GUIDE FOR ELECTIONS

INTRODUCTION

Our law firm has assisted many associations with the interpretation of both California statutes and provisions contained within the associations' governing documents related to the nomination and election of directors. As such, we have prepared numerous opinions and materials for all types of elections and see a need to clarify several areas related to election of directors.

Depending on an association's governing documents, nomination procedures and election materials can range from simple to complex. There are many factors which may impact an association's election process and, thus, subsequent drafting of relevant materials. Following are some factors which impact the election of directors:

• Do the governing documents provide for cumulative voting?
• Who is entitled to vote? Some governing documents provide that only members in good standing may vote in the election of directors.
• Who can be elected to the board? Some governing documents provide that only members in good standing may be nominees for an election.
• Does a nominating committee need to be appointed? If so, what are the committee's duties and deadlines?
• Must voting be conducted by secret written ballot?
• Can voting be conducted by mail?
• Can the members vote by proxy? If so, who can be named a proxyholder and what powers will the proxyholder have?
• Can nominations be made from the floor on the date of the annual meeting?
• Are nominations by petition allowed?
• Does the association have more than 500 members? See discussion of Corporations Code §7521(b) below.

Obviously, an association must carefully scrutinize its governing documents, in conjunction with California Corporations Code, to answer the above questions and to assure compliance with both.

REASONABLE NOMINATION PROCEDURE

California Corporations Code §7520 requires that a reasonable procedure for nominating persons for elections be available to the membership and states in pertinent part:

(a) As to directors elected by members, there shall be available to the members reasonable nomination and election procedures given the nature, size and operations of the corporation.

Accordingly, an association must provide a reasonable nominating procedure to its membership. There is nothing further in the Corporations Code which defines what a reasonable procedure might be. Fortunately, many governing documents, particularly bylaws, provide such reasonable procedures. For example, some governing documents provide for a Nominating Committee to compile a slate of candidates for placement on a ballot. Others may require that the slate of candidates be posted/published a few months prior to the annual meeting in order to allow members who wish to be nominated by petition sufficient time to secure the appropriate number of signatures. Additionally, some governing documents require candidates to comply with certain qualifications to be a nominee for the board, such as being in good standing (i.e., no delinquencies or violations on record).

Many associations, particularly those whose governing documents are deficient in specificity, have adopted objective and reasonable criteria for their Nominating Committees to follow. This is important in order to avoid the appearance of arbitrariness or impropriety in the nominee selection process. The committee may look at a member's standing, whether they are full time residents or part time residents, whether they have been active members or volunteers on committees appointed by the board, and whether or not they have some type of business acumen, special talent, or experience useful to the association.

It is this firm's opinion that if the bylaws specifically set forth the nomination process, those specific procedures control and must be followed. However, if no method is dictated in the bylaws, other than that the method be fair and reasonable, the board of directors may specifically adopt a nomination process by resolution. Additionally, it may be possible for the board to pass a resolution permitting nomination by petition, as long as there is no express provision precluding same in the governing documents.

NOMINATIONS FROM THE FLOOR AND/OR NOMINATIONS BY PETITION

In addition to nominations through the Nominating Committee, there are two other methods available to members by which nominations can be made for the election of directors. One method is nominations from the floor and the other method is nominations by petition.

Many bylaws and the California Corporations Code, respectively, provide for both additional methods of nomination. Accordingly, if the governing documents do provide for either alternate method of nominating candidates, they should be incorporated into the reasonable procedure that must be provided to the membership.

Some governing documents do not specifically provide for nominations from the floor and there is nothing in the law which states an association must accept nominations from the floor. In fact, we have seen a few associations which have amended their governing documents to delete nominations from the floor, so that the election of directors could be achieved entirely through voting by mail. However, we caution associations who may wish to eliminate nominations from the floor to consider such a move carefully because such nominations are a great tool in providing a reasonable nomination procedure to the members.

Under Corporations Code §7521(b), there is a little known procedure which requires an association of 500 or more members to permit any eligible member to be nominated through a petition, signed by members representing at least two percent (2%) of the voting power, and delivered to an officer of the association. Therefore, those associations with more than 500 members must permit nomination by petition.

