BOARD MEMBERS AND BOARD MEETINGS

OUR BOARD OF DIRECTORS IS COMPRISED MOSTLY OF OUT-OF-TOWN MEMBERS. CAN WE HANDLE URGENT MATTERS IF WE CAN'T GET TOGETHER?

Yes. Corporations Code §7211 and most association bylaws allow a board the ability to take action via unanimous written consent. The statute provides:

An action required or permitted to be taken by the board may be taken without a meeting, if all members of the board shall individually or collectively consent in writing to that action. The written consent or consents shall be filed with the minutes of the proceedings of the board. The action by written consent shall have the same force and effect as a unanimous vote of the directors.

Accordingly, if the entire board of directors unanimously agrees on the action to be taken, then the action can be taken without a meeting.

We recommend that a resolution be prepared in counterparts so that each board member can execute his/her own copy. Please be aware, however, that the authority provided to boards under the Corporations Code to take action without a meeting cannot be acted upon if all board members do not agree to the action to be taken. Simply polling board members over the telephone is not proper, even if all board members unanimously agree with the action to be taken, since the consents must be indicated in writing.

DOES THE MEMBERSHIP HAVE THE AUTHORITY TO REMOVE A BOARD MEMBER DIRECTLY AND SOLELY THROUGH A PETITION PROCESS?

Although association homeowners have the right to remove board members, such removal cannot be solely accomplished through a petition. The purpose of a petition would be to call a special meeting of the members. Corporations Code §§ 7510(e) and 7511 (c) provide in pertinent part:

§ 7510.(e) Special meetings of members for any lawful purpose may be called by the board, the chairman of the board, the president, or such other persons, if any, as are specified in the bylaws. In addition, special meetings of members for any lawful purpose may be called by 5 percent or more of the members.

§ 7511.(c) Upon request in writing to the chairman of the board, president, vice president, or secretary by any person (other than the board) entitled to call a special meeting of members, the officer forthwith shall cause notice to be given to the members entitled to vote that a meeting will be held at a time fixed by the board not less than 35 nor more than 90 days after the receipt of the request. If the notice is not given within 20 days after receipt of the request, the persons entitled to call the meeting may give the notice or the superior court of the proper county shall summarily order the giving of the notice, after notice to the corporation giving it an opportunity to be heard ... [emphasis added]

Therefore, a petition seeking to remove a board member would have to state that it is "for the purpose of calling a special meeting of the members in order to vote for the removal of a board member." Thereafter, a properly executed petition should be submitted to the board for appropriate handling.

In addition, please note that under the statute, the association has the right to fix the meeting not less than 35 nor more than 90 days after the receipt of the petition and provide notice of same within 20 days from the date of the receipt. At such meeting, the members can vote on the removal or retention of the board member at issue.

ARE HOMEOWNERS ENTITLED TO ATTEND EXECUTIVE SESSIONS OF THE BOARD AND ARE THEY ENTITLED TO MINUTES OF THOSE EXECUTIVE SESSION MEETINGS?

NO and NO. Homeowners are often confused about why they are unable to attend executive sessions of the board of directors, since it is their belief that the law requires all board meetings to be open to the membership. On the contrary, the law recognizes that there are some topics which may be sensitive in nature, thus requiring that the board discuss them and act upon them behind "closed" doors.

Civil Code § 1363.05 provides:

(b) Any member of the association may attend meetings of the board of directors of the association, except when the board adjourns to executive session to consider litigation, matters relating to the formation of contracts with third parties, member discipline, or personnel matters. The board of directors of the association shall meet in executive session, if requested by a member who may be subject to a fine, penalty, or other form of discipline, and the member shall be entitled to attend the executive session.

(c) Any matter discussed in executive session shall be generally noted in the minutes of the board of directors. ...

(f) As used in this section, "meeting" includes any congregation of a majority of the members of the board at the same time and place to hear, discuss, or deliberate upon any item of business scheduled to be heard by the board, except those matters that may be discussed in executive session.

