07(c) then
provides fixed deadlines by which claims are barred under various
circumstances, as follows:
(1) If a claimant receives written notice satisfying section 14.07(b)
but fails to file the claim by the deadline specified by the corporation,
the claim is barred by section 14.07(c)(1).
(2) If a claimant receives written notice satisfying section 14.07(b)
and files the claim as required:
(i) if the corporation rejects the claim, the claimant must
commence a proceeding to enforce the claim within the ninety days of
the rejection or the claim is barred by section 14.07(c)(2); or
(ii) if the corporation does not act on the claim or fails to notify
the claimant of the rejection, the claimant is not barred by section
14.07(c) until the corporation notifies the claimant.
(3) If the corporation publishes notice under section 14.08, a
claimant who was not notified in writing is barred unless he commences
a proceeding within five years after publication of the notice.
(4) If the corporation does not publish notice, a claimant who was
not notified in writing is not barred by section 14.07(c) from pursuing
his claim.
These principles, it should be emphasized, do not lengthen statutes of
limitation applicable under general state law. Thus claims that are not
barred under the foregoing rule - for example, if the corporation does not
act on a claim - will nevertheless be subject to the general statute of
limitations applicable to claims of that type. Official Comment to
Section 14.06 of the Model Business Corporation Act.
SOUTH CAROLINA REPORTERS' COMMENTS
1. Similar provisions
This section is identical with Section 33-14-106 of the South Carolina
Business Corporation Act. This section governed nonprofit corporations
prior to the adoption of this South Carolina Nonprofit Corporation Act.
2. Non-Model Act provisions
This South Carolina provision notes that before a claim can be barred
for failure of the claimant to bring a law suit, the notice to the claimant
must warn the claimant that the lawsuit must be filed. This identical
language appears in the South Carolina Business Corporation Act,
Section 33-14-106(c)(2).
3. Claims against members
If a corporation does not pay, or properly make provision for paying
the known creditors whose claims are properly presented, the individual
members are liable for such claims up to the amount of the distribution
they receive. Such a distribution would be a wrongful distribution in
violation of Section 33-31-833 and as provided in Section 33-31-833,
through subrogation to the wrongful director's rights, the creditor may
recover from "each person who received . . . [the] distribution for
the amount of the distribution whether or not the person receiving the
distribution knew it was made in violation of this Act." It is
therefore unnecessary to have in this Section 33-31-1407 language
similar to Section 33-31-1408(d) and no implication should be drawn
that a "known creditor" is in any manner barred from going
against the members if the corporation is unable to pay simply because
this section does not include wording similar to Section 33-31-1408(d).
In fact, the "known creditor" would not have to proceed
"pro rata" against all the members which is required of
"unknown" creditors. The "known creditor"
could satisfy his claim from only one member. All of this, of course,
assumes that the claim cannot be satisfied from the corporation or the
wrongfully distributing directors.
Section 33-31-1408. Unknown claims against dissolved
corporation.
(a) A dissolved corporation also may publish notice of its
dissolution and request that persons with claims against the corporation
present them in accordance with the notice.
(b) The notice must:
(1) be published one time in a newspaper of general circulation
in the county where the dissolved corporation's principal office, or, if
none in this State, its registered office, is or was last located;
(2) describe the information that must be included in a claim and
provide a mailing address where the claim may be sent; and
(3) state that a claim against the corporation will be barred unless
a proceeding to enforce the claim is commenced within two years after
publication of the notice.
(c) If the dissolved corporation publishes a newspaper notice in
accordance with subsection (b), the claim of each of the following
claimants is barred unless the claimant commences a proceeding to
enforce the claim against the dissolved corporation within two years
after the publication date of the newspaper notice:
(1) a claimant who did not receive written notice under Section
33-31-1407;
(2) a claimant whose claim was timely sent to the dissolved
corporation but not acted on; and
(3) a claimant whose claim is contingent or based on an event
occurring after the effective date of dissolution.
(d) A claim may be enforced under this section:
(1) against the dissolved corporation, to the extent of its
undistributed assets; or
(2) if the assets have been distributed in liquidation, against any
person, other than a creditor of the corporation, to whom the corporation
distributed its property to the extent of the distributee's pro rata share of
the claim or the corporate assets distributed to such person in liquida-
tion, whichever is less, but the distributee's total liability for all claims
under this section may not exceed the total amount of assets distributed
to the distributee.
OFFICIAL COMMENT
"Earlier versions of the Model Act did not recognize the serious
problem created by possible claims that might arise long after the
dissolution process was completed and the corporate assets distributed
to [members] . . .
The solution adopted in section 14.08 is to continue the liability of a
dissolved corporation for subsequent claims for a period of five years
after it publishes notice of dissolution. It is recognized that a five year
cut-off is itself arbitrary, but it is believed that the great bulk of post
dissolution claims will arise during this period. This provision is
therefore believed to be a reasonable compromise between the
competing considerations of providing a remedy to injured plaintiffs and
providing a period of repose after which dissolved corporations may
distribute remaining assets free of all claims. . . .
Directors must generally discharge or make provisions for discharging
all of the corporation's liabilities before distributing the remaining assets
. . . . But section 14.08 does not contemplate that liquidating
distributions . . . . will be deferred until all possible claims are barred
under section 14.08. Many claims covered by this section are of a type
for which provision may be made by the purchase of insurance or by the
setting aside of a portion of the assets, thereby permitting prompt
distributions in liquidation. Claimants, of course, may always have
recourse to the remaining assets of the dissolved corporation. See
section 14.08. Further, where unexpected claims arise after distributions
have been made to [persons other than creditors] in liquidation, section
14.08(2) authorizes recovery against the [persons] receiving the earlier
distributions. The recovery, however, is limited to the smaller of the
recipient [member's] pro rata share of the claim or the total amount of
assets received as liquidating distributions by the [member] from the
corporation. The provision ensures that claimants seeking to recover
distributions from [members] will try to recover from the entire class of
[members] rather than concentrating only on the larger [members]
. . . ." Official Comment to section 14.07 of the Model Business
Corporation Act.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is very similar to Section 33-14-107 of the South
Carolina Business Corporation Act. However, the Business Act does
not bar a contingent claim or a claim occurring after dissolution even if
newspaper notice is given and no filing is made within two years. These
are barred under this nonprofit provision. Different from the Model Act,
all filings must be made within two years rather than five years. There
was no comparable provision to this section in the former nonprofit
corporate statutes.
Section 33-31-1420. Grounds for administrative dissolution.
The Secretary of State may commence a proceeding under Section
33-31-1421 to administratively dissolve a corporation if the:
(1) corporation does not deliver a report of change of principal
office when due;
(2) corporation is without a registered agent or registered office
in this State;
(3) corporation does not notify the Secretary of State that its
registered agent or registered office has been changed, that its registered
agent has resigned, or that its registered office has been discontinued;
(4) corporation's period of duration, if any, stated in its articles of
incorporation expires; or,
(5) corporation has been adjudicated bankrupt pursuant to
Chapter 7 of the United States Bankruptcy Code.
OFFICIAL COMMENT
Section 14.20 sets forth the limited circumstances in which a
nonprofit organization may be dissolved administratively. The secretary
of state is authorized but is not required to commence dissolution
proceedings for the reasons set forth in section 14.20. The secretary of
state may commence the proceedings immediately or may give
additional notices or time to the offending corporation. An
administrative dissolution saves the time, money, and effort that might
otherwise be required for a judicial dissolution. This is particularly
important in the nonprofit area as numerous corporations with
insignificant funds may fade into oblivion without any responsible
person following the formalities required for a voluntary dissolution.
The notice provisions of section 14.21 are designed to give the offending
corporation an opportunity to avoid dissolution. Where, however, the
corporation has been administratively dissolved it still has two years to
be reinstated. See section 14.22.
When a corporation has been administratively dissolved, its corporate
name is available for use by other corporations.
SOUTH CAROLINA REPORTERS' COMMENTS
1. New section is comparable to Section 33-14-200
This section is very similar to Section 33-14-200 of the South
Carolina Business Corporation Act. Although the South Carolina
Business Corporation Act requires the Secretary of State to commence
dissolution if the corporation has failed to take the required actions, this
nonprofit section gives the Secretary of State discretion. It was
determined that nonprofit corporations may often inadvertently overlook
various filing requirements and it would be preferable to grant more
discretion on the part of the Secretary of State to allow the nonprofit
corporations time to correct any errors.
Business corporations which fail to file a tax return or pay taxes due
may also be administratively dissolved. Since nonprofit corporations do
not pay income or franchise taxes there is no provision to dissolve a
nonprofit corporation for failing to pay a tax or file a return.
2. Differences from Model Act
In keeping with the South Carolina Business Corporation Act,
immediately upon the occurrence of a disqualifying act, e.g., the failure
to have a statutory agent, the Secretary of State may begin the process
of administratively dissolving the corporation. The Model Act grants
various grace periods not found in this South Carolina provision.
Paragraph (a)(5) is not a Model Act provision and permits the Secretary
of State to dissolve a corporation which pursuant to Chapter 7 has been
adjudicated as bankrupt. Failure to file a tax return is not grounds for
dissolution.
Section 33-31-1421. Procedure for and effect of administrative
dissolution.
(a) Upon determining that one or more grounds exist under Section
33-31-1420(a) for dissolving a corporation, the Secretary of State may
serve the corporation with written notice of that determination under
Section 33-31-504, and in the case of a public benefit corporation shall
also notify the Attorney General in writing.
(b) If the corporation does not correct each ground for dissolution
or demonstrate to the reasonable satisfaction of the Secretary of State
that each ground determined by the Secretary of State does not exist
within at least sixty days after service of the notice is perfected under
Section 33-31-504, the Secretary of State shall administratively dissolve
the corporation by signing a certificate of dissolution that recites the
ground or grounds for dissolution and its effective date. The Secretary
of State shall file the original of the certificate and serve a copy on the
corporation under Section 33-31-504, and in the case of a public benefit
or religious corporation shall notify the Attorney General in writing.
(c) A corporation administratively dissolved continues its corporate
existence but may not carry on any activities except those necessary to
wind up and liquidate its affairs under Section 33-31-1406 and notify its
claimants under Sections 33-31-1407 and 33-31-1408.
(d) The administrative dissolution of a corporation does not
terminate the authority of its registered agent.
OFFICIAL COMMENT
Section 14.21 requires the secretary of state to give corporations 60
days' notice before it is administratively dissolved for one of the reasons
set forth in section 14.20. During this time the corporation has an
opportunity to correct the failure and avoid administrative dissolution.
if the corporation does not respond within the 60-day period, the
secretary of state may dissolve the corporation. The corporation will be
sent notice of the dissolution and have an opportunity to reinstate its
corporate status within two years after the effective date of the
dissolution. See section 14.22.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is comparable to the formerly applicable statute, Section
33-14-210 of the South Carolina Business Corporation Act. However,
different from the Business Corporation Act, (1) the Secretary of State
under this section has discretion whether to begin administrative
dissolution procedures, and (2) a nonprofit corporation will not be
dissolved for failing to pay an income or franchise tax or failing to file
a return since nonprofit corporations do not pay an income or franchise
tax. Different from the Model Act is the requirement in subsection (b)
that if the corporation does not cure the defect once formal
administrative proceedings have been commenced, that the Secretary of
State shall dissolve the corporation. The Model Act grants additional
discretion to the Secretary of State whether to complete the once-started
proceedings.
Section 33-31-1422. Reinstatement following administrative
dissolution.
(a) A corporation administratively dissolved under Section
33-31-1421 may apply to the Secretary of State for reinstatement within
two years after the effective date of dissolution. The application must:
(1) recite the name of the corporation and the effective date of its
administrative dissolution;
(2) state that the ground or grounds for dissolution either did not
exist or have been eliminated;
(3) state that the corporation's name satisfies the requirements of
Section 33-31-401.
(b) If the Secretary of State determines that the application contains
the information required by subsection (a) and that the information is
correct, the Secretary of State shall cancel the certificate of dissolution
and prepare a certificate of reinstatement reciting that determination and
the effective date of reinstatement, file the original of the certificate, and
serve a copy on the corporation under Section 33-31-504.
(c) When reinstatement is effective, it relates back to and takes
effect as of the effective date of the administrative dissolution and the
corporation shall resume carrying on its activities as if the administrative
dissolution had never occurred.
OFFICIAL COMMENT
Section 14.22 provides a two-year period after the effective date of an
administrative dissolution to apply to the secretary of state for
reinstatement. No court proceeding is needed. The secretary of state
may cancel the dissolution and prepare a certificate of reinstatement that
relates back to the effective date of the administrative dissolution. The
secretary of state should issue the certificate of reinstatement if the
application for reinstatement meets the requirements set forth in section
14.22. If the secretary of state refuses to reinstate the corporation an
appeal may be taken under section 14.23.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is essentially identical to the South Carolina Business
Corporation Act, Section 33-14-220. Therefore, there has been no
change in the law since this Business Corporation Act provision
governed nonprofit corporations prior to the adoption of this South
Carolina Nonprofit Corporation Act.
Section 33-31-1423. Appeal from denial of reinstatement.
(a) The Secretary of State, upon denying a corporation's application
for reinstatement following administrative dissolution, shall serve the
corporation by registered or certified mail addressed to its registered
agent at its registered office or to the office of the secretary of the
corporation at its principal office with a written notice that explains the
reason or reasons for denial.