CUMULATIVE VOTING

Where an association has provisions within its governing documents requiring that cumulative voting be utilized in the election of directors, it should be cognizant of Corporations Code §7513(e), which states:

Directors may be elected by written ballot under this section, where authorized by the Articles or Bylaws, except that election by written ballot may NOT be authorized where the Directors are elected by cumulative voting...

[emphasis added]

Pursuant to the above statute, where an association's existing governing documents authorize the use of cumulative voting, Directors may not be elected by mailing a written ballot to the membership. Unfortunately, many associations with cumulative voting have proceeded with conducting their elections via mailed written ballot. This is a violation of Corporations Code §7513(e).

On the other hand, many governing documents do permit members to vote either in person or by proxy. The use of a proxy is a good alternate method for voting by mail for those associations with cumulative voting. The member may designate a proxyholder and can provide the proxyholder with election instructions on how the member wishes his/her votes cast, allowing an association to utilize the mailing system in its election of directors without violating Corporations Code §7513(e). This procedure gives the member the choice to vote either by ballot on election day or by proxy.

Although many governing documents provide for cumulative voting, another technical point contained under Corporations Code §7615(b) merits reference. This provision provides that no member can cumulate votes unless, prior to the voting, at least one (1) member has given notice of his/her intention to cumulate votes. Waiting for a member to give notice of his/her intention to cumulate votes is problematic, because an association would then never be able to ascertain whether cumulative voting would be used until the actual date of the election. Thus, most board members solve this problem by indicating in the Notice of Annual Meeting and election materials that the board intends to invoke cumulative voting pursuant to the association's governing documents. As such, all members would have the right to cumulate votes for the election of directors at the annual meeting.

DESIGNATED PROXY WITH ELECTION INSTRUCTIONS ("DESIGNATED PROXY")

If an association chooses to use the designated proxy method for its election of directors, the proxy should clearly indicate that the proxyholder is to vote in accordance with the attached election instructions. Thus, with this process the member may indicate his/her preference for the election of directors by mail and need not be present at the annual meeting. Furthermore, this process allows the association to be in compliance with Corporations Code §7513(e).

A properly drafted Designated Proxy should:

• Permit a member to designate on the proxy the nominee(s) for whom he/she wishes to vote.
• Indicate that the member waives his/her right to a secret ballot, which allows the association to tabulate the votes for the election of directors directly from the proxy's election instructions. Members who want to preserve their right to a secret ballot would need to vote in person on election day.
• Allow the member the option of designating the majority of the present board of directors as the proxyholder. This provides expediency and convenience to the member.
• Provide that the proxy will also be used for the purposes of establishing a quorum.
• Include "fail-safe" mechanisms, such as if a member fails to indicate how the proxy is to be voted, the proxyholder is instructed to vote as the proxyholder deems advisable. Additionally, if the total votes cast exceed the number of director seats up for re-election, the election instructions will be invalid and the votes will not be counted. However, the proxy may still be used to establish a quorum.

In preparing the election materials, we recommend that associations also include voting instructions and a self-addressed envelope by which members can return their proxies to the association. The voting instructions should provide detailed information on how the members go about voting either in person or by proxy and, if applicable, explain cumulative voting. Furthermore, associations may want to include a cover letter, updating the members on any applicable information, as well as encouraging either their attendance at the annual meeting or return of the proxy.

SETTING THE RECORD DATE FOR MEMBERS ENTITLED TO NOTICE

Most association's governing documents, particularly the Bylaws, provide for a record date that the association must set and use for providing members notice of any annual or special meeting of the membership. Usually, the association's governing documents authorize the board of directors to set the record date for purposes of determining the members entitled to notice of any meeting of the membership. A typical provision would be:

The board may fix, in advance, a record date for the purpose of determining the owners entitled to Notice of, and to vote at, any meeting of owners. The record date for notice of a meeting shall not be more than 60 nor less than 10 days before the date of the meeting. The record date for voting shall not be more than 60 days before the date of the meeting or before the date on which the first written ballot is mailed or solicited.

However, if the Bylaws do not provide for such record dates, then California Corporations Code §7611(a) controls; said statute provides: "... the board may fix, in advance, a date as the record date for the purpose of determining the members entitled to notice of any meeting of members. Such record date shall not be more than 90 nor less than 10 days before the date of the meeting."

