My comments are attached to this e-mail in HTML format, and also appear at <A HREF = "http://www.law.miami.edu/~amf/bylaw-amend-comment.htm">http://www.law.miami.edu/~amf/bylaw-amend-comment.htm</A>. -- A. Michael Froomkin froomkin@law.tm Professor of Law "It's warm here" U. Miami School of Law , P.O. Box 248087 Coral Gables, FL 33124, USA +1 (305) 284-4285 | +1 (305) 284-6506 (fax) | http://www.law.tmTitle: Comments on proposed changes to ICANN By-laws
The proposal to abandon the idea of a real membership with actual meaning is, in the words of Talleyrand, worse than a crime--it is a blunder. ICANN proposes that its first major action on the governance front, the area where it is weakest, should be to distance itself from the people who actually use the Internet and who remain unrepresented in ICANN to this day. Rather than concentrating on attracting members, ICANN proposes to not have real members. Rather than invite in the people, ICANN will first build walls of insulation, and become ever less accountable. From the outside, this is almost incomprehensible.
By proposing to remove direct end-user input into the management of ICANN before it even has a chance to born, the corporation -- currently controlled by a majority of Board members selected in secret by a process still never fully explained to the world -- demonstrates the complete disconnect between "insiders" in this process and that small part of the rest of the world which is currently paying attention. This proposal is the antithesis of "bottom up" governance.
ICANN, a body whose legitimacy is deeply questionable, apparently sees fit to protect itself against the relatively remote and hypothetical contingency that it might be derivatively sued by an individual so bent on bringing a frivolous case that he is willing to forfeit California's statutorily required bond of up to $50,000 (see Cal. Corp. Code § 800 quoted in Appendix I below). The cost of this safeguard against an unlikely contingency is the following:
I understand how non-American members of the ICANN Board might be swayed by the representations of their American lawyers that this change is essential to the continued health of ICANN. I imagine a conversation in which the current Board is warned that changes such as this are necessary to protect ICANN from those litigation-mad Americans, and those American juries. Don't believe it. It is of course true that in a membership organization the risk of being subject to a frivolous derivative action is greater than zero. Neither I nor any other lawyer can assure you to a scientific certainty that no frivolous derivative lawsuits will be filed against ICANN. These suits are not, however, that common. The classic near-frivolous derivative action is the so-called "strike suit". The claim may be dubious, but must be better than frivolous; it is brought against a rich publicly-traded company, often alleging some misdeed affecting share prices, in the hope of quick financial gain since the company finds it cheaper to settle than litigate. That scenario need not threaten ICANN since it doesn't have publicly traded stock.
It is particularly noteworthy that the State of California has enacted two sets of rules that are designed to prevent frivolous suits from damaging a body like ICANN. First, there is § 800 of the Cal. Corporations Code, which empowers the court to order a plaintiff to post a bond of up to $50,000 before being allowed to pursue the action. I have quoted the text of this statute below. Second, there is the entire body of procedural rules in the California Code of Civil Procedure, many of which are designed to resolve issues expeditiously before trial. In particular, there are numerous procedural devices for dismissing frivolous cases on the pleadings, without the expense of an actual trial.
Furthermore, the State of California provides special protections for ICANN's directors: under Cal. Code Civil Procedure §425.15, no one can bring an action against volunteer Board members of a non-profit corporation unless they first petition the Court and show that they have "established evidence that substantiates the claim." (I quote the full text in Appendix II below.)
I could go on to complain about the potentially Byzantine consequences and possibilities for capture of the proposed electoral system's double geographic diversity requirement, but since I consider the entire idea mistaken, I cannot summon up the energy.
For the record, however, I protest against the two-week comment period offererd for a matter of this importance. It is impossible for anyone with other responsibilities to continually monitor ICANN's web site, which does not in any event state the deadline for comments on its opening page but merely the date that new material appeared. As each item posted for public comment appears at random intervals, with randomly varying times for comment, it should be no surprise that few comments are received. Of course, the fewer the comments, the easier to claim "consensus" when what there is might more accuarately be termed exhaustion, disillisionment, and the abandonment of hope that ICANN will reorient itself.
Even if motivated by the most laudible and noble motives, a plan to disenfranchise the public should not be adopted until there is an ICANN Board all of whose members have been elected.
Appendix I: Cal. Corp. Code.§ 800. Conditions; security; motion for order; determination
(a) As used in this section, "corporation" includes an unincorporated association; "board" includes the managing body of an unincorporated association; "shareholder" includes a member of an unincorporated association; and "shares" includes memberships in an unincorporated association.