(b) The corporation may appeal the denial of reinstatement to the
court of common pleas for Richland County within thirty days after
service of the notice of denial is perfected. The corporation appeals by
petitioning the court to set aside the dissolution and attaching to the
petition copies of the Secretary of State's certificate of dissolution, the
corporation's application for reinstatement, and the Secretary of State's
notice of denial.
(c) The court may summarily order the Secretary of State to
reinstate the dissolved corporation or may take other action the court
considers appropriate.
(d) The court's final decision may be appealed as in other civil
proceedings.
OFFICIAL COMMENT
Section 14.23 allows a corporation that has been administratively
dissolved to appeal the secretary of state's denial of reinstatement.
States adopting this Model Act should indicate which court will have
jurisdiction over the appeal, which party has the burden of proof on
appeal, and a standard for judicial review. See Official Comment to
Section 1.26.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is similar to Section 33-14-230 of the South Carolina
Business Corporation Act, but different from the Model Nonprofit Act.
This section gives the corporation only thirty days (and not ninety days)
within which to file an appeal.
Section 33-31-1430. Grounds for judicial dissolution.
(a) The court of common pleas may dissolve a corporation:
(1) in a proceeding by the Attorney General if it is established
that:
(i) the corporation obtained its articles of incorporation
through fraud;
(ii) the corporation has continued to exceed or abuse the
authority conferred upon it by law;
(iii) the corporation is a public benefit
corporation and the assets are being misapplied or wasted;
(iv) the corporation is a public benefit corporation and it is no
longer able to carry out its purposes;
(v) the corporation has improperly solicited money or has
fraudulently used the money solicited; or
(vi) has carried on, conducted, or transacted its business or
affairs in a persistently fraudulent or illegal manner.
The enumeration of these grounds for dissolution, (i) through (vi),
shall not exclude actions or special proceedings by the Attorney General
or other state official for the dissolution of a corporation for other causes
as provided in this chapter or in any other statute of this State.
(2) except as provided in the articles or bylaws of a religious
corporation, in a proceeding by fifty members or members holding five
percent of the voting power, whichever is less, or by a director or any
person specified in the articles, if it is established that:
(i) the directors are deadlocked in the management of the
corporate affairs and the members, if any, are unable to break the
deadlock;
(ii) the directors or those in control of the corporation have
acted, are acting, or will act in a manner that is illegal, oppressive, or
fraudulent, or unfairly prejudicial either to the corporation or to any
member, whether in his capacity as a member, director, or officer of the
corporation;
(iii) the members are deadlocked in voting power and have
failed, for a period that includes at least two consecutive annual meeting
dates, to elect successors to directors whose terms have, or would
otherwise have, expired;
(iv) the corporate assets are being misapplied or wasted; or
(v) the corporation is a public benefit or religious
corporation and is no longer able to carry out its purposes.
(vi) the corporation has abandoned its business and has failed
within a reasonable time, to dissolve, to liquidate its affairs, or to
distribute its remaining property among its members;
(vii) the corporation's period of duration stated in its articles
of incorporation has expired;
(3) in a proceeding by a creditor if it is established that:
(i) the creditor's claim has been reduced to judgment, the
execution on the judgment returned unsatisfied, and the corporation is
insolvent; or
(ii) the corporation has admitted in writing that the creditor's
claim is due and owing and the corporation is insolvent.
(4) in a proceeding by the corporation to have its voluntary dis-
solution continued under court supervision.
(b) Before dissolving a corporation the court shall consider whether:
(1) there are reasonable alternatives to dissolution;
(2) dissolution is in the public interest, if the corporation is a
public benefit corporation; and
(3) dissolution is the best way of protecting the interests of
members, if the corporation is a mutual benefit corporation.
The court may order any other form of relief which it deems proper
in the circumstances.
OFFICIAL COMMENT
Section 14.30 specifies the people who can seek a court-ordered
dissolution and the grounds for dissolution. A court has wide discretion
in determining whether dissolution will be granted and may refuse to
order dissolution even if it finds that the grounds for dissolution are
present. Before ordering dissolution a court must consider the matters
set forth in subdivision (b).
1. Involuntary Dissolution by State
Section 14.30 preserves the right of the state to file a proceeding to
involuntarily dissolve a corporation. The attorney general has the duty
of protecting the public interest. This duty is particularly important in
regard to public benefit corporations. The attorney general must
determine whether there is unfairness or fraud in regard to the public,
whether the corporation is carrying out its legitimate purposes, or
whether assets are being diverted to the personal benefit of officers,
directors, members, or controlling persons.
Members of mutual benefit corporations are more likely to protect
their own interests than members of public benefit corporations. In
addition, mutual benefit corporations do not hold themselves out as
operating for the public good. Therefore, the attorney general's
oversight role in regard to these corporations is less than in regard to
public benefit corporations. Consequently, subsection (a) draws a
distinction between public benefit and mutual benefit corporations and
gives the attorney general and courts greater leeway in regard to public
benefit corporations.
The attorney general can use subdivision (a)(1) to test the legality of
any actions the corporation has taken or intends to take. This duty has
been shifted to the attorney general and away from the secretary of state
who has limited authority in regard to filing articles. See Official
Comment to Section 1.25.
2. Involuntary Dissolution by Members, a Director, or a Person
Specified in a Corporation's Articles
Subdivision (a)(2) allows fifty members or members who hold 5% of
the voting power, whichever is less, a director, or any person specified
in the corporation's articles to bring a proceeding for involuntary
dissolution of the corporation. The articles or bylaws of a religious
corporation may prevent members or directors from bringing an action
to dissolve the corporation. Subdivision (a)(2) sets forth the grounds
upon which a court may order dissolution. In determining whether to
grant dissolution a court should act with caution. In the case of public
benefit corporations the primary matter of concern is the public or
charitable purposes of the corporation. In the case of mutual benefit
corporations the main consideration is whether the corporation can be
operated for the benefit of its members. Courts should be particularly
cautious in the case of religious corporations not to order dissolution if
there is an appropriate alternative.
3. Dissolution by Creditors
Creditors can bring a proceeding for dissolution only if the grounds
specified in subdivision (a)(3) have been met. Creditors may seek
dissolution as an alternative to a federal bankruptcy proceeding.
4. Dissolution by Corporation
A corporation that has commenced a voluntary dissolution proceeding
may seek protection in a court-supervised dissolution proceeding under
subdivision (a)(4). The directors of the corporation may be concerned
with personal liability or may face numerous suits or other actions that
should be dealt with in one court-supervised dissolution proceeding.
5. Factors to Be Considered by Court Before Ordering
Dissolution
Subsection (b) sets forth matters that a court should consider before
ordering dissolution. As dissolution is a remedy of the last resort, a
court should consider reasonable alternatives. For example, if the
directors are misapplying or wasting corporate assets, the court may give
the directors an opportunity to resign or, if the requirements of section
8.10 have been met, may remove the offending directors. In the case of
a public benefit corporation the court should attempt to fashion a remedy
that is in the public interest. In the case of a mutual benefit corporation
the remedy should be the best way of protecting the interests of
members.
SOUTH CAROLINA REPORTERS' COMMENTS
This section contains a number of non-Model Act provisions. For
example, subsections (a)(1)(v) through (vi) have been added to clarify
those actions which are not permitted. Subsections (a)(2)(ii) has been
modified, and subsections (a)(2)(vi) and (vii) are entirely new.
In an action filed by a shareholder to dissolve the corporation on the
grounds enumerated in this section the court may make such order or
grant such relief, other than dissolution as in its discretion is appropriate,
including without limitation an order:
(1) canceling or altering any provision contained in the articles
of incorporation or any amendment to the articles, or in the bylaws of
the corporation;
(2) canceling, altering, or enjoining any act or resolution for the
corporation;
(3) directing or prohibiting any act of the corporation or of
shareholders, directors, officers, or other persons party to the action; or
(4) providing for the purchase at their fair value of shares of a
shareholder, by the corporation or by other shareholders.
Merely because there has not been an election of directors for two
years, subsection (c)(2)(iii) will not apply automatically. The members
also must be deadlocked for the provision to apply.
Section 33-31-1431. Procedure for judicial dissolution.
(a) Venue for a proceeding by the Attorney General to dissolve
a corporation lies in the county where the corporation's principal office
is located, and if the corporation has failed to maintain a principal office
or failed to report any change of the office, in the court of common pleas
for Richland County. Venue for a proceeding brought by any other
party named in Section 33-31-1430 lies in the county where a corpora-
tion's principal office or, if none in this State, its registered office is or
was last located.
(b) It is not necessary to make directors or members parties to a
proceeding to dissolve a corporation unless relief is sought against them
individually.
(c) A court in a proceeding brought to dissolve a corporation may
issue injunctions, appoint a receiver or custodian pendente lite with all
powers and duties the court directs, take other action required to
preserve the corporate assets wherever located, and carry on the
activities of the corporation until a full hearing can be held.
(d) A person other than the Attorney General who brings an
involuntary dissolution proceeding for a public benefit or religious
corporation shall forthwith give written notice of the proceeding to the
Attorney General who may intervene.
OFFICIAL COMMENT
Section 14.31 sets forth procedures to be followed in a judicial
dissolution.
States adopting this Model Act should determine the place where
venue lies for proceedings brought by the attorney general to dissolve
a corporation.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is similar to the previously applicable statute, Section
33-14-310 of the South Carolina Business Corporation Act. Venue for
actions brought by the Attorney General is stated as where the
corporation has its principal office, but a default provision lists Richland
County as being a proper court. It should be noted that in any action
brought by a private party to dissolve the corporation, the Attorney
General must be notified and he shall have the right to intervene in the
action.
Section 33-31-1432. Receivership or custodianship.
(a) A court in a judicial proceeding brought to dissolve a public
benefit or mutual benefit corporation may appoint one or more receivers
to wind up and liquidate or one or more custodians to manage the affairs
of the corporation. The court shall hold a hearing, after notifying all
parties to the proceeding and any interested persons designated by the
court, before appointing a receiver or custodian. The court appointing
a receiver or custodian has exclusive jurisdiction over the corporation
and all of its property wherever located.
(b) The court may appoint an individual, or a domestic or foreign
business or nonprofit corporation authorized to transact business in this
State as a receiver or custodian. The court may require the receiver or
custodian to post bond, with or without sureties, in an amount the court
directs.
(c) The court shall describe the powers and duties of the receiver or
custodian in its appointing order, which may be amended from time to
time. Among other powers:
(1) the receiver may:
(i) dispose of all or any part of the assets of the corporation
wherever located, at a public or private sale, if authorized by the court;
however, the receiver's power to dispose of the assets of the corporation
is subject to any trust and other restrictions that would be applicable to
the corporation; and
(ii) sue and defend in the receiver's or custodian's name as
receiver or custodian of the corporation in all courts of this State;
(2) the custodian may exercise all of the powers of the corpora-
tion, through or in place of its board of directors or officers, to the extent
necessary to manage the affairs of the corporation in the best interests
of the corporation, its members, and creditors.
(d) The court during a receivership may redesignate the receiver
a custodian, and during a custodianship may redesignate the custodian
a receiver, if doing so is in the best interests of the corporation, its
members, and creditors.
(e) The court during the receivership or custodianship may order
compensation paid and expense disbursements or reimbursements made
to the receiver or custodian and the receiver or custodian's counsel from
the assets of the corporation or proceeds from the sale of the assets.
OFFICIAL COMMENT
Section 14.32 authorizes a court to appoint a receiver or custodian in
a judicial dissolution proceeding involving a public benefit or mutual
benefit corporation. Section 14.32 is designed to supplement provisions
found in most states dealing with the power of courts to appoint
receivers and custodians.
SOUTH CAROLINA REPORTERS' COMMENTS
The only difference between this section and the previously
controlling South Carolina Business Corporation Act Section 33-14-320
is that this section:
a. allows for nonprofit corporations to be appointed; and
b. specifies in subsection (c)(1) that the assets may be subject to
conditions of trust.
Section 33-31-1433. Decree of dissolution.
(a) If after a hearing the court determines that one or more
grounds for judicial dissolution described in Section 33-31-1430 exist,
it may enter a decree dissolving the corporation and specifying the
effective date of the dissolution, or may order any other form of relief
which it deems proper in the circumstances, and the clerk of the court
shall deliver a certified copy of the decree to the Secretary of State, who
shall file it without charging a fee.
(b) After entering the decree of dissolution, the court shall direct
the winding up and liquidation of the corporation's affairs in accordance
with Section 33-31-1406 and the notification of its claimants in
accordance with Sections 33-31-1407 and 33-31-1408.
OFFICIAL COMMENT
Section 14.33 provides that the court order dissolving a corporation
shall be filed with the secretary of state. The filing of the order of
dissolution has the same effect as the filing of the articles of dissolution.
After the decree of dissolution has been entered, the corporation
pursuant to court order must wind up and liquidate in accordance with
the provisions of sections 14.06-14.08.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is essentially identical to Section 33-14-330 in the South
Carolina Business Corporation Act.
Section 33-31-1440. Deposit with Department of Revenue and
Taxation.
Assets of a dissolved corporation that should be transferred to a
creditor, claimant, or member of the corporation who cannot be found
or who is not competent to receive them, must be reduced to cash
subject to known trust restrictions and deposited with the Department of
Revenue and Taxation or other appropriate state official for safekeeping
in accordance with the Uniform Disposition of Unclaimed Property Act.
However, in the Department of Revenue and Taxation or other
appropriate officials discretion, property may be received and held in
kind. When the creditor, claimant, or member furnishes satisfactory
proof of entitlement to the amount deposited, the department or the
appropriate state official shall pay him or his representative that amount.