Many associations forget to set the record date for members entitled to notice, in which case Corporations Code §7611(a) further enumerates: "If no record date is fixed, members at the close of business on the business day preceding the day on which notice is given ... are entitled to notice of a meeting of members."

Thus, if the association does forget to set a record date, the record date would normally be the close of business on the business day preceding the day of mailing of the notice to the membership.

SETTING THE RECORD DATE FOR MEMBERS ENTITLED TO VOTE AT A MEMBERSHIP MEETING

Again, most association's governing documents establish a record date or give the board of directors the authority to establish a record date for the purpose of determining the members entitled to vote at a meeting of the members. However, if the Bylaws do not provide for such record dates, California Corporations Code §7611(b) states: "... the board may fix, in advance, a date as the record date for the purpose of determining the members entitled to vote at a meeting of members. Such record date shall not be more than 60 days before the date of the meeting."

However, many associations forget to set the record date, in which case members on the day of the meeting who are otherwise eligible to vote, are entitled to vote at the meeting of the members.

As an example, assume the Smiths own Lot 1, but closed escrow and sold Lot 1 to the Joneses on March 14, 2003. Assume further that the association's governing documents did not establish a specific record date for members entitled to vote and that the board did not establish such a record date prior to the meeting. Finally, assume the association's annual meeting is on March 15, 2003. More than likely, if the election material went out in the month of February 2003, the Smiths, owning Lot 1 at the time, received the election material and sent in their designated proxy with written instruction to vote for the nominees they so desired to be elected. The Jones family actually attend the annual meeting on March 15th with a copy of a recorded Grant Deed showing the transfer from the Smiths to the Joneses occurring the previous day. In this instance, since the association did not establish a record date for members entitled to vote and since there was no specific date established within the governing documents, Corporations Code §7611(b) would control, and the record date would be the day of the meeting. Therefore, the Jones family, as members on the day of the annual meeting, are entitled to vote and the designated proxy from the Smith family would need to be voided. To avoid such confusion, we recommend that the board of directors establish the record date for members entitled to vote on a day not less than 10 nor more than 30 days prior to the membership meeting in order to avoid confusion created by recent transfers of properties within the project prior to the annual meeting.

APPOINTING THE INSPECTORS OF ELECTION

Corporations Code §7614 provides, and we strongly recommend that the association facilitate, the appointment of inspectors of election. The Corporations Code specifically indicates that the number of inspectors of election is either one or three. Associations should be careful to adhere to the statute and not appoint two or more than three inspectors of election.

Additionally, the Corporations Code provides that the Board can appoint the inspectors of election at any time in advance of the membership meeting. If the Board does not appoint the inspectors, or if any person so appointed fails to appear at the membership meeting, the Chair (usually the president of the association) at the membership meeting may, and on the request of any member must, appoint inspectors of election. Although an unusual provision, if inspectors of election are appointed at the membership meeting and not by the Board, the majority of the members represented in person and by proxy at the membership meeting shall determine whether it is one or three inspectors to be appointed. To avoid such confusion, we strongly recommend that the board of directors designate, in advance of any membership meeting, the inspectors of election. In the case of any action by a written ballot, the Board should similarly appoint inspectors of election to count and tabulate all votes. Inspectors of election not only tabulate the votes, but they determine the authenticity, validity and effect of proxies, determine all challenges and questions in any way arising in connection with the right to vote, determine the result and do all acts which are proper to conduct the election or votes with fairness to all members.

In large associations, there may be a need to have additional personnel available to assist with the tabulation of the vote total. Such additional personnel would not be inspectors of election, but rather assist by organizing the voting materials, acting as a reader of the ballots and/or proxies, or assisting in the tabulation. They would have no power to determine authenticity, validity and effect of any proxies or ballots, which authority would still reside with only the inspectors of election themselves.

CONCLUSION

As evidenced by the above, a multitude of factors mandate that associations carefully review their governing documents to assure compliance with their governing documents and California law. It is recommend that associations either allow their general counsel to prepare the necessary election materials or, at a minimum, have him/her review the materials before they are distributed to the membership.

See notice, voting instructions, proxy and ballot formats in our Samples section.

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