I had to leave today's Exchange for a blood draw and my plan was to not return. As i sat waiting for the lab work, i started stewing over the comments relative to the member meeting and how and why all of the motions were pulled? I got back in time to step to the mic and recant the good old days when the membership had their own meetings quarterly and the quorum was only 100. Not that it matters to some, because sadly it was a time most have little or no recognition or knowledge of. Beyond that, i wanted an answer from the board. It was the same one John asked in a different thread? "Do the members have the right to make motions and vote on them at their annual meeting?" I had expected the answer to be yes and include some ability for the board to exclude some of them (affairs of the corporation). What i was told threw even me: "when given to the attorney, his suggestion was to look at them in the aggregate and send them all back for discussion." In fairness, that isn't an exact quote, but it pretty closely resembles his answer. And of course we were told early on (which triggered me coming back), if the attorney had advised them and they didn't follow his advice and something went south, they could be sued for a breach of their fiduciary obligations. Which is why i took the time to point out the departure from the days when the board actually trusted and relied on the membership and committees. That the attorney now advising them was the same one who served the RCSC as our documents were dismembered and committees gutted (nope not blaming him). He was also the one who in fact appeared at our first membership meeting in 12 years and he told us to our faces, we had no right to a vote. You know the meeting, the one with the "lost footage" when Jim said that. Now, this would be the same attorney that advised them to dump the motions "in the aggregate." Really Jim? All of which begs the argument: "If said attorney advises the board to dump all of the members motions as a matter of convenience (my words), could the board be sued for following bad advice from their attorney rather than following their own documents that compel them to allow us a vote? Would that too be a breach of their fiduciary obligations because they listened to bad advice?
Here’s a quick summary of when a board has been alleged to have not met its obligations. The statement that the board should comply with its organizational documents is one key point. The second point is performing to the corporations mission. Shutting members out was never a tenet of Sun City. “The duty of care requires that directors and officers use the same degree of diligence, inquiry, and skill in performing their duties as a prudent person would use in similar circumstances. Directors and officers must make informed, good-faith decisions to further the organization’s purposes. To satisfy this duty, directors and officers must be “reasonably” well informed before making a business decision. As long as directors and officers exercise reasonable business judgment, they will generally fulfill their duty of care. That said, the “reasonable business judgment rule” is both the relevant standard and main defense against these kinds of suits. In the non-profit world, directors and officers must also fulfill a duty of obedience, which requires that directors and officers carry out an organization’s purpose as set out in its organizational documents. Because there are no shareholders in non-profit organizations, this duty ensures non-profit directors and officers act in a manner consistent with the organization’s mission. The duty also serves to protect the public’s interest by ensuring donations and goodwill serve the represented purpose of the organization.” Still researching break of Fiduciary Duty in respect to nonprofit organizations. Have to leave, back later
Carole, thank you for your wonderful and insightful research. One of the things I am sure you will find is the Board may rely on expert advice unless they have reason to know the advice is not valid. Now Jim (the lawyer) is, I think, providing essentially the same advice he gave the Sue Wilson board. Everything members propose, including motions to amend Bylaws, is a recommendation to the board to study. The language I think Jim is relying on to deny a vote is as follows: Article IV Section 4 ... "Proposals or matters relating to the conduct of the business affairs of the corporation, if brought before a Membership meeting, will be referred to the Board for study. Such matters, being solely within the powers delegated to the Board in accordance with the laws of the State of Arizona and Corporate Documents, will be considered only as a recommendation to the Board." As I told Jim and the court, the issue I have with that advice is (1) both Arizona law and the Coporate documents allow sharing of the powers to amend the bylaws so amending the bylaws is not a power "solely delegated to the Board" and (2) the bylaws are different now than they were when the advice was given to the Sue Wilson Board. The bylaws now say member made bylaw amendments are not considered to be Business Affairs of the Corporation. So, the bottom line for me is for the Board to have fulfilled their fiduciary duty they would have to get legal advice that said that my points (1) - power to amend bylaws is not solely held by the Board and (2) bylaw amendments are not considered Business Affairs of the Corporation in the Corporate Documents are not applicable to the motions made. If the Board is relying on advice that there is not enough time for members to object, then this makes matters really bad. We will see what comes out tomorrow as the legal opinion is one of the items on the agenda. Nothing herein is intended to provide legal advice to the reader. The sole intent of this communication is to explain the foundation of the authors concerns. John