OFFICIAL COMMENT
Section 14.40 provides for the deposit of unclaimed assets with the
[Department of Revenue and Taxation] State Treasurer. State escheat
or other laws provide for the ultimate disposition of these assets.
Section 14.40 provides that assets deposited with the state treasurer
shall be reduced to cash unless they are subject to known trust
restrictions or the treasurer decides it is in the public interest to hold the
assets in kind. The treasurer may decide to hold the assets in kind when
they are unique from an artistic or historical perspective.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is similar to previously applicable statute, Section
33-14-400 of the South Carolina Business Corporation Act. However,
under this new section property may be retained in kind.
Article 15
Foreign Corporations
Section 33-31-1501. Authority to transact business required.
(a) A foreign corporation may not transact business in this State
until it obtains a certificate of authority from the Secretary of State.
(b) The following activities, among others, do not constitute
transacting business within the meaning of subsection (a):
(1) maintaining, defending, or settling any proceeding;
(2) holding meetings of the board of directors or members or
carrying on other activities concerning internal corporate affairs;
(3) maintaining bank accounts;
(4) maintaining offices or agencies for the transfer, exchange,
and registration of memberships or securities or maintaining trustees or
depositaries with respect to those securities;
(5) selling through independent contractors;
(6) soliciting or obtaining orders, whether by mail or through
employees or agents or otherwise, if the orders require acceptance
outside this State before they become contracts;
(7) creating or acquiring indebtedness, mortgages, and security
interests in real or personal property;
(8) securing or collecting debts or enforcing mortgages and
security interests or any other rights in property securing the debts;
(9) owning, without more, real or personal property;
(10) conducting an isolated transaction that is completed within
thirty days and that is not one in the course of repeated transactions of
a like nature;
(11) transacting business in interstate commerce.
(12) soliciting those contributions as are defined in Section
33-55-20(3) or any succeeding statute of like tenor and effect.
(c) The list of activities in subsection (b) is not exhaustive.
OFFICIAL COMMENT
A state may prescribe the terms and conditions upon which a foreign
corporation is permitted to transact business within the state, subject, of
course, to the restrictions of the United States Constitution. Chapter 15
requires that a foreign corporation seeking to transact business within
the state must (1) obtain a certificate of authority from the secretary of
state and (2) maintain a registered office and appoint a registered agent
within the state. . . .
The Model Act does not attempt to formulate an inclusive definition
of what constitutes the transaction of business. Rather, the concept is
defined in a negative fashion by section 15.01(b), which states that
certain activities do not constitute the transaction of business.
In general terms, any conduct more regular, systematic, or extensive
than that described in section 15.01(b) constitutes the transaction of
business and requires the corporation to obtain a certificate of authority.
Typical conduct requiring a certificate of authority includes maintaining
an office to conduct local intrastate business, selling personal property
not in interstate commerce, entering into contracts relating to the local
business or sales, and owning or using real estate for general corporate
purposes. But the passive owing of real estate for investment purposes
does not constitute transacting business. See section 15.01(b)(9).
The test of "transacting business" defined in a negative
way in section 15.01(b) applies only to the question of whether the
corporation's contacts with the state are such that it must obtain a
certificate of authority. It is not applicable to other questions such as
whether the corporation is amenable to service of process under state
"long-arm" statutes or liable for state or local taxes. A
corporation that has obtained (or is required to obtain) a certificate of
authority to transact business under chapter 15 will generally be subject
to suit and state taxation in the state, while a corporation that is subject
to service of process or state taxation in a state will not necessarily be
required to obtain a certificate of authority under chapter 15.
The list of activities set forth in section 15.01(b) is not exhaustive.
See section 15.01(c). The list excludes several different types of
activities from the definition of "transacting business" which
are discussed below. Official Comment to Model Business Corporation
Act Section 15.01.
A corporation is not "transacting business" by
"maintaining, defending or settling any proceeding" in a
state. Section 15.01(b)(1). The term "proceeding" is
broadly defined in section 1.40(27) to include civil suits and criminal,
administrative and investigatory actions.
A corporation may carry on activities concerning its internal corporate
affairs and hold directors' and members' meetings without transacting
business within a state. Section 15.01(b). "Other activities
relating to the internal affairs of the corporation that do not constitute the
transaction of business under section 15.01(b) including having officers
or representatives of a corporation who reside within or are physically
present in the state . . . make executive decisions relating to the affairs
of the corporation without imposing on the corporation the requirement
that it obtain a certificate of authority in the state, provided these
activities are not so regular and system[at]ic as to cause the residence to
be viewed as a business office." Official Comment to Model
Business Corporation Act Section 15.01.
"A corporation is not `transacting business' . . . if it is
transacting business in interstate commerce . . . or soliciting or obtaining
orders that must be accepted outside the state before they become
contracts. . . . These limitations reflect the provisions of the United
States Constitution that grant to the United States Congress exclusive
power over interstate commerce, and preclude states from imposing
restrictions or conditions upon this commerce. These sections should be
construed in a manner consistent with judicial decisions under the
United States Constitution." Official Comment to Model Business
Corporation Act Section 15.01.
SOUTH CAROLINA REPORTERS' COMMENTS
There is no analogous section to this in former Chapter 31, Title 33.
However, other than subsection (b)(12), this section is essentially
identical with Section 33-15-101 of the South Carolina Business
Corporation Act. This section governed South Carolina nonprofit
corporations prior to the adoption of this Act. There is a small deviation
from the Model Act in item (8) which permits a foreign corporation to
enforce any rights which it has in any property in South Carolina, not
merely mortgages and deeds of trust.
In regard to subsection (b)(12), a non-Model Act provision, it was the
drafters intention that this section would protect out-of-state colleges
and similar entities from being required to register in South Carolina
merely because they had isolated fund raising activities in South
Carolina or held alumni meetings within the State.
It should be noted that there is a separate statute which deals with
charitable solicitations, Section 33-55-10, et seq. A foreign nonprofit
corporation which is not required to qualify under this section might be
required to register under this Charitable Solicitations Act (and even if
not required to register, might be required to comply with certain
provisions of that act). Conversely, corporations which are not required
to register under the Charitable Solicitations Act may still be required to
qualify to do business in South Carolina under this section. If a foreign
nonprofit corporation is not required to qualify to do business in South
Carolina, then many of the sections in this part of the chapter will not
apply. Sections 33-31-1502 through 33-31-1509, and 33-31-1520
through 33-31-1532 would not apply.
Section 33-31-1502. Consequences of transacting business
without authority.
(a) A foreign corporation transacting business in this State without
a certificate of authority may not maintain a proceeding in a court in this
State until it obtains a certificate of authority.
(b) The successor to a foreign corporation that transacted business
in this State without a certificate of authority and the assignee of a cause
of action arising out of that business may not maintain a proceeding on
that cause of action in any court in this State until the foreign
corporation or its successor obtains a certificate of authority.
(c) A court may stay a proceeding commenced by a foreign
corporation, its successor, or assignee until it determines whether the
foreign corporation or its successor requires a certificate of authority.
If it so determines, the court may further stay the proceeding until the
foreign corporation or its successor obtains the certificate.
(d) A foreign corporation is liable for a civil penalty of ten dollars
for each day it transacts business in this State without a certificate of
authority, but not to exceed a total of one thousand dollars. The
Attorney General may collect all penalties due under this subsection.
(e) Notwithstanding subsections (a) and (b), the failure of a foreign
corporation to obtain a certificate of authority does not impair the
validity of its corporate acts or prevent it from defending any proceeding
in this State.
OFFICIAL COMMENT
Section 15.02 is designed to compel foreign corporations to qualify
to transact business in a state by obtaining a certificate of authority but
not to impose Draconian penalties on those who fail to qualify. The
failure to qualify does not impair the validity of corporate acts or prevent
a corporation from defending itself in any proceeding. Section 15.01(e).
A corporation that is required to qualify, but has not qualified, may
not bring suit or seek an affirmative recovery in an action in which it is
a defendant until it has qualified. A court may stay a proceeding
commenced by a foreign corporation until it determines whether the
corporation should have qualified to transact business. If it concludes
that qualification is necessary, it may grant a further stay until the
foreign corporation obtains a certificate of authority. A foreign
corporation that is required to but has not obtained a certificate of
authority may do so and is not required to refile the suit.
Subsection (d) provides a specified dollar amount per day with a
maximum yearly total penalty for each year in which a foreign
corporation fails to qualify. Each state adopting the Model Act should
determine the appropriate daily and yearly amounts and insert them in
subsection (d).
SOUTH CAROLINA REPORTERS' COMMENTS
This section is identical to the formerly applicable statute, Section
33-15-102 of the South Carolina Business Corporation Act. This section
does not specify whether or not the bar to bringing an action in South
Carolina also applies to actions brought in federal court. This question
was intentionally left up to the determination of the particular federal
court.
Section 33-31-1503. Application for certificate of authority.
(a) A foreign corporation may apply for a certificate of authority to
transact business in this State by delivering an application to the
Secretary of State. The application must set forth:
(1) the name of the foreign corporation or, if its name is
unavailable for use in this State, a corporate name that satisfies the
requirements of Section 33-31-1506;
(2) the name of the state or country under whose law it is
incorporated;
(3) the date of incorporation and period of duration;
(4) the street address, including zip code, of its principal office;
(5) the street address, including zip code, of its proposed
registered office in this State and the name of its proposed registered
agent at that office;
(6) the names and usual business addresses, including zip
codes, of its current directors and officers;
(7) whether the foreign corporation has members; and
(8) whether the corporation, if it had been incorporated in this
State, would be a public benefit, mutual benefit or religious corporation.
(b) The foreign corporation shall deliver with the completed
application a certificate of existence, or a document of similar import,
duly authenticated by the Secretary of State or other official having
custody of corporate records in the state or country under whose law it
is incorporated within sixty days of the date that it is filed in this State.
OFFICIAL COMMENT
Section 15.03 requires corporations to submit specified information
to obtain a certificate of authority. "The purposes of these
disclosure requirements are: (1) to ensure that citizens of the state have
adequate information about foreign corporations in their transactions
with them; (2) to put them in a status of equality with domestic
corporations with respect to information required to be furnished; (3) to
facilitate their subjection to the jurisdiction of the state's courts, thereby
removing any disadvantage citizens of the state may have when dealing
with them; and (4) to provide readily accessible evidence of their
existence." Official Comment to Model Business Corporation Act
Section 15.03. Each application for a certificate of authority must be
accompanied by a certificate of existence (or document of similar
import) and the filing fee set forth in section 1.22.
Section 16.22 requires qualifying corporations to file annual reports
with the Secretary of State. [This provision was not adopted in South
Carolina.] They may also have to make other filings pursuant to
sections 15.04, 15.06, and 15.07, and regulatory and tax statutes.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is very similar to Section 33-15-103 of the South
Carolina Business Corporation Act which was applicable prior to the
adoption of this South Carolina Nonprofit Corporation Act. Different
from the Model Act, this section requires zip codes on all addresses and
requires that only the business addresses of the officers and directors be
listed. As to the certificate of existence which must be filed with the
application, this section, different from the Model Act, requires the
certificate to be current within sixty days of filing. Different from the
South Carolina Business Corporation Act, there is no requirement that
a South Carolina lawyer certify that the document has been properly
prepared.
Section 33-31-1504. Amended certificate of authority.
(a) A foreign corporation authorized to transact business in this
State must obtain an amended certificate of authority from the Secretary
of State if it changes:
(1) its corporate name;
(2) the period of its duration; or
(3) the state or country of its incorporation.
(b) The requirements of Section 33-31-1503 for obtaining an
original certificate of authority apply to obtaining an amended certificate
under this section.
OFFICIAL COMMENT
A foreign corporation must file an amended certificate of authority if
it changes its corporate name, the period of its duration or the state or
country of its incorporation. A change in registered office or registered
agent requires an immediate filing pursuant to section 15.07. Changes
in principal office, officers or directors only have to be reported in the
annual report filed yearly with the secretary of state pursuant to section
16.22.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is essentially identical to the previously applicable
statute, Section 33-15-104 of the South Carolina Business Corporation
Act. If the foreign corporation changes its principal office it must file
a Notice of Change of Principal Office. Section 33-31-1515.
Section 33-31-1505. Effect of certificate of authority.
(a) A certificate of authority authorizes the foreign corporation to
which it is issued to transact business in this State subject, however, to
the right of the State to revoke the certificate as provided in this chapter.
(b) A foreign corporation with a valid certificate of authority has the
same, but no greater rights, and enjoys the same, but no greater
privileges, as, and except as otherwise provided by this chapter is
subject to the same duties, restrictions, penalties, and liabilities now or
later imposed on, a domestic corporation of like character.
(c) This chapter does not authorize this State to regulate the
organization or internal affairs of a foreign corporation authorized to
transact business in this State.
OFFICIAL COMMENT
Foreign corporations that have a valid certificate of authority have the
same but no greater rights, and the same but no greater privileges, as
domestic corporations of a like character. Similarly qualified foreign
corporations, except as otherwise provided in the Model Act, are subject
to the same duties, restrictions, penalties and liabilities as domestic
corporations of a like character. As the Model Act draws distinctions
between public benefit, mutual benefit and religious corporations,
foreign corporations should determine in which category they would fall
if they were domestic corporations,. See sections 15.03(a)(8) and 17.07.
While the Model Act does not authorize a state to regulate the
"organization or internal affairs" of a foreign corporation,
the exact meaning of "organization and internal affairs" is
left to court determination. Section 15.05, however, is not intended to
preempt regulatory statutes that would otherwise be applicable to a
foreign nonprofit corporation.
