AB 663: Corporate law amendments address emergency powers and technological advances

Assembly Bill 663 amends the Corporations Code to provide additional flexibility for corporations in response to the COVID-19 pandemic, including provisions clarifying what constitutes an emergency, expanding a board's emergency powers, and allowing fully remote shareholder meetings during emergencies. In addition, the amendments confirm procedures for hybrid (remote and in-person) shareholder meetings in non-emergencies.

The amendments apply to corporations, nonprofit public benefit corporations, nonprofit mutual benefit corporations, nonprofit religious corporations and cooperative corporations.

Governor Gavin Newsom signed AB 663 into law on Oct. 15, 2021; the bill took effect Jan. 1, 2022.

Emergency, Defined. AB 663 broadens the definition of "emergency" to include among the list of events constituting a "natural catastrophe" an "epidemic, pandemic, or disease outbreak." In addition, the amendments modernize the kinds of enemy attacks that qualify under the definition to include attacks "within" California or that threaten "the public security of its residents." Unlike the 2020 amendments to the Delaware General Corporation Law, which confirmed a board's emergency powers irrespective of whether the emergency prevents a quorum, AB 663 retains language in the prior statute limiting emergencies to those "as a result of which, and only so long as" a quorum cannot be achieved. (We note that the preservation of this language may limit the practical significance of the amendments and suggests the board's emergency powers may even vary during the emergency event, as the availability of a quorum may frequently change. We suspect this may have been unintentional.)

Emergency Powers. AB 663 resolves issues in the prior statute that constrained a board's ability to use its emergency powers to take actions outside the ordinary course of business, notwithstanding that, as the COVID-19 pandemic has demonstrated, an emergency may require an extraordinary corporate response.

First, the prior statute allowed a corporation to take certain actions in anticipation of or during an emergency as necessary to conduct its "ordinary" business, including measures concerning succession planning, office relocations, alternative methods for notifying directors and quorum requirements for board meetings, unless emergency bylaws provide otherwise. The prior statute also provided that a board may adopt emergency bylaws to manage and conduct a corporation's "ordinary" business. By amending the prior statute to delete "ordinary" in each such case, AB 663 eliminates a source of uncertainty for boards in assessing whether a particular emergency action complies with California law.

Second, the prior statute provided limited affirmative authority to a board to determine and take emergency action and restricted any action not in the ordinary course. AB 663 affirmatively permits a board to take "any action that it determines to be necessary or appropriate to respond to the emergency, mitigate the effects of the emergency, or comply with lawful federal and state government orders," subject only to existing provisions prohibiting actions requiring shareholder approval unless such approval was obtained prior to the emergency. This change provides significant flexibility for boards to respond to future emergencies (including COVID-19 variants), even absent the adoption of emergency bylaws.

Remote Shareholder Meetings. Early in the COVID-19 pandemic, Gov. Newsom issued executive orders permitting fully remote shareholder meetings by suspending certain provisions of the prior statute that prohibited such meetings absent unanimous, unrevoked shareholder consent to electronic transmission. AB 663 updates the prior statute to align with such orders by permitting participation in fully remote shareholder meetings by conference call or other remote means if all shareholders consent or as the board determines necessary or appropriate due to an emergency. In addition, in non-emergencies, the amendments now permit hybrid shareholder meetings without prior shareholder consent if a corporation complies with certain procedures, including reasonable measures to verify a shareholder's status. While California remains less flexible than Delaware regarding remote shareholder meetings, AB 663 may be helpful to corporations navigating physical distancing requirements and widespread adoption of virtual meeting technology.

California corporations should review their organizational documents to understand how, if at all, they already address emergencies and electronic communications and consider adopting amendments in light of AB 663. 