(b) No action may be instituted or maintained in right of any domestic or foreign corporation by any holder of shares or of voting trust certificates of the corporation unless both of the following conditions exist:
(1) The plaintiff alleges in the complaint that plaintiff was a shareholder, of record or beneficially, or the holder of voting trust certificates at the time of the transaction or any part thereof of which plaintiff complains or that plaintiff's shares or voting trust certificates thereafter devolved upon plaintiff by operation of law from a holder who was a holder at the time of the transaction or any part thereof complained of; provided, that any shareholder who does not meet these requirements may nevertheless be allowed in the discretion of the court to maintain the action on a preliminary showing to and determination by the court, by motion and after a hearing, at which the court shall consider such evidence, by affidavit or testimony, as it deems material, that (i) there is a strong prima facie case in favor of the claim asserted on behalf of the corporation, (ii) no other similar action has been or is likely to be instituted, (iii) the plaintiff acquired the shares before there was disclosure to the public or to the plaintiff of the wrongdoing of which plaintiff complains, (iv) unless the action can be maintained the defendant may retain a gain derived from defendant's willful breach of a fiduciary duty, and (v) the requested relief will not result in unjust enrichment of the corporation or any shareholder of the corporation; and
(2) The plaintiff alleges in the complaint with particularity plaintiff's efforts to secure from the board such action as plaintiff desires, or the reasons for not making such effort, and alleges further that plaintiff has either informed the corporation or the board in writing of the ultimate facts of each cause of action against each defendant or delivered to the corporation or the board a true copy of the complaint which plaintiff proposes to file.(c) In any action referred to in subdivision (b), at any time within 30 days after service of summons upon the corporation or upon any defendant who is an officer or director of the corporation, or held such office at the time of the acts complained of, the corporation or the defendant may move the court for an order, upon notice and hearing, requiring the plaintiff to furnish a bond as hereinafter provided. The motion shall be based upon one or both of the following grounds:
(1) That there is no reasonable possibility that the prosecution of the cause of action alleged in the complaint against the moving party will benefit the corporation or its shareholders.(d) At the hearing upon any motion pursuant to subdivision (c), the court shall consider such evidence, written or oral, by witnesses or affidavit, as may be material (1) to the ground or grounds upon which the motion is based, or (2) to a determination of the probable reasonable expenses, including attorneys' fees, of the corporation and the moving party which will be incurred in the defense of the action. If the court determines, after hearing the evidence adduced by the parties, that the moving party has established a probability in support of any of the grounds upon which the motion is based, the court shall fix the amount of the bond, not to exceed fifty thousand dollars ($50,000), to be furnished by the plaintiff for reasonable expenses, including attorneys' fees, which may be incurred by the moving party and the corporation in connection with the action, including expenses for which the corporation may become liable pursuant to Section 317.A ruling by the court on the motion shall not be a determination of any issue in the action or of the merits thereof. If the court, upon the motion, makes a determination that a bond shall be furnished by the plaintiff as to any one or more defendants, the action shall be dismissed as to the defendant or defendants, unless the bond required by the court has been furnished within such reasonable time as may be fixed by the court.(2) That the moving party, if other than the corporation, did not participate in the transaction complained of in any capacity. The court on application of the corporation or any defendant may, for good cause shown, extend the 30-day period for an additional period or periods not exceeding 60 days.
(e) If the plaintiff shall, either before or after a motion is made pursuant to subdivision (c),or any order or determination pursuant to the motion, furnish a bond in the aggregate amount of fifty thousand dollars ($50,000) to secure the reasonable expenses of the parties entitled to make the motion, the plaintiff has complied with the requirements of this section and with any order for a bond theretofore made, and any such motion then pending shall be dismissed and no further or additional bond shall be required.
(f) If a motion is filed pursuant to subdivision (c), no pleadings need
be filed by the corporation or any other defendant and the prosecution
of the action shall be stayed until10 days after the motion has been disposed
of.
(a) No cause of action against a person serving without compensation as a director or officer of a nonprofit corporation described in this section, on account of any negligent actor omission by that person within the scope of that person's duties as a director acting in the capacity of a board member, or as an officer acting in the capacity of, and within the scope of the duties of, an officer, shall be included in a complaint or other pleading unless the court enters an order allowing the pleading that includes that claim to be filed after the court determines that the party seeking to file the pleading has established evidence that substantiates the claim. The court may allow the filing of a pleading that includes that claim following the filing of a verified petition therefor accompanied by the proposed pleading and supporting affidavits stating the facts upon which the liability is based. The court shall order service of the petition upon the party against whom the action is proposed to be filed and permit that party to submit opposing affidavits prior to making its determination. The filing of the petition, proposed pleading, and accompanying affidavits shall toll the running of any applicable statute of limitations until the final determination of the matter, which ruling, if favorable to the petitioning party, shall permit the proposed pleading to be filed.
(b) Nothing in this section shall affect the right of the plaintiff to discover evidence on the issue of damages.
(c) Nothing in this section shall be construed to affect any action against a nonprofit corporation for any negligent action or omission of a volunteer director or officer occurring within the scope of the person's duties.
(d) For the purposes of this section, "compensation" means remuneration whether by way of salary, fee, or other consideration for services rendered. However, the payment of perdiem, mileage, or other reimbursement expenses to a director or officer shall not constitute compensation.
(e) (1) This section applies only to officers and directors of nonprofit corporations that are subject to Part 2 (commencing with Section 5110), Part 3 (commencing with Section 7110), or Part 4 (commencing with Section 9110) of Division 2 of Title 1 of the Corporations Code that are organized to provide charitable, educational, scientific, social, or other forms of public service and that are exempt from federal income taxation under Section 501(c)(1), except any credit union, or Section 501(c)(4), 501(c)(5), 501(c)(7), or501(c)(19) of the Internal Revenue Code. [FN1]
(2) This section does not apply to any corporation that unlawfully restricts membership, services, or benefits conferred on the basis of race, religious creed, color, national origin, ancestry, sex, marital status, disability, political affiliation, or age.