The common law in some sates may give a state jurisdiction over
assets held i n trust by a foreign nonprofit corporation. The extent of
this jurisdiction, if any, is not set forth in the Model Act.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is very similar to Section 33-15-105 of the South
Carolina Business Corporation Act which was controlling prior to the
adoption of this South Carolina Nonprofit Corporation Act. The section
varies from the Model Act only by clarifying that the foreign
corporation enjoys no greater rights or privileges than the domestic
corporation.
Section 33-31-1506. Corporate name of foreign corporation.
(a) If the corporate name of a foreign corporation does not satisfy
the requirements of Section 33-31-401, the foreign corporation, to obtain
or maintain a certificate of authority to transact business in this State,
may use a fictitious name to transact business in this State if its real
name is unavailable and it delivers to the Secretary of State for filing a
copy of the resolution of its board of directors, certified by its secretary,
adopting the fictitious name.
(b) Except as authorized by subsections (c) and (d), the corporate
name, including a fictitious name, of a foreign corporation 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 corporation, business corporation, professional corporation, or
limited partnership incorporated in, formed in, or authorized to do
business in this State, or a name reserved, registered, or otherwise filed
upon the records of the Secretary of State.
(c) A foreign corporation may apply to the Secretary of State for
authorization to use in this State the name of another corporation,
incorporated or authorized to transact business in this State, that is not
distinguishable upon the records of the Secretary of State from the name
applied for. 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 foreign corporation may use in this State 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 transact business in this State and the
foreign corporation:
(1) has merged with the other corporation;
(2) has been formed by reorganization of the other corporation;
or
(3) has acquired all or substantially all of the assets, including
the corporate name, of the other corporation.
(e) If a foreign corporation authorized to transact business in this
State changes its corporate name to one that does not satisfy the
requirements of Section 33-31-401, it may not transact business in this
State under the changed name until it adopts a name satisfying the
requirements of Section 33-31-401 and obtains an amended certificate
of authority under Section 33-31-1504.
OFFICIAL COMMENT
Section 15.06 requires qualified foreign corporation to have names
distinguishable from other corporate names on the records of the
secretary of state. Section 15.06 requires the secretary of state to
evaluate names based on the secretary of state's records. It does not
require the secretary of state to decide issues relating to unfair
competition. See section 4.01.
If the true corporate name of a foreign corporation is unavailable, the
foreign corporation may use a fictitious name to transact business if it
delivers a certified copy of a board resolution adopting the fictitious
name together with its application for a certificate of authority. The
fictitious name must be one that is otherwise available. States adopting
the Model Act may have registration, filing or other requirements
applicable to the use of fictitious names.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is very similar to the formerly applicable statute, Section
33-15-106 of the South Carolina Business Corporation Act. Subsection
(b) varies in form, but not in substance, from the Model Act. There is
no counterpart to this section in former Chapter 31, Title 33.
Section 33-31-1507. Registered office and registered agent of
foreign corporation.
Each foreign corporation authorized to transact business in this State
must continuously maintain in this State:
(1) a registered office with the same address as that of its
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 15.07 requires each foreign corporation authorized to transact
business in a state to maintain continually a registered office and
registered agent in the state so it will be amenable to suit within the
state. Section 15.07 is based on section 5.01. See Official Comment to
Section 5.01 for an explanation of the policies upon which section 15.07
is based.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is identical with Section 33-31-501, the Registered Office
and Agent for a South Carolina nonprofit corporation, and essentially
the same as Section 33-15-107 of the South Carolina Business
Corporation Act.
Section 33-31-1508 requires that the agent's actual street address must
be specified.
Section 33-31-1508. Change of registered office or registered
agent of foreign corporation.
(a) A foreign corporation authorized to transact business in this
State 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 of its current registered office;
(3) if the current registered office is to be changed, the street
address of its new registered office;
(4) the name of its current registered agent;
(5) if the current registered agent is to be changed, the name of its
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 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 15.08(a) requires foreign corporations upon changing their
registered office or registered agent to file a statement with the secretary
of state containing the information required by section 15.08(a). If the
office of the registered agent is changed, the agent may change the
registered office by notifying the secretary of state and complying with
the provisions of section 15.08(b) rather than section 15.08(a). Section
15.08 is based on section 5.02. See Official Comment to Section 5.02
for an explanation of the policies upon which section 15.08 is based.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is identical with Section 33-31-502, Change of Office or
Registered Agent, applicable to South Carolina nonprofit corporations.
It is also very similar to Section 33-15-108 of the South Carolina
Business Corporation Act.
Section 33-31-1509. Resignation of registered agent of foreign
corporation.
(a) The registered agent of a foreign corporation may resign as 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 also discontinued.
(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 application for
certificate of authority or most recent 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
Section 15.09 permits a registered agent of a foreign corporation to
resign upon fulfilling the requirements set forth in the section. See
Official Comment to Section 5.03 for an explanation of the policies
underling section 15.09.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is identical with Section 33-31-503, Resignation of the
Registered Agent of a South Carolina nonprofit corporation, and
essentially identical to Section 33-15-109 of the South Carolina
Business Corporation Act.
Section 33-31-1510. Service on foreign corporations.
Except as specifically provided in this chapter, service of process on
a foreign nonprofit corporation must be in accord with the applicable
provisions of Title 15.
OFFICIAL COMMENT
Section 15.10 sets forth nonexclusive ways of serving foreign
corporations. Section 15.10(a) allows service to be made upon a
registered agent of a qualified foreign corporation. Section 15.10(b)
authorizes service on the secretary of the foreign corporation in the
manner and at the places specified if the foreign corporation does not
have a registered agent, the registered agent cannot be found at the
registered office, the corporation has withdrawn from the state or the
foreign corporation's certificate of authority has been revoked. Section
15.10 is based on section 5.04. See Official Comment to Section 5.04
for an explanation of the policies underlying Section 15.10.
SOUTH CAROLINA REPORTERS' COMMENTS
The service of process provisions for foreign nonprofit corporations
are found in Sections 15-9-240 and 15-9-245. This section, as does
Section 33-31-504, applicable to South Carolina nonprofit corporations,
merely cross references the service provision found in Chapter 15.
Certain additional information is available in the South Carolina
Reporters' Comments to Section 33-15-110 which deals with serving
foreign business corporations.
Section 33-31-1515. Notice of change of principal office.
If a foreign corporation changes the location of its principal office,
then within thirty days of the date of the change the corporation shall file
a notice of change of principal office with the Secretary of State. The
notice of change shall set forth:
(1) the name of the corporation; and
(2) the current street address, with zip code, of the corporation's
principal office and the address of the former principal office.
SOUTH CAROLINA REPORTERS' COMMENTS
As discussed in detail in the South Carolina Reporters' Comments to
Section 33-31-505, nonprofit corporations are not required to file an
annual report. Since the annual report would advise the Secretary of
State of any change in principal office, it was determined that like
domestic nonprofit corporations, foreign nonprofit corporations must
notify the Secretary of State as to any change of office. Each foreign
nonprofit corporation therefore 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
corporations principal office. This is not a Model Act provision. The
Model Act requires all nonprofit corporations to file an annual report.
Section 33-31-1520. Withdrawal of foreign corporation.
(a) A foreign corporation authorized to transact business in this
State may not withdraw form this State until it obtains a certificate of
withdrawal from the Secretary of State.
(b) A foreign corporation authorized to transact business in this
State may apply for a certificate of withdrawal by delivering an
application to the Secretary of State for filing. The application must set
forth:
(1) the name of the foreign corporation and the name of the
state or country under whose law it is incorporated;
(2) that it is not transacting business in this State and that it
surrenders its authority to transact business in this State;
(3) that it revokes the authority of its registered agent to accept
service on its behalf and appoints the Secretary of State as its agent for
service of process in any proceeding based on a cause of action arising
during the time it was authorized to do business in this State;
(4) a mailing address to which the Secretary of State may mail
a copy of any process served on him under item (3); and
(5) a commitment to notify the Secretary of State during the six
years following the delivery of the certificate of withdrawal of any
change in the mailing address.
(c) After the withdrawal of the corporation is effective, service of
process on the Secretary of State under this section is service on the
foreign corporation. Upon receipt of process, the Secretary of State shall
mail a copy of the process to the foreign corporation at the post office
address set forth in its application for withdrawal.
OFFICIAL COMMENT
A foreign corporation authorized to transact business in a state must
file an application for a certificate of withdrawal to withdraw from the
state. The application must appoint the secretary of state as agent for
service of process in any proceeding based on a cause of action arising
during the time the corporation was authorized to transact business in
the state. If the secretary of state is served as agent for the foreign
corporation, the secretary of state must mail a copy of the process to the
foreign corporation at the address set forth in the application for
withdrawal.
Subsection 15.20(b) sets forth the information that must be contained
in the application for a certificate of withdrawal. The application for
withdrawal must be on the form prescribed by the secretary of state. See
section 1.21. This insures that the appointment of the secretary of state
as agent for service of process is unqualified and not limited in a way
inconsistent with the requirements of section 15.20.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is similar to Section 33-15-200 of the South Carolina
Business Corporation Act which formerly was the applicable statute.
The South Carolina Reporters' Comments to that section may be helpful
in interpreting this section. Different from Section 33-15-200, this
section only requires the withdrawing corporation to notify the South
Carolina Secretary of State of any change in address for the first six
years after it withdraws. Six years was selected because as of the date
this section was adopted, the general tort statute of limitations was six
years.
Section 33-31-1530. Grounds for revoking a foreign corp-
oration's authority to transact business in this State.
(a) The Secretary of State may commence a proceeding under
Section 33-31-1531(a) to revoke the certificate of authority of a foreign
corporation authorized to transact business in this State if:
(1) the foreign corporation does not deliver a notice of change of
principal office when due;
(2) the foreign corporation is without a registered agent or
registered office in this State;
(3) the foreign corporation does not inform the Secretary of
State that its registered agent or registered office has been changed, that
its registered agent has resigned, or that its registered office has been
discontinued;
(4) the corporation's period of duration, if any, stated in its
articles of incorporation expires;
(5) the Secretary of State receives a duly authenticated
certificate from the Secretary of State or other official having custody of
corporate records in the state of country under whose law the foreign
corporation is incorporated stating that it has been dissolved or
disappeared as the result of a merger; or,
(6) that the corporation has been adjudicated bankrupt pursuant
to Chapter 7 of the United States Bankruptcy Code.
(b) The Richland County Court of Common Pleas under Section
33-31-1531(b) may revoke the certificate of authority of a foreign
corporation authorized to transact business in this State in a proceeding
by the Attorney General if it is established that:
(1) the corporation obtained its articles of incorporation
through fraud;
(2) the corporation has continued to exceed or abuse the
authority conferred upon it by law;
(3) the corporation is a public benefit corporation and the assets
are being misapplied or wasted;
(4) the corporation is a public benefit corporation and it is no
longer able to carry out its purposes.
(5) the corporation has improperly solicited money or has
fraudulently used the money solicited; or,
(6) the corporation has carried on, conducted, or transacted its
business or affairs in a persistently fraudulent or illegal manner.
The enumeration of the grounds in items (1) through (6) revoking the
authority shall not exclude actions or special proceedings by the
Attorney General or other state official for revoking the authority of a
foreign nonprofit corporation for other causes as provided in this chapter
or in any other statute of this State.
OFFICIAL COMMENT
Section 15.30 authorizes the secretary of state or attorney general to
commence an administrative proceeding under section 15.31 to revoke
a foreign corporation's certificate of authority. This revocation may take
place for the reasons specified in section 15.30 pursuant to the
procedures set forth in section 15.31. See Official Comment to Section
14.20 for an explanation of the policies underlying section 15.30.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is similar in part to Section 33-15-300 of the South
Carolina Business Corporation Act and thus does not represent any
significant change in the law. Likewise, it is very similar to the grounds
for dissolving a domestic South Carolina nonprofit corporation.
Subsection (a) is essentially identical with Section 33-31-1420(a), and
subsection (c) is essentially identical with Section 33-31-1420(b).
Subsection (b) of this section is essentially identical with Section
33-31-1430(a)(1). A provision essentially identical with Section
33-31-1430(b), which relates to alternative remedies, other than
revoking the authority of the foreign corporation, is found in Section
33-31-1531(b). Section 33-31-1430, dealing with dissolving a domestic
nonprofit corporation, also contains provisions whereby creditors and
members may request the court order dissolution. These provisions are
not applicable to the question whether or not a foreign corporation
should be permitted to do business in South Carolina. If either creditors
or members believe that the foreign corporation is improperly acting,
their recourse is to exercises those rights which the statutes of the state
of incorporation grant to them.
See also nonmodel act section 33-31-174 which grants to the Attorney
General the authority to cause the foreign nonprofit corporation to
"forfeit" its right to operate in South Carolina.
Section 33-31-1531. Procedure and effect of revocation.
(a) Upon determining that one or more grounds exist under Section
33-31-1530(a) to revoke a certificate of authority of a foreign nonprofit
corporation, the Secretary of State may serve the foreign corporation
with written notice of that determination pursuant to Section
33-31-1510.
If the foreign corporation does not correct each ground for revocation
or demonstrate to the reasonable satisfaction of the Secretary of State
that each ground for revocation determined by the Secretary of State
does not exist within sixty days after service of the notice is perfected
under Section 33-31-1510, the Secretary of State shall revoke the foreign
corporation's certificate of authority by signing a certificate of
revocation that recites the ground or grounds for revocation and its
effective date. The Secretary of State shall file the original of the
certificate and serve a copy on the foreign corporation under Section
33-31-1510 and, in the case of a public benefit corporation, shall notify
the Attorney General in writing.
