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Electronic Notices by Corporations to Shareholders and Members: A Dangerous Path

The ability of corporations or limited liability companies to provide their shareholders or members with electronic notice of meetings and other events is far more complicated and dangerous than may appear. Electronic notice includes notice by facsimile and email, as well as a host of other non-paper formats, including internet postings, and blogs.

Contrary to common belief, companies have no inherent right to provide notice to their shareholders or members in any form other than mail, overnight delivery, or personal delivery. It is a hard and expensive lesson to learn that your company has not complied with electronic notice requirements when 10% of a company's shareholders or members claim that they never received a company's electronic notice of a meeting and subsequently try to set aside the actions taken at the meeting.

Many officers and directors are shocked when they learn, the hard way, that even if their shareholder or operating agreements state that notices may be given by facsimile or email, such consent to electronic notice is not binding unless some very extensive disclosure are made in advance. These disclosures are quite burdensome and will generally require a separate consent document all together.

As an example, in California for purposes of giving electronic notice of a meeting to members of a limited liability company, the company is required to comply with California Corporations Code 171004, 17001 as well as the Electronic Signatures in Global and National Commerce Act. (15 U.S.C. 7001.) In order to comply with these statutes a company must obtain the consent of the person who is to be provided electronic notice. But the path to obtaining that consent is quite complicated. To obtain the consent the company must complete the following requirements:

  1. The member must be provided a "clear and conspicuous" statement:

(i) that he has the right or option to have the notice made available on paper or in non-electronic form;

(ii) that he has the right to withdraw his consent to have notice provided to him in electronic form and of any conditions or consequences that may result (such as additional fees); and

(iii) as to whether the consent to electronic notice applies to all future notices or not.

  1. The company is also required to explain:

(i) the exact procedure that the member must use to withdraw his consent for electronic notice;

(ii) the exact procedure he must go through to update his electronic information with the company; and

(iii) the exact procedure the member must use to request a paper copy of any notices and whether any fee will be charged.

But the requirements are even more cumbersome than that. After the disclosures above, the company must provide a statement to the member, before the consent is given, of the exact type of facsimile, computer and software that the member will need to obtain the notices (ie, email account, a computer running a particular operating system, access to the internet, and software such as Microsoft Outlook, Abode Acrobat).

Now that the company has gone through the exercise of providing these disclosures to the member, the member must consent ELECTRONICALLY "in a manner that reasonably demonstrates that the consumer can access information" in the electronic format being used. That means that the company must receive consent from the member either by email or facsimile, or both. For example, it is not sufficient that the member simply sign a consent document for electronic notice and deliver a copy by fax to the company if notice is to be given by email. In such a case the consent must first be delivered to the company by email.

After all of this is completed, and the consent is obtained, if there is any change in hardware or software being used to give notice the entire disclosure process must be repeated and a new consent must be obtained. Keeping in mind the disclosures that must be provided and the manner in which consent must be received, and the fact that software and technology used to give electronic notice will likely change, the question must then be asked, "is providing electronic notice practicable". For some larger companies who have a dedicated staff that can monitor these type of technical requirements the burden imposed by the law may be a worthwhile trade-off to the expense of mail. However, for most medium and small companies the stringent law is simply not realistic.

Until the law catches up with the developments of technology, which has never occurred in the past, the best way to give notice is by mail.

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