[emphasis added]

Accordingly, the membership may not attend executive sessions called by the board of directors to consider: (a) pending or threatened litigation, (b) personnel matters, (c) matters that relate to the formation of contracts with third parties and (d) member discipline. However, as to a member facing disciplinary action, the member and/or said member's attorney shall be permitted to attend that portion of the executive session related to his/her matter. Conversely, any matter deliberated by the board that does not fall under one of the four executive session categories should be handled only as part of a regular or special board meeting open to the membership.

Members are not entitled to the minutes of executive sessions of the board of directors. California Civil Code § 1363.05(d) specifically states:

(d) The minutes, minutes proposed for adoption that are marked to indicate draft status, or a summary of the minutes, of any meeting of the board of directors of an association, other than an executive session, shall be available to members within 30 days of the meeting. ..." [emphasis added]

It stands to reason that if members are not entitled to attend executive sessions of the board, then it also makes sense that the members would not be entitled to the minutes of executive sessions. Any matter discussed in executive session should be generally noted in the minutes of the board meeting if the executive session took place prior, during or directly after a Board meeting. If the executive session was independent of any board meeting, then the executive session should be noted in the minutes of the following board meeting. The term generally noted in the minutes of the Board meeting means that the Board should indicate the date and time of the executive session, and list the topic or topics discussed in Executive Session, but nothing further.

CAN AN ASSOCIATION AWARD A SERVICE CONTRACT TO A MEMBER CURRENTLY SERVING ON THE BOARD OF DIRECTORS?

YES. A board member may contract with the association to provide services unrelated to his/her role as a director or officer and be compensated for such services. However, certain criteria must be met, since awarding a contract to a member of the board is especially sensitive for the obvious reason that members may challenge whether the decision is made in good faith or not. Therefore, the board must carefully follow the disclosure provisions provided in Corporations Code § 7233(a), which states in pertinent part:

(a) No contract or other transaction between a corporation and one or more of its directors ... is either void or voidable because such director or directors ... are parties or because such director or directors are present at the meeting of the board ... which authorizes, approves or ratifies the contract or transaction, if:

(1) The material facts as to the transaction and as to such director's interest are fully disclosed or known to the members and such contract or transaction is approved by the members in good faith;

(2) The material facts as to the transaction and as to such director's interest are fully disclosed or known to the board or committee, and the board or committee authorizes, approves or ratifies the contract or transaction in good faith.

Under § 7233(a)(3), a contract between a corporation and one or more of its directors is not void or voidable if the parties comply with the requirements of either subsection (1) or subsection (2). The underlying intent of the statute is that an interested director make full disclosure of all aspects of his/her interest in the contract or transaction to either the board of directors or the membership, and thereafter have the board or membership, as applicable, approve the transaction.

In addition, although § 7233 refers to directors who have a "material financial interest" in a proposed contract or other transaction, the phrase material financial interest is not defined. However, if there is the slightest doubt as to whether a particular interest is subject to § 7233, i.e., constitutes a material financial interest, then we recommend compliance with the above requirements. Such compliance will insulate the contract or other transaction and the approving directors from future challenges based on conflicts of interest. In other words, when in doubt, disclose and treat the proposed transaction as one between the association and a director with a material financial interest.

Despite the above, there is always a "hint of impropriety" when an existing director is awarded a contract and involved in an independent contractor arrangement with the association. We encourage the board to proceed carefully and do the following:

• Obtain at least three bids, one of which may be from the interested director. The board would then be better able to compare the costs of having someone other than the director perform the same work.
• Any request for a proposal from the interested director should include a full disclosure of his/her ownership interest in the company performing the work and any expected profit he/she will receive from said contract.
• Clarify the arrangement so that the director is deemed to be an independent contractor. It is very important that the association spell out the specifics of the work to be performed.
• Require that the independent contractor maintain adequate liability and other applicable insurance and that the association is an additional insured on those policies.