(b) If the court of Common Pleas of Richland County determines
that one or more grounds for revoking the foreign nonprofit's authority
to transact business as described in Section 33-31-1530(b) exists, it may
enter a decree dissolving the corporation and specifying the effective
date of the dissolution, and the clerk of the court shall deliver a certified
copy of the decree to the Secretary of State, who shall file it without
charging any fee.
Before revoking the foreign nonprofit corporation's authority to
transact business in this State, the court shall consider whether:
(1) there are reasonable alternatives to revoking the authority;
(2) revoking the authority is in the public interest, if the
corporation is a public benefit corporation; and,
(3) revoking the authority is the best way of protecting the
interests of members, if the corporation is a mutual benefit corporation.
The court of common pleas of Richland County may order any other
form of relief which it deems proper in the circumstances.
(c) The authority of a foreign corporation to transact business in this
State ceases on the date shown on the certificate revoking its certificate
of authority.
(d) The Secretary of State's or Richland County Court of Common
Pleas revocation of a foreign corporation's certificate of authority
appoints the Secretary of State the foreign corporation's agent for service
of process in any proceeding based on a cause of action that arose during
the time the foreign corporation was authorized to transact business in
this State. Service of process on the Secretary of State under this
subsection is service on the foreign corporation. Upon receipt of
process, the Secretary of State shall mail a copy of the process to the
secretary of the foreign corporation at its principal office shown in its
most recent notice of change of principal office or in any subsequent
communications received from the corporation stating the current
mailing address of its principal office, or, if none are on file, in its
application for a certificate of authority.
(e) Revocation of a foreign corporation's certificate of authority does
not terminate the authority of the registered agent of the corporation.
OFFICIAL COMMENT
Section 15.31 sets forth the method by which the certificate of
authority may be revoked. The foreign corporation must be advised of
the proposed revocation and have an adequate opportunity to take action
to prevent the revocation from taking place. A foreign corporation that
believes that it has been improperly treated may seek judicial review of
the revocation pursuant to section 15.32.
Section 15.31 is based on section 14.21. See Official Comment to
Section 14.21 for an explanation of the policies underlying section
15.31.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is somewhat similar to both Sections 33-31-1421 and
33-15-310 of the South Carolina Business Corporation Act. The second
part of subsection (c) is very similar to Section 33-31-1430(b) and is not
a Model Act provision. See the South Carolina Reporters' Comments to
sections 33-31-1421 and 33-31-1430.
Section 33-31-1532. Appeal from revocation.
(a) A foreign corporation may appeal the Secretary of State's
revocation of its certificate of authority to the Richland County Court
of Common Pleas within thirty days after the service of the certificate
of revocation was received. The foreign corporation appeals by
petitioning the court to set aside the revocation and attaching to the
petition copies of its certificate of authority and the Secretary of State's
certificate of revocation.
(b) The court may summarily order the Secretary of State to
reinstate the certificate of authority or may take any other action the
court considers appropriate.
(c) The court's final decision may be appealed as in other civil
proceedings.
OFFICIAL COMMENT
Section 15.32 authorizes a foreign corporation to appeal from the
secretary of state's revocation of its certificate of authority. States
adopting this section should indicate the court in which the appeal
should be filed. Normally this should be a court in the county of the
corporation's principal office or a court in the state capitol. States
adopting this section should also specify the party who has the burden
of proof and the standard for judicial review. See Official Comment to
Section 1.26.
SOUTH CAROLINA REPORTERS' COMMENTS
This section is similar to the formerly applicable statute, Section
33-15-320 of the South Carolina Business Corporation Act.
Article 16
Records and Reports
Subarticle A
Records
Section 33-31-1601. Corporate records.
(a) A corporation shall keep as permanent records minutes of all
meetings of its members and board of directors, a record of all actions
taken by the members or directors without a meeting, and a record of all
actions taken by committees of the board of directors as authorized by
Section 33-31-825(d).
(b) A corporation shall maintain appropriate accounting records.
(c) A corporation or its agent shall maintain a record of its members
in a form that permits preparation of a list of the name and address of all
members, in alphabetical order by class, showing the number of votes
each member is entitled to cast.
(d) A corporation shall maintain its records in written form or in
another form capable of conversion into written form within a
reasonable time.
(e) A corporation shall keep a copy of the following records at its
principal office:
(1) its articles or restated articles of incorporation and all
amendments to them currently in effect;
(2) its bylaws or restated bylaws and all amendments to them
currently in effect;
(3) resolutions adopted by its board of directors relating to the
characteristics, qualifications, rights, limitations, and obligations of
members or any class or category of members;
(4) the minutes of all meetings of members and records of all
actions approved by the members for the past three years;
(5) all written communications to members generally within the
past three years, including the financial statements furnished for the past
three years under Section 33-31-1620;
(6) a list of the names and business or home addresses of its
current directors and officers; and
(7) its most recent report of each type required to be filed by it
with the Secretary of State under this chapter.
OFFICIAL COMMENT
Section 16.01 requires corporations to keep specified records. The
remainder of the chapter deals with members' rights to inspect, copy and
receive copies of these records and reports.
1. Permanent Records
Section 16.01(a) requires a corporation to keep permanent records of:
(i) minutes of all meetings of its members and a record of all actions
taken by its members by written ballot and written consent without a
meeting (see sections 7.04 and 7.08); and (ii) minutes of all meetings of
its directors, all actions taken by directors without a meeting, and all
actions taken by committees of the board in place of the board (see
section 8.25).
A corporation is required to keep permanent records of board
committee actions only when: (i) the committee takes action in place of
the board, and (ii) the committee is appointed pursuant to section 8.25.
If the committee is appointed pursuant to section 8.25 but does not take
action in place of the board, section 16.01(a) does not require a record
of its activities. If the action taken is only advisory, section 16.01(a)
does not require a record of the deliberations or advice.
Section 16.01(a) does not require a corporation to keep permanent
records of non-board committee actions.
The underlying rationale of section 16.01(a) is that there should be a
permanent record of actions taken by the members, the board and
committees of the board acting in place of the board. The section does
not require that the minutes or record of an action include a discussion
of or reasons for an action. The amount of detail is left to the discretion
of each nonprofit organization. The minutes or records may merely
recite that after consideration a certain action was taken or they may go
into great detail as to the background, rationale, and reasons for the
particular action.
2. Accounting Records
Section 16.01(b) requires a corporation to maintain "appropriate
accounting records." The required records are the current
accounting records of the corporation. Section 16.01(b) does not require
that these records be kept permanent or address the question of how long
accounting records should be kept. For tax, regulatory and
record-keeping reasons each nonprofit corporation should determine
how long it should keep its accounting records.
The question of what accounting records are
"appropriate" depends on the nature, size and other
characteristics of the corporation. Numerous nonprofit corporations
have a relatively small amount of money and operate with volunteer
staffs. In such cases, "appropriate accounting records" may
be composed of checkbooks, canceled checks and receipts. In the case
of entities with significant funds, more detailed accounting records are
appropriate.
"Appropriate" records should allow the financial
statements to be prepared in a fashion that fairly presents the financial
condition and results of operations of the corporation. There is no
requirement that accounting records be kept in accordance with
generally accepted accounting principles. Many nonprofit corporations
operate on a cash rather than an accrual basis. As accounting for
nonprofit organizations is presently in a state of transition, no particular
approach is required by the Model Act.
3. Membership Lists
Section 16.01(c) requires a corporation to maintain a record of its
current members in a form that allows preparation of an alphabetical list
of members, their addresses, by class, and an indication of the number
of votes each member is entitled to cast. The records themselves do not
have to be kept in this form. Sections 16.02 through 16.05 deal with the
circumstances under which membership lists are available for inspection
and copying.
4. Form of Records
Section 16.01(d) requires that corporate records be maintained in
written form or another form capable of conversion into a written form
within a reasonable time. This allows nonprofit organizations to keep
records on microfilm or microfiche, in computer memory or in any other
appropriate manner. The records must, however, be kept in a form that
allows the corporation to comply with members' rights to obtain and
inspect the records.
5. Records Required at Principal Office
Section 16.01(e) requires that specified corporate records be kept at
the principal office of the corporation. For domestic corporations the
principal office of the corporation is defined in section 1.40(26) as an
office in the state designated in the annual report filed pursuant to
section 16.22. Section 16.22 requires a corporation to designate
annually the address of its principal office in the state. In some
instances, particularly for small nonprofit corporations, the home of an
officer or director may be the principal office of the corporation.
SOUTH CAROLINA REPORTERS' COMMENTS
This section makes two changes from the previously applicable
statute, Section 33-16-101 of the South Carolina Business Corporation
Act: The requirement under subsection (d)(4) that records of members'
actions be maintained has been lowered from ten to three years, and the
requirement that tax returns be maintained has been deleted. In addition,
under prior law, nonprofit corporations were required to make an annual
report to the Department of Revenue and Taxation, and this report was
required to be maintained. Nonprofit corporations are no longer
required to make such reports. In certain circumstances, reports must be
made to the Secretary of State, and the most recent of each of such
reports must be maintained under subsection (e)(7).
Section 33-31-1602. Inspection of records by members.
(a) Subject to subsection (e) and Section 33-31-1603(c), a member
is entitled to inspect and copy, at a reasonable time and location
specified by the corporation, any of the records of the corporation
described in Section 33-31-1601(e) if the member gives the corporation
written notice or a written demand at least five business days before the
date on which the member wishes to inspect and copy.
(b) Subject to subsection (e), a member is entitled to inspect and
copy, at a reasonable time and reasonable location specified by the
corporation, any of the following records of the corporation if the
member meets the requirements of subsection (c) and gives the
corporation written notice at least five business days before the date on
which the member wishes to inspect and copy:
(1) excerpts from any records required to be maintained under
Section 33-31-1601(a), to the extent not subject to inspection under
Section 33-31-1602(a);
(2) accounting records of the corporation; and
(3) subject to Section 33-31-1605, the membership list.
(c) A member may inspect and copy the records identified in
subsection (b) only if:
(1) the member's demand is made in good faith and for a proper
purpose;
(2) the member describes with reasonable particularity the
purpose and the records the member desires to inspect; and
(3) the records are directly connected with this purpose.
(d) This section does not affect:
(1) the right of a member to inspect records under Section
33-31-720 or, if the member is in litigation with the corporation, to the
same extent as any other litigant; or
(2) the power of a court, independently of this chapter, to compel
the production of corporate records for examination.
(e) The articles or bylaws of a religious corporation may limit or
abolish the right of a member under this section to inspect and copy any
corporate record.
OFFICIAL COMMENT
1. Automatic Access to Certain Records
Section 16.02(a) gives each member the right to inspect and copy at
a reasonable time and place the records described in section 16.01(e).
This right is conditioned only upon the member giving the corporation
written notice of the demand at least five business days before the date
on which the member wishes to inspect and copy the records and paying
any reasonable charge the corporation may impose pursuant to section
16.03(c). The member does not have to show that the demand is made
in good faith for a proper purpose. Nor does the member have the show
the purpose for the request or that the records are directly connected
with the member's purpose.
2. Limited Access to Certain Records
Section 16.02(b) allows members to copy and inspect specified
records, but imposes more conditions that section 16.02(a). Members
have the right to inspect the following types of records:
(1) Excerpts of any meetings of the board, records of any action of
a committee of the board as authorized by section 8.25 while acting in
place of the board, minutes of any meeting of members and records of
actions taken by members or directors without a meeting to the extent
not subject to inspection under section 16.02(a).
(2) The accounting records of the corporation. See Official
Comment to Section 16.01 for a discussion of what accounting records
the corporation must keep.
(3) The membership list. See section 16.05 for limitations on use of
the membership list. Also see section 7.20 for the right members have
to inspect membership lists beginning two business days after notice of
the membership meeting is given and continuing through the meeting.
A demand to copy and inspect records under section 16.01(b) must be
made in good faith for a proper purpose. See section 16.02(c). The
proper purpose must reasonably relate to the member's interest as a
member, which may be boarder than a shareholder's interest in a
business corporation. In addition, the member must describe with
reasonable particularity the purpose and the records the member desires
to inspect. The object of this requirement is to inform the corporation
in general terms of the object of the member, not to limit the purpose of
the inspection rights. Thus, for example, a request to contact fellow
members concerning the corporation or a request to examine records to
determine whether improper transactions have occurred or a charitable
trust breached states a proper purpose.
3. Religious Corporations
The articles or bylaws of religious corporations may limit or abolish
the rights of inspection set forth in section 16.02. If no limit is placed
on these rights, members of religious corporations have the same
inspection rights under section 16.02 as members of other nonprofit
corporations. Even if the articles or bylaws limit the rights set forth in
section 16.02, a member may still have other inspection rights. See
section 16.02(d).
4. Additional Rights of Inspection
The rights set forth in section 16.02 may not be abolished or limited
by a public benefit or mutual benefit corporation. Moreover the rights
set forth in section 16.02 are not exclusive. Section 16.02(d)
"provides that the right of inspection granted by section 16.02 is
an independent right of inspection that is not a substitute for or in
derogation of rights of inspection that may exist (1) under section 7.20,
to inspect the [membership] list following the establishment of a record
date for a meeting; (2) as part of a right of discovery that exists in
connection with litigation; and (3) as a `common law' right of inspection,
if any is found to exist by a court, to examine corporate records. Section
[16.02(d)] simply preserves whatever independent right of inspection
exists under these sources and does not create or recognize any rights,
either expressly or by implication." Official Comment to Model
Business Corporation Act Section 16.02.
