Corporate Process Is NOT Your Enemy!

In community association governance, corporate formalities seem to get in the way of “good old common sense.” If someone is doing a good job, and is making good decisions, why allow procedural technicalities to interfere? In almost 30 years of law practice, I find that clients view corporate formalities as a curse and try to avoid dealing with it as much as possible. However, the process is very important to you.

Why the Process?

The corporate process is there to protect you volunteers and managers. It documents that the actions are by the corporation and not you personally. California law does not recognize actions as corporate if the procedures are not followed. So, a failure to follow proper corporate process may be that an obligation thought to be corporate may be imposed upon the individual who failed to obtain proper corporate approval. That could result in the imposition of personal responsibility for an obligation intended to be corporate. Scrupulously following proper procedures avoids that nightmare.

Corporate Action vs. Individual Action

Corporations are legal fictions recognized by law as “persons” which act through authorized agents, normally a board of directors. Actions outside the corporate authority are called “Ultra Vires,” a Latin term meaning “outside the powers.” In small corporations, certain officers often act as the primary agents. However, officers have only the powers stated in the bylaws or expressly granted by board. If the officer acts outside those powers, the action is not corporate action.

The Importance of Minutes

Minutes document the board’s decisions, and should also document any authority to act given by the board to a director or manager. Careful managers or officers should insist that authority to act is recorded in minutes.

Occasions sometimes can arise when there is no time to convene the board and urgency requires a decision to be made immediately — such as calling an emergency contractor, for example. In those situations it is imperative to as soon as possible obtain the corporation’s approval of the action taken. That retroactive board approval is called “ratification,” and must be documented in minutes.

The Importance of the Open Meeting Act

The Open Meeting Act (Civil Code §1363.05) sets forth a variety of mandatory procedures — in addition to the procedures in the association’s bylaws. That law bans action outside of board meetings, requires advance notice of board meetings, restricts on the use of executive sessions, and requires prompt availability of draft minutes.

Many associations allow meetings violating the law on the rationale of efficiency or convenience. If an association violates the law by taking action outside of meetings or by abusing executive session, are the board’s decisions susceptible to challenge as outside the corporate authority? Although the Open Meeting Act does not discuss the consequences of violations, such a result is possible.

The Lone Ranger

Sometimes directors step outside of their authority, in their zeal to “get things done,” making all kinds of decisions and commitments without documented board authority. The “Lone Ranger” is just that… alone. Such a director can sometimes find that the board later may disavow the director’s action, leaving the director personally exposed to liability.

Avoiding Shortcuts is Safer

Observing proper corporate process protects you. Make sure decisions are made properly, and documented properly. You don’t want your volunteer work to be “rewarded” with any personal liability.

Written by Kelly G. Richardson

Kelly G. Richardson Esq., CCAL, is a Fellow of the College of Community Association Lawyers and a Partner of Richardson | Ober | DeNichilo LLP, a California law firm known for community association advice. Submit questions to [email protected]. Past columns at www.hoahomefront.com. All rights reserved®.