Community Associations Update - March 2015

Date: March 4, 2015

Ex-Officio Directors Get Voting Rights in California

By: Eileen M. Johnson

Take-away: Beginning January 1, 2015, a nonprofit organization that was incorporated in California will no longer be able to have ex officio directors who do not have voting rights.

Background: There is a popular misconception that ex officio means “without a vote”. A literal translation from the Latin is “from the office.” An ex officio director is someone who is a member of the board of directors of a corporation because of the office that person holds. In the association community, it is not unusual for an executive director or CEO to be named as an ex officio director in the association’s bylaws. Well drafted bylaws that provide for one or more ex officio directors will also indicate whether the ex officio director position is with or without a vote.

Analysis: Why the change? A director of a nonprofit corporation has certain fiduciary duties and is responsible, along with all of the other directors, for the oversight and the ultimate success or failure of the corporation. The California legislature decided that a person cannot be a member of the board of directors, with all of the responsibilities of that position, without the right to vote. So, effective January 1, all ex officio directors of California nonprofit corporations will have the right to vote.

What if the bylaws state that the ex officio director may not vote? In that case, the person who is named as an ex officio director may not vote. But that person is not a director of the corporation under California law. The amended statute says: “A person who does not have authority to vote as a member of the governing body of the corporation, is not a director as that term is used in this division regardless of title.” (CA Corp. Code Sec. 5047.)

This can lead to another governance change for California corporations. If the Executive Director or CEO is not a director under California law, then the governing documents should provide for indemnification of employees in addition to officers and directors.

The new California law does not affect your organization if it was incorporated in another state. However, California is often the leader in governance changes. While this change might not spread across the country in 2015, it is possible that other states will follow California’s lead and ban nonvoting directors.

Eileen Johnson is a member of the State Bar of California.

Signing Contracts

By: Timothy Huffstutter

With the wear and tear from winter weather, and spring cleaning approaching, there may be several projects waiting in the wings for your association. Whether it be routine maintenance or a new construction project you will probably need to execute a contract for the work to be completed. Managers may be tempted to sign contracts for these projects, especially for a lackadaisical board or for a project that simply needs to be done. Managers, as a general rule, however, should avoid signing contracts for work performed for the association. In this article, I will discuss why and provide some best practices tips for managers.

Who Can Sign a Contract?

The governing documents for the association will, among other things, delegate the duties and responsibilities of the association, the board of directors, and officers of the association. They will specify who can execute contracts on behalf of the association and should always be reviewed to make sure they are being properly followed. Most often, they will require the president and the secretary of the board both sign contracts on behalf of the association. In some cases, an association’s governing documents may even give the board authority to delegate this duty to a manager. However, for the reasons described below, it is best for managers to avoid signing any contracts on behalf of the association

Consequences of Signing a Contract Without Authority

There are several possible consequences of signing contracts without the authority to do so. Among the most serious, the manager could be personally liable for the contract. If a manager signs a contract on behalf of an association, then it may appear to the contractor that the manager has the authority to enter into the contract, even if the manager does not, in actuality, have this authority. Accordingly, the contract may still be considered a valid contract and the association will be bound by its terms and conditions. If something then goes wrong or if the association later decides it got a bad deal, then it may attempt to hold the manager personally liable for signing the contract without the authority to do so.

Best Practice Tips for Managers

The best practice is for managers to, as a general rule, not sign contracts on behalf of the association. Read your governing documents to determine who has the authority to negotiate and enter into contracts for your association.

If a board insists on having a manager sign, then you must first make sure that delegating that duty is allowed under the governing documents. Next, it would be best for the association to execute a resolution stating the board’s intention to delegate the duty and have its intention to execute a specific contract reflected in the association’s minutes. However, at the end of the day, it is best to avoid these situations and obtain the signature of the required board members.

If you have any questions or would like help in reviewing your governing documents, please contact your attorney.