SOUTH CAROLINA REPORTERS' COMMENTS
This section replaces previously applicable statutory law found at
Section 33-16-102 of the South Carolina Business Corporation Act.
Several changes are made:
(1) Subsection (e) permits the articles or bylaws of a religious
corporation to limit or abolish the right to inspect records under this
section. Subsections (a) and (b) are made subject to this provision.
(2) There is no provision for inspection of tax returns, as is found at
Section 33-16-102(a).
(3) Inspection under subsections (a) and (b) is to be made "at
a reasonable time and reasonable location specified by the
corporation", not during business hours at the corporation's
principal office, as provided by Section 33-16-102.
(4) The right under subsection (b)(3) to see the membership list is
made subject to Section 33-31-1605, which imposes limits on the
availability of the membership list.
Section 33-31-1603. Scope of inspection rights.
(a) A member's agent or attorney has the same inspection and
copying rights as the member the agent or attorney represents.
(b) The right to copy records under Section 33-31-1602 includes, if
reasonable, the right to receive copies made by photographic,
xerographic, or other means.
(c) The corporation may impose a reasonable charge, covering the
costs of labor and material, for copies of any documents provided to the
member. The charge may not exceed the estimated cost of production
or reproduction of the records.
(d) The corporation may comply with a member's demand to inspect
the record of members under Section 33-31-1602(b)(3) by providing the
member with a list of its members that was complied no earlier than the
date of the member's demand.
OFFICIAL COMMENT
Section 16.03 allows a member's agent and attorney to have the same
inspection and copying rights as the member. These rights include the
right, if reasonable, to receive copies made by photographic, xerographic
or other means. In some instances corporations may keep records in
bubble memories, computer disks or other nonprinted form. If
reasonable, section 16.03 requires corporations to make copies of these
records and charge the member for the cost of reproduction. The cost
of reproduction includes the cost of preparing the information for
reproduction and reproducing the information.
SOUTH CAROLINA REPORTERS' COMMENTS
No change was made by this section from the previously applicable
statute, Section 33-16-103 of the South Carolina Business Corporation
Act.
Section 33-31-1604. Court-ordered inspection.
(a) If a corporation does not allow a member who complies with
Section 33-31-1602(a) to inspect and copy any records required by that
subsection to be available for inspection, the circuit court in the county
where the corporation's principal office in this State, or, if none in this
State, its registered office, is located may summarily order inspection
and copying of the records demanded at the corporation's expense upon
application of the member.
(b) If a corporation does not within a reasonable time allow a
member to inspect and copy any other record, the member who complies
with Section 33-31-1602(b) and (c) may apply to the circuit court in the
county where the corporation's principal office in this State, or if none
in this State, its registered office, is located for an order to permit
inspection and copying of the records demanded. The court shall
dispose of
an application under this subsection on an expedited basis.
(c) If the court orders inspection and copying of the records
demanded, it also shall order the corporation to pay the member's costs,
including reasonable counsel fees, incurred to obtain the order unless the
corporation proves that it refused inspection in good faith because it had
a reasonable basis for doubt about the right of the member to inspect the
records demanded.
(d) If the court orders inspection and copying of the records
demanded, it may impose reasonable restrictions on the use or
distribution of the records by the demanding member.
OFFICIAL COMMENT
1. Summary Procedure for Refusal to Comply with Section
16.02(a)
Members have the right under section 16.02(a) to inspect the records
described in section 16.01(e) imply by showing that they are members
of the corporation. If the corporation refuses to allow inspection of the
records, the member or members may seek a summary order directing
the corporation to allow inspection and copying at the corporation's
expense. See section 16.02(e) for a list of the records that are subject to
this summary procedure.
2. Expedited Procedure for Refusal to Comply with Section
16.02(b)
Members have the right to inspect and copy certain records under
section 16.02(b) and, depending on state law, the common law.
Members seeking to enforce these rights are entitled to a hearing on
"an expedited basis." However, a member must comply
with the requirements of subsections 16.02(b) and (c) and, if applicable,
section 16.05 prior to obtaining access to the records. Consequently the
court procedure may take longer than the procedure to obtain records
under section 16.02(a).
The Model Act does not indicate who should pay for inspection and
copying of records if it is necessary to obtain a court order to enforce
section 16.02(b) or common law rights. This matter is left to the
discretion of the court.
3. Payment of Costs Including Reasonable Counsel Fees
If a court orders inspection and copying of records the corporation
must pay the member's costs "including reasonable counsel
fees" incurred in obtaining the order unless the corporation proves
that its refusal is in good faith because it had a reasonable basis for
doubt about the member's right to inspect the records. "This
normally will involve reasonable doubt whether the [member] had the
necessary good faith and proper purpose or whether the records
demanded are directly connected to the [member's] purpose. The phrase
"in good faith because it had a reasonable basis for doubt'
establishes a partially objective standard, in that the corporation must be
able to point to some objective basis for its doubt that the [member] was
acting in good faith or had a purpose that was proper. For example, a
corporation may point to earlier conduct of the [member] involving
improper use of information obtained from the corporation in the past as
indicating that reasonable doubt existed as to his present purpose. A
corporation may not avoid the imposition of costs under this section
merely by showing it had no information one way or the other about the
issues in controversy." Official Comment to Model Business
Corporation Act Section 16.04. See section 16.05 for limitations on the
uses to which membership lists can be put.
SOUTH CAROLINA REPORTERS' COMMENTS
No change is made by this section from the previously applicable
statute, Section 33-16-104 of the South Carolina Business Corporation
Act. Under this section, inspection and copying of lists of contributors
is not a matter of membership right.
Section 33-31-1605. Limitations on use of membership list.
Without consent of the board, a membership list or any part of a
membership list may not be obtained or used by a person for any
purpose unrelated to a member's interest as a member. Without limiting
the generality of the foregoing, without the consent of the board a
membership list or any part of the list may not be:
(1) used to solicit money or property unless the money or property
will be used solely to solicit the votes of the members in an election to
be held by the corporation;
(2) used for any commercial purpose; or
(3) sold to or purchased by any person.
OFFICIAL COMMENT
A nonprofit corporation's membership list is a valuable asset. For
public benefit and religious corporations, the membership list may
represent a list of contributors. For mutual benefit corporations the list
may represent a list of members of a trade association, social club,
political organization or other significant group. Section 16.05 sets forth
the basic premise that a membership list may not be obtained or use by
any person for any purpose unrelated to a member's interest as a
member. It then provides that a membership list may not be used in any
of the following three purposes without the board's consent:
(1) The solicitation of money or property unless such money or
property will be used solely to solicit the votes of members in an
election held by the corporation. A membership list therefore cannot be
used by members who in good faith believe the organization has strayed
from its purposes and want to solicit the members to contribute to a
competitive organization that is carrying out the true purposes of the
corporation whose membership list is sought. Nor can members use a
membership list to solicit contributions for a non-competitive
organization, even if the non-competitive organization has laudable
purposes.
(2) Used for any commercial purpose. Commercial organizations
frequently desire to use membership lists of nonprofit organizations to
contact members. Such use is only allowed if approved by the board of
directors of the nonprofit corporation.
(3) Sold to or purchased by any person. Members of a nonprofit
organization do not have the right to sell a membership list to any
person. Nor may a person seeking a membership list purchase it except
from the corporation with the approval of the board of directors.
A corporation must have some factual basis for believing that the
members seeking the membership list will violate the provisions of
section 16.05 to deny inspection rights pursuant to section 16.05. If a
corporation has a legitimate doubt as to the purposes for which a
member seeks a membership list, the matter can be heard by a court
pursuant to section 16.04. The court should closely scrutinize the
transaction to determine whether a member has a legitimate purpose or
whether the corporation was simply using section 16.05 as a ruse to
prevent and frustrate a member's rights. See Official Comment to
Section 16.04 for the circumstances in which a court may order the
corporation to pay attorney fees and costs.
SOUTH CAROLINA REPORTERS' COMMENTS
This section had no counterpart under prior statutory law.
Subarticle B
Reports
Section 33-31-1620. Financial statements for members.
(a) Except as provided in the articles or bylaws of a religious
corporation, a corporation upon written demand from a member or the
Attorney General shall furnish the demanding party its latest annual
financial statements, which may be consolidated or combined statements
of the corporation and one or more of its subsidiaries or affiliates, as
appropriate, that include a balance sheet as of the end of the fiscal year
and statement of operations for that year. If financial statements are
prepared for the corporation on the basis of generally accepted
accounting principles, the annual financial statements also must be
prepared on that basis.
(b) If annual financial statements are reported upon by a public
accountant, the accountant's report must accompany them. If not, the
statements must be accompanied by the statement of the president or the
person responsible for the corporation's financial accounting records:
(1) stating the president's or other person's reasonable belief as to
whether the statements were prepared on the basis of generally accepted
accounting principles and, if not, describing the basis of preparation; and
(2) describing any respects in which the statements were not
prepared on a basis of accounting consistent with the statements
prepared for the preceding year.
OFFICIAL COMMENT
Nonprofit organizations are not required to mail annual financial
statements to any member unless the member makes a written demand
for the latest financial statements. The cost of an automatic mailing to
all members would be prohibitive for some nonprofit organizations. In
many instances, the only financial report that members receive is an oral
report at an annual meeting. While the bylaws of some organizations
require that annual financial statements be delivered to all members,
section 16.20 only requires that the latest annual financial statement be
furnished to a member upon written demand of that member. In
addition, members have the right to receive a report on the financial
condition of the corporation at the annual meeting. Section 7.01(c).
Because there is so much diversity in nonprofit organizations and
because accounting treatment of nonprofit corporations is in a transition
state, section 16.20 does not require that financial statements be
prepared on the basis of generally accepted accounting principles.
However, if the corporation prepares financial statements on the basis
of generally accepted accounting principles, the annual financial
statements must also be prepared on that basis.
There is no requirement that the annual financial statements be
audited. Where, however, they are audited, the accountant's report must
accompany the statement.
"Section 16.20 refers to a `public accountant.' The same
terminology is used in section 8.30 (standards of conduct for directors)
of the Model Act. In various states, different terms are employed to
identify those persons who are permitted under the state licensing
requirements to act as professional accountants. Phrases like
`independent public accountant,' `certified public accountant.' `public
accountant,' and others may be used. In adopting the term `public
accountant,' the Model Act uses the words in a general sense to refer to
any class or classes of persons who, under the applicable requirements
of a particular jurisdiction, are professionally entitled to practice
accountancy." Official Comment to Model Business Corporation
Act Section 16.20.
If the financial statements are not reported upon by an accountant,
they must be accompanied by a report of the president or other person
in charge of the corporation's financial accounting records. The object
of the report is to describe the basis upon which the financial statements
were prepared so the members will have a basis for evaluating them.
The report must:
(1) indicate the reporting person's reasonable belief as to whether
the statements were prepared on the basis of generally accepted
accounting principles. If not, the report should describe the basis on
which the statements were prepared. The financial statements may, for
example, be prepared on a cash basis. If so, the report should so
indicate.
In some circumstances, the financial records of the organization may
be in a state of disarray. If so, this fact should be disclosed. The report
should indicate how the statements were prepared. If appropriate, the
report may have to state that the financial statements do not fairly reflect
the condition and operations of the corporation.
(2) describe any respects in which the financial statements were
not prepared on a basis consistent with the statements prepared for the
preceding year. Members are entitled to know whether the financial
statements were prepared on a consistent basis so they can determine
whether a year-to-year comparison of financial reports will yield
comparable figures.
Business and nonprofit corporations control subsidiaries through
stock ownership. Nonprofit corporations control other nonprofit
corporations by holding all or a majority of their memberships or
through article or bylaw provisions. The term "affiliates" in
section 16.20 refers to corporations controlled by nonprofit corporations
regardless of whether control is exercised through memberships, or
articles or bylaw provisions.
SOUTH CAROLINA REPORTERS' COMMENTS
This section changes previously applicable statutory law, found at
Section 33-16-200 of the South Carolina Business Corporation Act, in
several ways:
1. It contains an exemption for religious corporations.
2. It does not require that financials be mailed, but only that they be
provided on demand.
3. A provision is added empowering the Attorney General to demand
nonprofits' financial statements.
4. Under subsection (b), the president is not solely responsible for
certifying the basis of preparation of financial statements.
Section 33-31-1621. Report of indemnification to members.
If a corporation indemnifies or advances expenses to a director under
Section 33-31-851, 33-31-852, 33-31-853, or 33-31-854 in connection
with a proceeding by or in the right of the corporation, the corporation
shall report the indemnification or advance in writing to the members
with or before the notice of the next meeting of members.
OFFICIAL COMMENT
Section 16.21 requires that members be notified of indemnification of
directors under sections 8.51, 8.52 and 8.54 and advances for expenses
under section 8.53. The report must be made only if the payment or
advances were made in a derivative action. The report must be made
with or before the notice of the next members' meeting.
SOUTH CAROLINA REPORTERS' COMMENTS
This section makes no change from the previously applicable statute,
Section 33-16-210(a) of the South Carolina Business Corporation Act.
Article 17
Miscellaneous
Section 33-31-1701. Application to Existing Domestic
Corporations
(a) This chapter applies to all domestic corporations which on this
chapter's effective date were governed by Title 33, Chapter 31 of the
1976 Code.
(b) This chapter applies to each domestic corporation in existence
on its effective date, organized other than under Title 33, Chapter 31,
Code of Laws of South Carolina, 1976, upon such corporation's filing
with the Secretary of State an irrevocable election to be governed by the
provisions of this chapter. The irrevocable election shall contain all the
information required by, and may include any other matter permitted by,
section 33-31-202 (except that information required by subsection (a)(4),
relating to the incorporators, is not required). The irrevocable election
shall be signed by the presiding officer of its board (or other governing
body), its president, by another of its officers, or any other person,
regardless of designation, whose functions are those of, or equivalent to
such officer.
