Electronic Balloting for Limited Liability Companies and Cooperatives

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Electronic Balloting for Limited Liability Companies and Cooperatives

Electronic Balloting for Limited Liability Companies and Cooperatives[1]

 

In a recent blog, we observed “A growing trend for nonprofit and for profit organizations is to provide for electronic balloting. Indeed, many state corporation laws now allow for electronic balloting whether or not the organization’s bylaws expressly allow for it.[2]  However, this allowance is not universal for LLCs and cooperatives notwithstanding the passage of the Uniform Electronic Transactions Act, (“UETA”), in most all the states.[3]

 

Notably, the federal Electronic Signatures in Global and National Commerce Act (“ESIGN Act”),[4] requires any person to agree to use or accept electronic records or electronic signatures, other than a governmental agency with respect to a record other than a contract to which it is a party. However, as a general rule a state UETA statute may preempt this requirement if it specifies the alternative procedures or requirements for the use or acceptance (or both) of electronic records or electronic signatures to establish the legal effect, validity, or enforceability of contracts or other records; and if enacted or adopted after June 30, 2000, makes specific reference to ESIGN.[5]

 

Most state corporate statutes take advantage of the foregoing preemption allowance and specify the alternative procedures. Moreover, state corporate statutes amplify the rather “minimalist” provisions of ESIGN and UETA by prescribing in detail how the electronic transaction and signature recognition should proceed. However, we find in some instances state LLC and cooperative statutes do not address procedural detail.  This lacuna persuades us that LLC operating agreements and cooperative bylaws and other organizational documents should embed procedures to emulate the procedural detail of corporate statutes.

 

The use of electronic voting has become popular and most useful for organizations, especially national or state wide nonprofits because their members often reside in disparate geographical locations and find it difficult or inconvenient to physically attend member meetings. Also, for routine voting matters, it is less costly to provide for electronic balloting as opposed to the administrative organizational costs to convene and hold an in person meeting when several hundred or even a thousand or more members are involved.  

 

In anticipation of a possible challenge to the legality of electronic voting which may be raised by disgruntled members, it is useful to consider several safeguards and procedures to be provided in the organization’s governing documents.

 

UETA provides “If parties have agreed to conduct a transaction by electronic means and a law requires a person to provide, send, or deliver information in writing to another person, the requirement shall be satisfied if the information is provided, sent, or delivered, as the case may be, in an electronic record capable of retention by the recipient at the time of receipt. An electronic record is not capable of retention by the recipient if the sender or its information processing system inhibits the ability of the recipient to print or store the electronic record.”[6]

 

The organization should consider ensuring its governing documents, e.g., articles of association, bylaws, operating agreement or rules & regulations, contain the following language in advance of sending out ballots for electronic voting: 

 

Whenever a notice is required by the [Operating Agreement or bylaws] and whenever a vote is to be taken by (i) Members at an annual or special meeting of members or by informal action without meeting; or (ii) by Directors or committee members at a meeting of the Board or a committee thereof by informal consent or action without meeting, the notice to or vote of a Member, Director or committee member (including related materials, e.g., a ballot),  may be delivered by any electronic means which may be printably recorded by the person who receives it. The notice and its related materials shall conform to the Uniform Electronic Transaction Act[7], i.e., the information is provided, sent, or delivered, as the case may be, in an electronic record capable of retention by the recipient at the time of receipt.

 

 All solicitations for votes by ballot in writing or by electronic transmission shall: (1) Indicate the number of responses needed to meet the quorum requirements; (2) State the percentage of approvals necessary to approve each matter other than election of directors; and (3) Specify the time by which a ballot must be received by the [type of organization] in order to be counted. Except as otherwise provided in the [Articles of Association, Bylaws or Operating Agreement], a ballot in writing or by electronic transmission may not be revoked.  

 

If a third party vendor is furnishing the electronic voting system by which the electronic balloting is to occur, it is recommended the organization’s governing board require the vendor to demonstrate the ballot and accompanying materials are printably recordable by the person who receives them and to show the efficacy of any security procedure applied to determine the person to whom the electronic signature was attributable.

 

If a member refuses to vote using the electronic voting system, the Board shall provide for alternative means to vote by the refusing member.[8]  

 

It is recommended the member enrollment agreement signed by all members contains language similar to “I hereby acknowledge receipt of and the opportunity to read a copy of the [articles of association, bylaws or Operating Agreement and Rules, Policies and Procedures (as applicable)], (collectively, “Association Documents”), and agree to be bound by all of their respective terms and conditions, as presently in force or hereafter amended.” While bylaws and operating agreements generally are considered contracts between an organization and its members, unless there is some evidence the individual members acknowledged receiving and having the opportunity to review and agreed to abide by the bylaws or operating agreement or rules & regulations, it is possible a member can claim the member is not bound by a bylaw requiring the member to use an electronic voting machine or any other requirement. Whether this claim would be successful may depend upon the whim of a local judge.

 

To summarize, if the organization desires to avail itself of electronic balloting, it is recommended it ensure its governing documents and enrollment agreement reflect the UETA or other applicable electronic communication and document laws.

 

 

[1] This blog is designed for general information only. The information presented at this site should not be construed to be formal legal advice or the formation of a lawyer/client relationship. The author of this blog is not certified by any state agencies or boards of legal specialization. This blog may constitute attorney advertising in some jurisdictions.

[2] See, e.g., GA. Code 14-3-708

[3] See, e.g., GA. Code 10-12-1 et seq. Forty-seven states, the District of Columbia, and the U.S. Virgin Islands have adopted the UETA. The remaining three states, New York, Washington and Illinois have similar state legislation in place. UETA complements the Electronic Signatures in Global and National Commerce Act, (“ESIGN Act”), in that both were enacted to help ensure the validity of electronic contracts and the defensibility of electronic signatures. The ESIGN Act is a federal statute, 15 U.S.C. § 7001 et seq.

[4] 15 U.S.C. § 7001 et seq.

[5] 15 U.S.C. § 7002. See further GUIDANCE NOTE REGARDING THE RELATION BETWEEN THE UNIFORM ELECTRONIC TRANSACTIONS ACT AND FEDERAL ESIGN ACT, BLOCKCHAIN TECHNOLOGY AND “SMART CONTRACTS” (adopted by the Uniform Act Commission January 2019).

[6] See, e.g., Ga. Code § 10-12-8

[7] A different reference may be required for New York, Washington and Illinois.

[8] See, e.g., Ga. Code § 10-12-5(c) A party that agrees to conduct a transaction by electronic means may refuse to conduct other transactions by electronic means. The right granted by this subsection shall not be waived by agreement.