DIRECTOR QUALIFICATIONS UNDER SB 323

DIRECTOR QUALIFICATIONS UNDER SB 323

By Sandra L. Gottlieb, Esq., CCAL SwedelsonGottlieb

Since the adoption of SB 323, there have been many questions about the vast implications of this bill and the numerous changes to a number of Sections of the Civil Code effective January 1, 2020. Here, we will only be discussing director qualifications and the procedure or process for removing directors.

First, SB 323 requires that associations disqualify nonmembers from board nominations. For associations that have allowed non-members, such as tenants, to sit on the board, they will no longer be allowed to nominate them for the board moving forward. Effective January 1, 2020, non-member directors may remain seated on the board until their term is up.

There is an exception for this disqualification for developer appointed representatives. For director appointed representatives, associations must still look to their governing documents for qualifications and conditions under which the developer can retain seats on the board.

Second, SB 323 allows for non-natural person members, such as trusts, LLCs, corporations, and/or business entities to designate a natural person to act as the member. As such, the entity could have their tenant act as the member. There is no specific requirement for when the designation is made, only that it is made by the governing body of the entity. Therefore, the designation could be made at the same time as the nomination. In order to verify the correct party has made the designation, associations need to review documents from the entity describing the governing body, minutes from corporations where directors have been elected or appointed to the board, etc. It is recommended that associations develop a procedure for entities to designate persons to act on their/its behalf including preparing documents that the entities will be required to be submitted along with the designation and inform entities of same in the election rules.

Associations are now provided additional limited options for director qualifications. For these, it will be up to the association to adopt them into the association election rules, or not.

One such option is to require nominees to be current in assessments, which does not include fines, interest, late charges, collection costs or charges from third parties. However, if amounts were paid under protest or are included in a payment plan, then an association may not disqualify the nominee. This qualification requires that seated directors also remain current in their assessments to remain on the board. Associations that select this option will then be required to enforce the qualification by removing any director that is not current in their assessments. In order to do this, associations must decide how many days past due a director can be before starting the removal process. Boards should consider if one missed payment (or part thereof) is enough to disqualify or if it prefers a different threshold. Whatever the board decides, the same requirement must be applied to nominees/ candidates and directors. While SB 323 does not address the removal process for a director, California Corporations Code 7221(b) provides that a board can remove a director by majority vote of qualified directors, provided that the qualification was included in the bylaws or articles of incorporation at the beginning of the disqualified director’s term. Since SB 323 supersedes the Corporations Code, SwedelsonGottlieb recommends removal at the time the director becomes disqualified due to the delinquency even if the qualification is not included in the bylaws or articles of incorporation or it was not in effect at the start of the director’s term.

Third, an association may disqualify a nominee when a co-owner of the same separate interest is already nominated or seated on the board.

Fourth, an association may disqualify a nominee who has not been a member, as in an owner of their separate interest, for at least one year. We recommend that associations use one year from the date of ownership of the separate interest which is then tied to the date of the board election, so the nominee would be qualified to sit, as of that date, when elected. One could also read into the law that the year should be fixed to the nomination deadline, to be qualified to be nominated however this would be problematic if an association’s election rules allowed for nominations from the floor.

Fifth, an association may disqualify a nominee with a felony background that would cause the association to lose or not be able to acquire a fidelity bond. In order to determine what would constitute or trigger this uninsurable candidate, an association’s board will need to consult with the association’s insurance broker or carrier. Not all felonies will have an impact on fidelity insurance and the age of the felony record may also affect the insurance carrier’s decision. Associations will want to have written opinions from their broker or carrier about the nominee’s specific circumstances in order to disqualify the nominee.

For any of the above required or optional disqualifications, the association must provide the nominee an opportunity to participate in internal dispute resolution before the association can disqualify the nominee. Due to this requirement, we recommend that associations build in enough time to go through this process in its election calendar.

All other director qualifications that may exist in your bylaws are now invalid. This includes residency restrictions, term limits, conflict of interest provisions, etc. For nominees that would have been disqualified under these provisions in an association bylaws, they will no longer be controlling. While SB 323 does not require amendment of bylaws to comply with the law, for clarity for members, it is recommended that the election rules address any discrepancies and/or inconsistencies between the election rules and the bylaws and advise that the election rules will be controlling.

Sandra L. Gottlieb is one of California’s leading community association attorneys. She is a founding partner of the law firm of SwedelsonGottlieb