Corporate Notices and Consents in an Electronic World: Practice Tips and Sample Provisions

• Publication year: 2021
• Author: Marek J. Adamo and Katherine J. Blair

Corporate Notices and Consents in an Electronic World: Practice Tips and Sample Provisions

Marek J. Adamo and Katherine J. Blair

Marek Adamo is a partner in the corporate practice of Paradigm Counsel LLP. His areas of expertise include venture capital and mergers and acquisitions. He regularly represents emerging companies and investors in the software, internet commerce, wearable technology, semiconductor and professional services industries.

Katherine J. Blair is a partner in the Capital Markets practice of Manatt, Phelps & Phillips, LLP representing companies, investment banks and investors in a broad range of public and private securities offerings, shareholder proposals, proxy contests, tender offers, going-private transactions and mergers and acquisitions. Ms. Blair also advises a wide range of listed public companies on governance, reporting and other obligations under the securities laws and stock exchange rules.

Attribution: The following is a publication of the Corporations Committee (hereinafter referred to as the "Committee"), Business Law Section of the California Lawyers Association. It was prepared by Marek J. Adamo and Katherine J. Blair. The Committee acknowledges significant contributions to this article by Richard G. Burt, former member of the Committee.

Twenty-five years ago, California adopted legislation that, for the first time, allowed a corporation to communicate with its constituents by voice and electronic mail.¹ Recognizing the rapid pace of technological change in communications, the Legislature adopted Senate Bill 1306 (SB 1306) a decade later to generalize the statute beyond voice and electronic mail. That bill added the definitions "electronic transmission to the corporation" and "electronic transmission by the corporation" to the California Corporations Code (the "Corporations Code"), and also amended the definition of "writing" to include those terms. At the time and as sponsor of SB 1306 through the Business Law Section of the State Bar of California ("CA"), the Committee explained the need for these broad definitions to future-proof the Corporations Code:

[v]arious types of corporate communications and actions that have traditionally been handled by manual writings or in-person meetings may eventually be replaced by communications in electronic forms, including meeting notices, board and shareholder written consents, and the holding of board and corporate meetings. Attempts to limit these communications and actions to specific forms will become outdated over time.²

That prediction has proved correct. In the years since SB 1306 was adopted, electronic communications have become ubiquitous to the point that many, if not most, corporations routinely use electronic transmission as the primary means to communicate with corporate constituents and to transmit and approve actions by written consent.

Over time, communications technology has become significantly more varied and fragmented. Telephone, fax, and electronic mail were the dominant forms of electronic communication in 1995. Today, corporations often use a diverse array of technologies to communicate with constituents, such as text messaging, corporate instant messaging, electronic signature systems (e.g., DocuSign³), and board meeting management software. This diversity of technology inevitably creates situations that are ripe for dispute,⁴ increasing the possibility of claims that some electronic communications by or to the corporation do not constitute valid notice, or that board or shareholder actions taken electronically were not validly taken.

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Corporations may eliminate uncertainty as to modern forms of communications by adopting bylaws that authorize specific forms of electronic communication by and to the corporation and specify the manner in which corporate actions may be taken electronically. Corporations may also proactively obtain clear written consents to any forms of electronic communication that the corporation intends to use with its constituents.

In this article, we propose a sample form of consent to electronic communications as well as sample bylaws authorizing electronic notices and actions.

What is a Communication by Electronic Transmission Under the California Corporations Code?

The meanings of, and conditions for, electronic transmissions by and to a corporation are covered in sections 20 and 21 of the Corporations Code. Both sections authorize communications by various electronic means, including by facsimile, telecommunication, electronic mail, posting on an electronic message board or network which the corporation has designated for those communications, or "other means of electronic communication."⁵

Communications by fax or email must be directed to the fax number or email address for the recipient "on record" with the corporation,⁶ or in the case of communications to the corporation, to the number or email address the corporation has provided from time to time to shareholders or members and directors for sending communications to the corporation.⁷ Communications by the corporation via electronic message board or network must be sent together with a separate notice to the recipient(s) of the posting.⁸

To be a valid "electronic transmission," an electronic communication by the corporation must be to a recipient who has provided unrevoked consent to the means of transmission.⁹ Electronic communications to the corporation must be by means "as to which the corporation has placed in effect reasonable measures to verify that the sender is the shareholder or member (in person or by proxy) or director purporting to send the transmission."¹⁰ In all cases, the electronic communication must create a record that is capable of retention, retrieval, and review, and that may be...