(c) This chapter applies to all domestic corporations resulting from
the merger of any corporation with a corporation organized under this
chapter, when the latter is designated as the surviving corporation.
OFFICIAL COMMENT
The underlying concept of the Model Act is that it applies to all or
substantially all nonprofit corporations organized in a state. Many states
have a general nonprofit corporation statute and special laws for
particular types or categories of nonprofit corporations. The Model Act
provides an opportunity to adopt a unified, consistent, and
understandable law applicable to all or substantially all nonprofit
organizations in a state. States adopting the Model Act should specify
the statutes it replaces.
The concept of a uniform law is enhanced by the mandate of section
17.01 that the Model Act is applicable on its effective date to all
corporations subject to its provisions. See section 17.06 [section
33-31-1705] for provisions relating to the effective date.
Section 17.01 applies to corporations formed under statutes that have
reserved the right to amend or repeal their provisions. The Model Act
may therefore be made applicable to all corporations to which it can be
constitutionally applied. As most statutes adopted in this century have
"reservation of power" clause the act will have general
applicability to most nonprofit corporations.
Some states may wish to adopt optional subsection (b) which allows
a few nonprofit corporations to decide whether or not to be governed by
the provisions of the Model Act. Usually these corporations would be
corporations formed under old statutes or charters that did not reserve
the power of amendment, or religious corporations formed under some
special statute. These corporations might prefer the Model Act and
should be given the opportunity to come under its provisions in whole
or in part.
SOUTH CAROLINA REPORTERS' COMMENTS
Subsection (a). Pursuant to section 33-31-1701(a), amended Title
33, Chapter 31 applies to all South Carolina corporations governed by
former Title 33, Chapter 31 ("Nonprofit Corporations
Generally"). The power to alter the statutory governance of
existing corporations was reserved by the General Assembly by Code
Section 33-1-102, which, by operation of Code Section 33-20-103
applies to nonprofit corporations organized under the provisions of Title
33, Chapter 31.
Subsection (b). Amended Title 33, Chapter 31 applies only to
corporations chartered under former Title 33, Chapter 31 and its
predecessors and not, therefore, to entities organized under any other
chapter including, for example, Title 33, Chapters 35, 37, 39, 45, 47, 49,
and 53 (expect that section 33-31-834 specifically applies to electrical
coops organized under Chapter 49). Subsection (b) entitles such entities
to elect to be governed by Title 33, Chapter 31 by an irrevocable
election filed with the Secretary of State. This subsection also permits
corporations which were specifically legislatively chartered and those
which may have been chartered by cities or other local governmental
units to elect to be governed by this chapter. Such an election by a
legislatively chartered corporation would constitute, in effect, the
surrender by the latter of its legislative charter powers. Enactment of
section 33-31-1701 by the General Assembly constitutes that body's
consent to the surrender of such powers and adoption by the corporation
of the powers, rights, governance provisions, and obligations provided
in this chapter.
Subsection (c). Subsection (c) is a non-Model Act provision,
intended to make clear that any corporation may merge with a
corporation governed by this chapter pursuant to any applicable merger
statute and that the corporation organized under this chapter will be the
surviving corporation, if so designated in the terms of merger. Such a
merger between a corporation governed by this chapter and a
corporation possessing a pre-1900 legislative charter would constitute,
in effect, the surrender by the latter of its legislative charter powers.
Enactment of section 33-31-1701 by the General Assembly constitutes
that body's consent to the surrender of such powers.
Section 33-31-1702. Application to Qualified Foreign Corporations
A foreign corporation authorized to transact business in this State on
the effective date of this chapter is subject to this chapter but is not
required to obtain a new certificate of authority to transact business
under this chapter.
OFFICIAL COMMENT
Foreign corporations are subject to the Model Act as of its effective
date. See section 17.06 [section 33-31-1705]. However, as a result of
section 17.02, it is not necessary for foreign corporations to obtain a new
certificate of authority to transact business.
Section 33-31-1703. Saving Provisions
(a) Except as provided in subsection (b), the repeal of a statute by
this chapter does not affect:
(1) the operation of the statute or any action taken under it before
its repeal;
(2) any ratification, right, remedy, privilege, obligation, or
liability acquired, accrued, or incurred under the statute before its repeal;
(3) any violation of the statute or any penalty, forfeiture, or
punishment incurred because of the violation, before its repeal;
(4) any proceeding, reorganization, or dissolution commenced
under the statute before its repeal, and the proceeding, reorganization,
or dissolution may be completed in accordance with the statute as if it
had not been repealed; or
(5) any meeting of members or directors or action by written
consent noticed or any action taken before its repeal as a result of a
meeting of members or directors or action by written consent.
(b) If a penalty or punishment imposed for violation of a statute
repealed by this chapter is reduced by this chapter, the penalty or
punishment if not already imposed shall be imposed in accordance with
this chapter.
OFFICIAL COMMENT
Section 17.03 is derived from section 25 of the Uniform Statutory
Construction Act adopted by the National Conference of Commissioners
on Uniform State Laws in 1965.
SOUTH CAROLINA REPORTERS' COMMENT
Section 33-31-1703 is substantially identical to section 33-20-105 of
the South Carolina Business Corporation Act.
Section 33-31-1704. Severability
If any provision of this chapter or its application to any person or
circumstance is held invalid by a court of competent jurisdiction, the
invalidity does not affect other provisions or applications of this chapter
that can be given effect without the invalid provision or application, and
to this end the provisions of this chapter are severable.
OFFICIAL COMMENT
Section 17.04 is a standard severability provision.
Section 33-31-1705. Effective Date
As used in this chapter, the term `this chapter's effective date'or any
similar variation means the effective date of the act which revised the
provisions of Chapter 31 of Title 33 to enact the South Carolina
Nonprofit Corporation Act of 1994.
Section 33-31-1706. Public Benefit, Mutual Benefit and
Religious Corporations
(a) On the effective date of this chapter, each domestic corporation
that is or becomes subject to this chapter shall be designated as a public
benefit, mutual benefit, or religious corporation as follows:
(1) any corporation designated by statute as a public benefit
corporation, a mutual benefit corporation or a religious corporation is
the type of corporation designated by statute;
(2) any corporation that does not come within subsection (1) but
is organized primarily or exclusively for religious purposes is a religious
corporation;
(3) any corporation that does not come within subsection (1) or
(2) but that is recognized as exempt under section 501(c)(3) of the
Internal Revenue Code, or any successor provision, is a public benefit
corporation;
(4) any corporation that does not come within subsection (1), (2)
or (3), but that is organized for a public or charitable purpose and that
upon dissolution must distribute its assets to a public benefit
corporation, the United States, a state or a person that is recognized as
exempt under section 501(c)(3) of the Internal Revenue Code or any
successor provision, is a public benefit corporation; and
(5) any corporation that does not come within subsection (1), (2),
(3), or (4) is a mutual benefit corporation.
(b) In any filing with the Secretary of State, an existing corporation
may elect designation as a public benefit, mutual benefit, or religious
corporation.
OFFICIAL COMMENT
Section 17.07 [section 33-31-1706] sets forth the rules for
determining whether nonprofit corporations existing on the effective
date of the Model Act are public benefit, mutual benefit, or religious
corporations.
Subsection (1) provides that corporations may be designated by a
statute other than the Model Act as public benefit, mutual benefit, or
religious corporations. Health maintenance organizations or other
corporations may feel that the type of corporation they would be
required to be under subsections (2) through (5) is inappropriate. If so,
they can be designated as a public benefit, mutual benefit, or religious
corporation under a law other than the Model Act.
A corporation not covered by subsection (1) that is organized
primarily or exclusively for religious purposes is a religious corporation.
Under subsection (3) a corporation not falling within subsection (1)
or (2) that is recognized as exempt under section 501(c)(3) of the
Internal Revenue Code, or any successor section, is a public benefit
corporation. A corporation obtains the tax benefits of section 501(c)(3)
by holding itself out as operating or a public or charitable purpose and
not for the private benefit of its officers, directors, members, or
controlling persons. Its entire reason for being is to operate in the public
interest. Consequently the Model Act requires it to be a public benefit
corporation. See Introduction of Model Nonprofit Corporation Act for
a discussion of public benefit corporations.
Subsection (4) provides that any corporation not falling under
subsection (1), (2), or (3) is a public benefit corporation if: (i) it is
organized for a public or charitable purpose; and (ii) upon dissolution its
assets must be distributed to the United States, a public benefit
corporation, a state, or a section 501(c)(3) organization. Because
corporations described by subsection (4) have the same objectives as
public benefit corporations and their members have no economic interest
in their assets, they are in effect and the Model Act treats them as public
benefit corporations. The Sierra Club or some other organization
holding themselves out as operating for a public purpose, but that have
lost or never obtained section 501(c)(3) tax status because of political
activities would fall within the provisions of subsection (4) if their assets
must be distributed to a public benefit corporation, the United States, a
state, or a section 501(c)(3) organization.
A corporation that exists on the effective date of the Model Act may
consider itself to be a public benefit corporation, but not have the
dissolution clause described in subsection (4). If it wishes to become a
public benefit corporation, it should amend its articles to insert an
appropriate dissolution clause.
Subsection (5) is a catch-all provision. Any corporation not otherwise
covered by subsections (1) through (4) is treated as a mutual benefit
corporation by subsection (5). The members of many of these
corporations have an economic interest in the corporate assets upon
dissolution. Country clubs and social organizations typically fall within
this category. Some corporations may be formed for the private benefit
of their members, but must distribute their assets on dissolution to a
section 501(c)(3) organization. They would be treated as mutual benefit
corporations by subsection (5).
SOUTH CAROLINA REPORTERS' COMMENTS
Section 33-31-1706(a) is a default provision, applying to an existing
nonprofit corporation unless and until it makes an election under
subsection (b). Subsection (b), a non-Model Act provision, permits
existing corporations to choose to be categorized as religious, mutual
benefit or public benefit corporations (as may corporations which
organize under this chapter after effectiveness).
If an existing corporation wishes to make this election it may do so on
the Notification by Existing Corporation form described in section
33-31-1707 or by an appropriate statement on any other filing with the
Secretary of State. In respect of the right of corporations to choose their
category under this chapter, the Reporter for the Model Act observed as
follows:
Incorporators may choose the category of
nonprofit corporation they believe is most
appropriate for the corporation's intended activities.
. . .
When an incorporator has chosen to form a public
benefit, mutual benefit, or religious corporation, the
Secretary of State may not question the proposed
corporation's intended activities, purposes, or
operations if the [Model Act's] filing requirements
are met. The Secretary of State cannot challenge the
corporation on the ground that it will not benefit the
public or its member or that its purposes are not
really religious. [Footnote: In appropriate cases, a
corporation may be challenged in a quo warranto
proceeding.]
The [Model Act] does not deal with the question
of whether the activities of a public benefit
corporation, or any other nonprofit corporation, can
be so offensive to public policy that its existence can
be challenged by the state in a quo warranto or other
proceeding. The matter is left to judicial
development on a state-by-state basis.
M. Hone, Revised Model Nonprofit Corporation Act xxiii (Prentice
Hall 1987). The Reporter goes on to observe that practical
considerations will determine category selection to a large extent. As an
example, he points out that a corporation qualifying under IRC section
501(c)(3) could not abide by the Model Act's rules governing mutual
benefit corporations.
Section 33-31-1707. Existing domestic and foreign corporations
required to file "Notification by Existing Corporation"
form.
(a) All domestic corporations in existence on the effective date of
this act which are governed by this chapter, and all foreign nonprofit
corporations authorized to transact business in this State on the effective
date of this Act which do not then have on file with the Secretary of
State either a current registered office or a current registered agent at
that office shall file on or before January 2, 1996, a "Notification
by Existing Corporation" form. Such form shall designate:
(1) the name of the corporation;
(2) the street address of the registered office in this State with zip
code; and,
(3) the name of the registered agent whose office address shall be
identical with the registered office.
(b) If any domestic or foreign corporation fails to make the filing
required by subsection (a) on or before January 2, 1996, it is considered
as of January 2, 1996, to have designated the Secretary of State as its
agent upon whom process against it may be served in any action or
proceeding arising in any court in this State. Service of process is made
by delivering to and leaving with the Secretary of State, or with any
person designated by him to receive such service, duplicate copies of the
process, notice, or demand. The Secretary of State immediately shall
cause copies to be forwarded by certified mail addressed to the
corporation at (1) the headquarters or principal office of the domestic
corporation designated upon its declaration and petition for
incorporation or application for qualification of a foreign corporation,
(2) the last address of the domestic or foreign corporation known to the
plaintiff, and (3) with respect to a foreign corporation, any registered
office in the jurisdiction of incorporation (which address shall be as
provided to the Secretary of State by the plaintiff). All costs of mailing
shall be paid by the plaintiff and the Secretary of State may charge a fee
of twenty dollars for the service.