All discussions, deliberations, and voting by the board related to the awarding of the contract should exclude the interested director. If, after review of all bids, the board wishes to award the contract to the director and enter into a contract proposal that is fair, reasonable, and comparable with the other bids, we believe the board can do so. We also recommend that the minutes of any such award be reviewed by the association's attorney to make sure it complies with the above-referenced Corporations Code. (All of the above can be done in executive session).

CAN A BOARD MEMBER GIVE ANOTHER BOARD MEMBER HIS/HER PROXY FOR THE PURPOSES OF VOTING AT A BOARD MEETING?

NO. This question comes up frequently and with good reason, since governing documents and California statute do not provide a clear cut answer. However, it is our opinion that a board member may not give a fellow board member his/her proxy for the purpose of voting at a board of directors meeting for the following reasons:

Standard provisions contained in association bylaws and CC&Rs ("governing documents") provide for the use of proxies only by homeowners and never by directors. We have yet to see a set of governing documents which would allow a member of the board of directors to send a proxy to vote in his/her stead in any capacity.

Additionally, Corporations Code §7211, related to meetings of boards of directors, specifically provides that members of the board may participate in a meeting through the use of a conference telephone or similar communications equipment, so long as all members participating in such a meeting can hear one another. §7211 also provides that action can be taken by the board without a meeting, if all members of the board shall individually or collectively consent in writing to such action (usually referred to as Action Taken Via Unanimous Written Consent). Most standard bylaws also contain language similar to §7211. Thus, an individual board member does not actually have to be present at a board meeting, as long as the use of a conference telephone is used and all members can hear one another. Alternatively, written consent signed by all members of the board, consenting to a certain action of the board, could be done without a board of directors meeting.

Corporations Code §5069 is also revealing in its definition of the word proxy. Proxy is defined to mean "a written authorization signed by a member or the member's attorney in fact giving another person or persons power to vote on behalf of such member." Applying this definition to a community association, a proxy would mean a written authorization signed by a homeowner/member or the homeowner/member's attorney in fact, giving another person power to vote with respect to his/her membership in the association. However, the definition of the word proxy itself under the Corporations Code or under governing documents does not apply to directors.

Furthermore, a board member attempting to vote by proxy would be in violation of his/her fiduciary duty to the association, and cannot delegate to another individual his/her fiduciary duty to vote on matters coming before the board. Board members are elected by the membership to operate and manage the affairs of the association in a similar fashion that members of Congress are elected by the electorate in that particular congressional district, and said members cannot delegate their respective responsibilities to another congress representative to vote on their behalf.

Support of this concept is found in a treatise on community association law by Gary A. Poliakoff, The Law of Condominium Operations. Sections 2:47 and 3:89 of the treatise state as follows:

Section 2:47. - Use of Proxies Prohibited.

"Officers and directors are prohibited from voting by proxy at meetings of the association board. board members are elected to participate and owe the association the benefit of their judgment, experience and business ability."

Section 3:89. - Proxies.

"Board members cannot vote by proxy. They cannot delegate a fiduciary duty by attempting to vote by proxy."

Based on all of the above, we believe members of a board of directors may not give a fellow board member his/her proxy for the purpose of voting at a board of directors meeting. The giving of such a proxy would frustrate the purposes of an association's governing documents and the fiduciary duty of a board of directors, as well as the California Corporations Code. With alternate opportunities available which allow board members to vote, there is no reason to permit board members to vote by proxy.

CAN A BOARD OF DIRECTORS UNILATERALLY INCREASE REGULAR ASSESSMENTS OR LEVY A SPECIAL ASSESSMENT EVEN THOUGH OUR GOVERNING DOCUMENTS REQUIRE MEMBERSHIP APPROVAL PRIOR TO THE IMPOSITION OF SAID ASSESSMENTS?