Some case studies for moving forward from various legal opinions Breach of Care Obligations Carelessness in decision-making can have far-reaching consequences for an organization, and a breach of care obligations is a serious offense that can lead to severe repercussions for directors. As fiduciaries, directors have a duty of care to act with diligence and prudence in making decisions that affect the organization. A breach of this duty can lead to personal liability for directors, as well as damage to the organization's reputation and financial well-being. Board members must understand the legal implications of their decisions, as they can be held personally liable for breaching their fiduciary duties. Fulfilling governance obligations, such as verifying compliance with laws and regulations, and exercising duty of care, is essential. Failure to do so can lead to personal liability for organization losses, with directors facing claims of breach of fiduciary duty, negligence, or other wrongdoing. Additionally, regulatory compliance risks, breach of contract claims, and insider trading consequences can arise from board member decisions. Understanding these implications is essential for making informed decisions and avoiding potential legal pitfalls, and there is more to explore on this paramount topic. What Constitutes Board Director Misconduct? Written by Nick Price When board directors behave badly, the consequences for the board director and the organization can be swift, severe and long-lasting. Misconduct by board directors can be intentional or unintentional, and sometimes it’s difficult to tell the difference. When someone perceives the actions or decisions of board directors as questionable, it gives the appearance of impropriety. Unfortunately, in some instances, the actions and decisions of some board members are undoubtedly illegal or improper. Whether board directors demonstrate blatant disregard for their responsibilities or they become the victim of an unintentional faux pas, the remaining board directors of corporations and non-profit entities have to decide what actions they need to take to deal with the fallout. Besides making decisions about the depth of an investigation, the remaining board members also need to decide whether making the debacle public will help or harm the corporation’s reputation. Regulations require that some types of misconduct be disclosed to the authorities and to the public. Rights of a Board Member To vote on each matter presented to the board for action. To take actions on behalf of the corporation, but only if duly delegated with such authority (typically by the board or executive). To have the means of communicating with all other board members concurrently at any board meeting. To have the means of participating in all matters before the board, including, without limitation, the capacity to propose, or to interpose an objection to, a specific action to be taken by the corporation. To, at any reasonable time, inspect and copy all books, records and documents of every kind (while this is framed in the corporate law as an absolute right, it’s probably subject to conflicting privacy laws that may take precedence). To, at any reasonable time, inspect the physical properties of the corporation. To receive an annual report, which shall include any required statements of certain transactions and indemnifications required to be disclosed to the board members. To identify oneself as a board member and, to the extent authorized, act as an ambassador and fundraiser for the organization (most commonly through private communications with others). To sue derivatively on behalf of the corporation a third party, including one or more other directors. To sue the corporation for certain violations of law. Non-Rights of a Board Member* * unless duly delegated with such rights To order the executive or any of the corporation’s employees to take a particular action. To enter into a contract on behalf of the corporation. To expend corporate funds. To use the corporation’s assets, particularly for their personal benefit. To have their vote at a board meeting count for purposes of approving a self-dealing transaction(under state law) in which the board member has a material financial interest. To make any public announcements on behalf of the corporation, particularly if they are outside of the corporation’s approved messaging or in violation of any contractual or fiduciary obligations of confidentiality. To divulge any confidential or protected information acquired through their position with the corporation. To usurp, for the board member’s own benefit, any corporate opportunities intended for the corporation. To act unlawfully in carrying out any delegated responsibilities. To participate in a board meeting in a manner that is intended to be disruptive, disrespectful, or otherwise for their personal interests ahead of the corporation’s interests.
John, I found these examples online from various sources. I don’t have the oomph required to do extensive analysis right now. I will circle back shortly. The examples are those posted in the prior post.