(c) All domestic corporations in existence on the effective date of
this act which are governed by this chapter, and all foreign nonprofit
corporations authorized to transact business in this State on the effective
date of this Act whose headquarters or principal office as listed upon its
declaration and petition for incorporation as a domestic nonprofit
corporation or application for certificate of authority to transact business
as a foreign nonprofit corporation which is no longer the location of the
corporation's principal office shall file (1) a Notice of Change of
Principal Office as is required by section 33-31-505 or section
33-31-1515, or (2) may designate upon the notice filed pursuant to
subsection (a) the current street address along with the zip code of the
corporation's principal office and the address of the former principal
office (which filing shall serve as a Notification of Change of Principal
Office). Any such domestic corporation may also elect a designation as
a public benefit, mutual benefit, or religious corporation as is provided
in section 33-31-1706(b)."
SOUTH CAROLINA REPORTERS' COMMENTS
This is not a Model Act section. There is no comparable provision in
the Business Corporation Act. Most nonprofit corporations have no
statutory agent. This section provides that if the Secretary of State has
not been notified of the name of the statutory agent by January 2, 1996,
that the Secretary of State is designated as the corporation's agent for
service of process. It is also likely that the principal office of existing
nonprofit corporations as listed on the corporation's declaration and
petition for incorporation is no longer current. Each nonprofit
corporation is required to maintain a current address with the Secretary
of State, and therefore, it may be convenient for existing corporations to
make a combined filing, both identifying a statutory agent and also the
entity's current principal office. If the corporation fails to keep its
principal office current it is subject to being administratively dissolved.
Likewise the Secretary of State is authorized to dissolve a corporation
which fails to keep a current filing of the name and address of its
statutory agent. The Secretary of State is given discretion as to whether
to pursue dissolution actions against nonprofit corporations which have
failed to make these technical filings. It is assumed that prior to January
2, 1996, that the Secretary of State will exercise this discretion by not
pursuing dissolution actions against nonprofit corporations solely on the
basis that they have not provided the name of a statutory agent or
brought their principal place of business address up to date.
The failure of any corporation to make a filing required by this
section does not in and of itself impair its good standing or qualification
to do business, nor in any way impair the validity of any contract or act
taken by such corporation. However, the failure may provide grounds
for the Secretary of State to commence a dissolution action against the
corporation as provided in other sections of this chapter.
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.
Section 33-31-1708. Provisions not applicable.
Other sections of this chapter notwithstanding, cooperative nonprofit
membership corporations organized under or transacting business
pursuant to Chapter 49 of this title and telephone cooperatives organized
under or transacting business pursuant to Chapter 45 or any other
provision of law in this title are not subject to the provisions of this
chapter and no provision of this chapter shall repeal or amend any
provision of Chapter 49 of this title, or any provision of Chapter 45 of
this title or any other provision of law in this title relating to telephone
cooperatives.
SECTION 2. Section 15-9-210 of the 1976 Code, as last amended by
Act 181 of 1993, is further amended to read:
"Section 15-9-210. (a) A domestic business or
nonprofit corporation's registered agent is the agent of the
corporation for service of any process, notice, or demand required or
permitted by law to be served, and the service is binding upon the
corporation.
(b) The business or nonprofit corporation may be served
under Rule 4(d)(8) of the South Carolina Rules of Civil Procedure by
registered or certified mail, return receipt requested, addressed to the
office of the registered agent, or the office of the secretary of the
corporation at its principal office. Service is effective upon the date of
delivery as shown on the return receipt. Entry of default and default
judgments shall be subject to the conditions of Rule
4(d)(8);.
(c) If the business or nonprofit corporation has no
registered agent, or the agent cannot be served with reasonable diligence
by means authorized by rule or statute, other than under Section
15-9-710, and such appears by affidavit, the court or judge thereof, the
clerk of the court of common pleas, or the master, may grant an order
that the corporation may be served by registered or certified mail, return
receipt requested, addressed to the office of the secretary of the
corporation at its principal office. The summons shall state the date it
was mailed under this subsection, and the date service is effective.
Service is perfected five days after its deposit in the United States mail,
as evidenced by the postmark, or other evidence of the date the
summons and complaint was mailed pursuant to this paragraph, if
mailed postpaid and correctly addressed to the address of the company's
principal office which is listed on the last filed annual report of the
company business corporation or last filed notice of change
of principal office for a nonprofit corporation or, if none has been
filed, the address of the principal office specified in the initial annual
report of the business corporation filed with the South Carolina
Department of Revenue and Taxation and, in the Articles of
Incorporation (or initial annual report, if filed) for a nonprofit
corporation. Entry of judgment and judgment by default may be
taken as otherwise provided by Rule 55 of the Rules of Civil Procedure.
(d) This section does not prescribe the only means, or necessarily
the required means, of serving a domestic business or nonprofit
corporation."
SECTION 3. Section 15-9-240 of the 1976 Code, as last amended by
Act 42 of 1993, is further amended to read:
"Section 15-9-240. (a) The registered agent of a foreign
business or nonprofit corporation authorized to transact
business in this State is the corporation's agent for service of process,
notice, or demand required or permitted by law to be served on the
foreign corporation.
(b) A foreign business or nonprofit corporation may be
served under Rule 4(d)(8) of the South Carolina Rules of Civil
Procedure by registered or certified mail, return receipt requested,
addressed to the office of the registered agent, or office of the secretary
of the foreign corporation at its principal office shown in its application
for a certificate of authority or in its most recent annual report. Service
is effective upon the date of delivery as shown on the return receipt.
Entry of default and default judgments shall be subject to the conditions
of Rule 4(d)(8).
(c) If the foreign business or nonprofit corporation:
(1) has no registered agent or its registered agent cannot be served
with reasonable diligence by other means authorized by rule or statute,
other than under Section 15-9-710 service by publication;
(2) has withdrawn from transacting business in this State as
provided by law; or
(3) has had its certificate of authority revoked as provided by
law, and such appears by affidavit, the court or judge, the clerk of court
of common pleas, or the master may grant an order that the corporation
may be served by registered or certified mail, return receipt requested,
addressed to the office of the secretary of the corporation at its principal
office. The summons shall state the date it was mailed under this
subsection and that service is perfected five days after its deposit in the
United States mail.
(d) Service is perfected under subsection (c) five days after its
deposit in the United States mail, as evidenced by the postmark, or other
evidence of the date the summons and complaint was mailed pursuant
to this subsection, if mailed postpaid and correctly addressed to the
address of the company's principal office which is listed on the filed
annual report of the company a business corporation or listed
on the last filed notice of change of principal office for a nonprofit
corporation (or in its application for certificate of authority if no
annual report or notice of change of principal office has ever
been filed).
(e) This section does not prescribe the only means, or necessarily
the required means, of serving a foreign business or nonprofit
corporation."
SECTION 4. Section 15-9-245 of the 1976 Code, as last amended by
Act 444 of 1988, is further amended to read:
"Section 15-9-245. (a) Every foreign business or
nonprofit corporation which is not authorized to do business in this
State, by doing in this State, either itself or through an agent, any
business, including any business activity for which authority need not
be obtained as provided by Section 33-15-101, is considered to have
designated the Secretary of State as its agent upon whom process against
it may be served in any action or proceeding arising in any court in this
State out of or in connection with the doing of any business in this State.
(b) Service of the process is made by delivering to and leaving with
the Secretary of State, or with any person designated by him to receive
such service, duplicate copies of the process, notice, or demand. The
Secretary of State immediately shall cause one of the copies to be
forwarded by certified mail, addressed to the corporation either at its
registered office in the jurisdiction of its incorporation, its principal
place of business in the jurisdiction, or at the last address of the foreign
business or nonprofit corporation known to the plaintiff, in that
order.
(c) Proof of service must be by affidavit of compliance with this
section and filed, together with a copy of the process, with the clerk of
court in which the action or proceeding is pending. There must be filed
with the affidavit of compliance the return receipt signed by the foreign
business or nonprofit corporation or other official proof of
delivery or, if acceptance was refused, there must be filed the original
or a photostated or certified copy of the envelope with a notation by the
postal authorities that acceptance was refused. If acceptance was
refused, a copy of the notice and process, together with notice of the
mailing by certified mail and of refusal to accept must be sent promptly
to the foreign business or nonprofit corporation. If this section
is complied with, the refusal to accept delivery of the certified mail or
to sign the return receipt shall not affect the validity of the service, and
the foreign corporation refusing to accept the certified mail must be
charged with knowledge of the contents thereof.
(d) Service under this section may be made also by delivery of a
copy of the process to any foreign business or nonprofit
corporation outside the State. Proof of the delivery must be made by
affidavit of the person making delivery, and the affidavit must be filed
with the clerk of court in which the action or proceeding is pending.
(e) The Secretary of State shall charge a fee of ten dollars for the
service.
(f) This section does not prescribe the only means, or necessarily
the required means, of serving a foreign business or nonprofit
corporation not authorized to do business in this State."
SECTION 5. Section 15-9-430 of the 1976 Code, as last amended by
Act 444 of 1988, is further amended to read:
"Section 15-9-430. (a) Each director of a domestic
business corporation who is a nonresident of this State at the
time of his election or who becomes a nonresident during his term in
office, shall by his acceptance of election or by continuing in office as
director, be deemed to have appointed the Secretary of State as an agent
to receive service of process upon him in any action or proceeding
relating to actions of such corporation and arising while he held office
as director of such corporation.
(b) Service of such process shall be made by delivering to and
leaving with the Secretary of State, or with any person designated by
him to receive such service, duplicate copies of such process. The
Secretary of State shall thereupon immediately cause one of such copies
to be forwarded to the nonresident director by certified mail. Proof of
service shall be by affidavit of compliance with this section filed,
together with a copy of the process, with the clerk of court in which the
action or proceeding is pending.
(c) Service under this section may also be made by delivery of a
copy of the process to the nonresident director at his address outside the
State. Proof of such delivery shall be made by affidavit of the person
making delivery and the affidavit shall be filed with the clerk of court in
which the action or proceeding is pending.
(d) The resignation in good faith of any nonresident director
shall, effective as of the date of filing with the Secretary of State
a notice of his resignation, shall terminate the application to
him of the provisions of this section, except for any cause of action
already accrued.
(e) Every domestic business corporation which has any
director who is or becomes a nonresident of this State after the
corporation has filed its most recent annual report pursuant to Section
12-19-20 shall file with the Secretary of State the names and addresses
of its directors and shall file supplementary reports showing any change
of address or residence of any director. The reports must be filed within
ten days from the date of election, removal from this State, or change of
address of any director. The Secretary of State shall compile and
maintain a current list, indexed by corporation, of all nonresident
directors of domestic business corporations which are listed on
such interim filings. Delivery of copies of service as required in
subsections (b) and (c) to the nonresident director must be made by
delivering the copy to the most recent address on file with the company's
most current annual report or any more current interim report which has
been filed with the Secretary of State pursuant to this subsection.
(f) The Secretary of State shall charge a fee of ten dollars
($10) to accompany service thereunder."
SECTION 6. Section 33-11-101 of the 1976 Code is amended to read:
"Section 33-11-101. (a) Business corporations
Corporations may merge into,
(i) another business corporation or
(ii) a nonprofit corporation, to the extent permitted by Section
33-31-1101, if the board of directors of each corporation adopts and
its shareholders, of a business corporation, and members, of a
nonprofit corporation, (if required by Section
33-11-103) for business corporations and Section
33-31-1103 for nonprofit corporations, approve a plan of merger.
(b) The plan of merger must set forth the:
(1) name of each corporation planning to merge and the name of
the surviving corporation into which each other corporation plans to
merge;
(2) terms and conditions of the merger; and
(3) manner and basis of converting the shares of each
business corporation into shares, obligations, or other
securities, or membership interests of the surviving or any other
corporation or into cash or other property in whole or part.
(c) The plan of merger may set forth:
(1) amendments to the articles of incorporation of the surviving
corporation; and
(2) other provisions relating to the merger.
(d) For purposes of this Section 33-11-101, the term `corporation'
means both business and nonprofit corporations."
SECTION 7. The 1976 Code is amended by adding:
"Section 33-49-690. All directors, trustees, or members of the
governing bodies of electric cooperatives organized under this chapter
are immune from suit arising from the conduct of the affairs of these
electric cooperatives in the same manner and under the same conditions
as directors, trustees, and members of the governing bodies of
not-for-profit cooperatives, corporations, associations, and
organizations are immune under Section 33-31-834. 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 electric cooperatives."
SECTION 8. Section 33-20-103 of the 1976 Code is amended to read:
"Section 33-20-103. Except for corporations organized
under or transacting business pursuant to the provisions of Chapter 49
of this title, except for corporations organized under or transacting
business pursuant to Chapter 45 of this title or any other provision of
law in this title relating to telephone cooperatives, and except for those
nonprofit corporations which are governed exclusively by the provisions
of Chapter 31 of this title, Chapters 1 through 20 of this Title apply
to every domestic nonprofit corporation and to every any
other foreign nonprofit corporation which is authorized or transacts
business in this State except as otherwise provided in Chapters 1 through
20 of this Title or by the law regulating the organization, qualification,
or governance of the nonprofit corporation."
SECTION 9. The 1976 Code is amended by adding:
"Section 62-7-507. Nothing contained in Sections 33-31-150,
33-31-151, and 62-7-506 may be construed to cause a forfeiture or
reversion of any of the property of a trust which is subject to such
sections, or to make the purposes of the trust impossible of
accomplishment."
SECTION 10. Chapter 33 of Title 33 of the 1976 Code is repealed.
SECTION 11. The analysis lines preceding the code sections are for
identification only and are not considered part of the Code sections. The
Official Comments and the South Carolina Reporter's Notes which are
included after each section are included for analytical and information
purposes only and must not be considered part of the sections
themselves.
SECTION 12. This act takes effect upon approval by the Governor.
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