YES. Although some governing documents state that a board of directors cannot increase regular assessments or impose a special assessment without membership approval, California law contains specific statutes regarding increases in association assessments.

The authority of the board with respect to increasing regular assessments or imposing special assessments is dictated by the Davis-Stirling Common Interest Development Act (Civil Code §1350 et seq). Civil Code §1366(b) specifically states:

Notwithstanding more restrictive limitations placed on the board by the governing documents, the board of directors may not impose a regular assessment that is more than 20 percent greater than the regular assessment for the association's preceding fiscal year or impose special assessments which in the aggregate exceed 5 percent of the budgeted gross expenses of the association for that fiscal year without the approval of owners, constituting a quorum, casting a majority of the votes at a meeting or election of the association...".

Thus, although the CC&Rs may contain more restrictive limitations on a board's ability to increase regular assessments or impose special assessments, those limitations are not controlling. The Civil Code further provides that regardless of restrictive provisions, a board of directors has the authority to increase regular assessments up to twenty percent (20%) over the assessments of the preceding year and to impose a special assessment up to five percent (5%) of the budgeted gross expenses without membership approval.

In addition to the foregoing, even though the CC&Rs may provide for a higher percentage requirement of membership approval, increases of regular assessments beyond twenty percent (20%) or levying of a special assessment in excess of five percent (5%) only require a vote of a majority of a quorum of the membership and not a higher percentage, if any, provided within the governing documents.

ARE BOARD PRESIDENTS PROHIBITED FROM VOTING AT BOARD MEETINGS UNLESS THERE IS A NEED TO BREAK A TIE?

NO. The president of the association, although chairing board meetings, serves in really two capacities: one as the president, but also as a board member who, in exercising his/her fiduciary director obligations, must vote on matters that come before the board of directors. Thus, unless there is a reason to abstain, such as a conflict of interest, the board president should vote on all matters that come before the board.

We believe this misconception is based upon the parliamentary procedure contained within Robert's Rules of Order ("Robert's"). Under older versions of Robert's, it was suggested that chairpersons should not make motions and should not vote on any questions coming before the assembly (in this case, the board of directors). However, Robert's has been substantially amended and updated to modern times, and the streamlined version no longer contains a provision that a chair/president cannot make motions and cannot vote on questions coming before the assembly. Rather, it indicates that the chair/president can vote at all matters and can make motions.

ARE BOARD MEETINGS SUBJECT TO THE BROWN ACT?

NO. The Ralph M. Brown Act (Government Code §§54950-54962) does not apply to homeowner associations. The Act provides that all meetings of a "legislative body" of a local agency are to be open to the public. The term legislative body is defined in the Act as "the governing board, commission, directors or body of a local agency, or any board or commission thereof, and ... and which is supported in whole or in part by funds provided by such agency, whether such board, commission, committee or other body is organized and operated by such local agency or by a private corporation." Although the reference to "private corporations" appears to encompass homeowner associations, the above provision first requires the existence of a "local agency," a term that is defined to include cities, counties and other local districts. Therefore, because homeowner associations are not governmental agencies, they are not subject to the requirements of the Brown Act.

However, homeowner association meetings are subject to Civil Code §1363.05, also known as The Common Interest Development Open Meeting Act ("Open Meeting Act"). The Open Meeting Act requires, among other things, that associations permit members to speak at both membership meetings and board of directors meetings (other than executive sessions). It also mandates that, unless the time and place of board meetings are fixed by the bylaws or unless the bylaws provide for a longer period of time for notice, members shall be given notice of the time and place of board meetings wherein there will be "any congregation of a majority of the members of the board of directors" at least four days prior to the meeting. Finally, the Open Meeting Act provides that notice to the members can be given by "posting the Notice in a prominent place or places within the common area, by mail or delivery of the notice to each unit in the development, or by newsletter or similar means of communication." Please see a detailed analysis of the Open Meeting Act in our Twelfth Annual Legislative Update.

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