Like i said above, i was frustrated by Tom's remarks after John made his comments. It triggered something in me and then i thought back to the revised agenda that said this: "Legal advice of General Counsel regarding proposed membership motions." That would imply to me we could expect to hear from the General Counsel to explain the rationale behind shit-canning every motion. After returning and asking my question, that doesn't appear to be the case. I suspect the board president will read the attorneys written opinion/advice. My remarks here have no basis from any legal training. That said i sat through countless hours of training regarding our fiduciary obligations as trustees on multiple benefit plans and participated in doing presentations on trustee's obligations. We had a boatload of "professionals" (attorneys and money managers) and one of the things we taught and were taught was just because a professional said something was not a justification for us to follow their direction. We had a duty beyond just doing what someone told us to do. Carole mentioned the Prudent Man Theory which was a much more basic approach that started with the simple premise asking what would a reasonable person would do. The motions the "professional" told them to set aside using the argument of doing so "in the aggregate" is blatant folly. In listening to him and then arguing they were following their attorney's advice does not relieve them of their obligations contained in our documents. There's always should be a balance between their fiduciary obligation to the organization/members and following what the Articles and Bylaws tell them how to act. I would and have argued they had the opportunity by culling out those motions effecting the affairs of the corporation, but they were simply not willing to take the time to sift through and give members the chance to vote on anything. That easily in my mind fails the Prudent Man Theory. It's also insulting to everyone who submitted motions as mandated by our documents. Worse yet, tomorrow night they have to try and rationalize why our documents don't mean what they say. What's really troubling is the question that lingers: Does the RCSC's attorney really believe we don't have the right to submit motions for the annual membership meeting and then vote on them? If that's the case, he should be in the room and explaining why those very documents this community was built around should now be tossed aside and he become the solution to every challenge the board faces.
Will they though? I have watched one board member dance around issues that would make the swan mating dance look like street dance.
Bill, You are correct in that if everything is going to be based upon an attorney’s opinion, stopping members rights from being exercised, then he should be present to explain why these rights were violated. In reading the corporate documents, there should be a member’s meeting, complete with the submissions for consideration. If there is a motion that clearly places the needs of the business in jeopardy, explain why then remove from consideration. I was trying to do more research about suits and what can be done, only to find the best solution for a lawsuit is going to be costly and lengthy. The best suggestion is to ask for injunctive action against the board. “An injunction is a court order that compels an individual or entity to do, refrain from doing, or to stop doing, a specified thing.” An action similar is what John filed. I have not heard if a ruling has been made on John’s Court filing as of yet. This would certainly place the board and the members at extreme odds. This is going to create a huge rift between the members and the board. There’s no reason for creating such a situation within the community. I have nothing more to offer in regards to this difficult situation and for now, will not be posting any more links. Thank you for the opportunity to try to help.
The lingering questions that troubles me are, did this really need to get this far? Is our Board really incapable of making hard decisions? Seems to me this decision shouldn't have been that hard to make. The Board simply lacked the ability to make a simple common sense decision and took the easy way out by simply involving the lawyer. As we have heard continually, "We're following our legal advice", so now it's the lawyers fault! I have read several common sense solutions but they let it get too far. One of the reasons this couldn't be resolved in a timely manner is because there's not enough time between when the motions have to be submitted and the actual meeting!
Well said Tom...hence the name "Prudent Man Theory." Or even from a more basic premise; "what makes sense?" Come on guys, this isn't that hard, it really isn't.
It would appear there needs to be a change in the way the bylaws are written in relation to definitions of annual meeting and how the members can and shall be entitled to a viable membership meeting. I am not in favor of legislating or adding more verbiage to the bylaws, but it would make sense to further clarify exactly what the members have the right to do, how it will be done, and what the members should expect as an outcome. The gray area of leaving it up to the board members, who then offload to their attorney, is shown how inept the board members might be when faced with the task of making a common sense decision. There has been written on the TOSC site over these past few days, excellent examples of what kind of clarification needs to be adopted in the future to make the documents more salient. A refining of direction for the board and removal of the ability to invoke a complete communication blackout. While reading the multiple pages about board director responsibility, repeatedly the issue of communication with the members was indicated as a crucial step to the board process. The building of trust in the organization was repeated time and time again. Currently, there is no real belief the board is acting in the best interest of the community, but rather, hiding behind their lack of skills in making prudent decisions, and defraying the decision to an attorney. An attorney who has chosen not to be forthcoming with answers in a timely manner and who’s job it is is to shield the corporation from the members. Apparently making “prudent man” decisions needs to be spelled out, and no longer rely on what most would call “common sense”. I think, from now on, in today’s society, if it’s not spelled out clearly, one cannot rely on a common sense approach. These last few days have shown me how much having common sense spelled out is needed moving forward.
I've said it a million times; there needs to be a much more definitive definition of "affairs of the corporation."
I tried that, too, in the bylaws review committee. Didn't make it to the definitions. I would think that is standard legal language and should have been litigated somewhere at sometime. John?
You did, and sadly we can see clearly at work the importance from on high regarding the significance of ambiguity. To be more blunt, clear as mud is a lawyers best friend.
I hope your heart is in really good shape. I just finished watching the Exchange Meeting and absolutely loved your comments.
