Analysis: Statutory Members Versus Nonstatutory Members for the ICANN AT-Large Membership
August 11, 1999
[NOTE: This document is a staff report, not an ICANN policy. As such, it is not authoritative and should not be relied on by any party. Following public comment and discussion, the ICANN Board may take action on the recommendations in this report at its Santiago meeting, August 26. Comments should be sent to firstname.lastname@example.org.]
One of the fundamental issues underlying the development of a process to create an ICANN "membership" that will select At-Large Directors of ICANN is to determine precisely what rights and/or powers those "members" will have. While everyone involved to date in this discussion has used the term "members" casually, without regard to its precise legal implications, the fact is that California law recognizes two broad categories of "members" of non-profit organizations, which we will call here (these terms are not used in California law) "Statutory Members" and "Nonstatutory Members." A Statutory Member, for the purposes of this discussion, is intended to refer to a person with all the rights and powers granted by default to those persons who elect the directors of non-profit organizations. A Nonstatutory Member is intended to refer to a person who participates in the At-Large Director selection process, but who is explicitly (as permitted by California law) not intended to have all the default rights and powers of a Statutory Member. Statute section references in this memorandum refer to the California Nonprofit Corporation Law.
II. Rights of Statutory Members
California law provides that certain specific rights and powers automatically belong to any "member" of a non-profit corporation. A "member" includes "any person who, pursuant to a specific provision of a corporation's articles or bylaws, has the right to vote for the election of a director or directors or . . . has the right to vote on changes to the articles or bylaws." (5056). If the ICANN "membership" was created without any explicit limitations on these rights or powers, an ICANN member would be a Statutory Member, as we are using that term here, and would have the following rights and powers, as set forth in the California Nonprofit Corporation Law:
A meeting of members must be held in each year in which directors are to be elected. ( 5510). Members may apply to the Attorney General to order such meeting if not timely held. (5510)
Special meetings of members may be called by 5% of the members. (5510)
Members are entitled to written notice of member meetings. (5511)
Members may act by written ballot except to cumulatively vote for directors. (5513)
Proxies are allowed unless withdrawn by bylaws or articles. Proxies may be limited by articles or bylaws. Proxies are revocable. (5613)
Members may bring derivative actions, subject to the usual conditions. (5710) No bond shall be required if enough members bring the action. (5710)
Most amendments to articles must be approved by Board and members (and any other persons specified in articles). (e.g. SOs). (5812)
Board must send annual report (as defined in 6321) to members within 120 days after the end of the fiscal year. (6321)
Membership lists and accounting books and records and minutes must be made available to members for proper purposes. (6330, 6333 and 6338)
Members may amend the bylaws; however, the bylaws may provide that the amendment may occur only with the approval of a specified person other than the Board. (e.g. SOs). ( 5150) Note, however, that the Board may amend the bylaws without the approval of members unless the action would materially and adversely affect the right of members as to voting or transfer.
Directors elected by members may be removed by members. (5222)
The bylaws must specify a quorum requirement. (5512)
Members can bring legal actions to
III. Definition of Statutory Members
Notwithstanding the foregoing, California law also provides that a person is not a "member" merely by virtue of any rights such person has to "designate or select" a director or directors. (5056) Thus, California law distinguishes between (i) persons who have the right to "vote for" the election of directors and (ii) persons who "designate or select" directors. (Note also Section 5220, which provides that directors may "hold office by virtue of designation or selection as provided by the articles or bylaws rather than by election by a member or members.") The law also provides that a corporation may refer to persons "associated with it" as members, even though such persons are not "members" as defined by Section 5056.
Thus, the key to whether persons are "members" under California law (and, consequently, are Statutory Members as that term is used here) derives not from what those persons are called -- persons can be called members even if they do not elect directors -- but whether they are within the definition of Section 5056. In this case, that means whether they have the right to "elect" (as opposed to designate or select) directors. Unfortunately, California law does not further define these terms.
IV. Why is this Distinction Relevant?
Typically, the designation and selection provisions of the California law are used for things like: (i) allowing the California Employment Development Department to fill a board seat to ensure that the interests of disabled persons are represented or (ii) reserving a seat on the Board for the chief executive officer. For ICANN, these designation and selection provisions have already been used for the CEO directorship and the Supporting Organization directorships; with respect to the latter, the SO Councils designate (not elect) their directors, who are then seated. Developing a similar structure for the At Large Directors, where the public at large controls the selection of directors but is "selecting or designating" directors (as Nonstatutory Members) rather than "electing" them (as Statutory Members) can be done if it was thought desirable to do so, although it would require some additional structural complexity. There is no reason to add this complexity (and any additional legal uncertainty) unless it serves some important purpose.
The Membership Advisory Committee concluded that it would not be desirable for ICANN members to bring derivative actions, since that would create the high potential (assuming a large membership) of wasting very limited time and resources. In addition, it is hard to see how to create balance between the rights of ICANN members, and those of ICANN's other participants (the SO participants), if ICANN's members are Statutory Members, since Statutory Members would have rights that SO participants would not have. Finally, a Nonstatutory Member structure could be specifically tailored to include only those rights and powers thought appropriate for members under the unique circumstances of ICANN, rather than simply accepting the generic default structure set forth in the California Nonprofit Corporation Law.
For all these reasons, some consideration should be given to use of a Nonstatutory Member Structure ("NMS"). To illustrate the effect this could have on the rights and powers that would automatically exist if ICANN members were Statutory Members, it is useful to look individually at each of those statutory rights:
Requirement for annual members meeting -- the generally accepted view is that such a meeting is not required if elections are held by written ballot. Moreover, ICANN already holds numerous public meetings that the public can attend (either in person or via the Internet), and its bylaws already require an annual meeting. Consequently, the existence of this right is not a strong reason to opt for a NMS.
Special meetings may be called by 5% of Statutory Members. The meeting can be called for any "proper purpose," which generally includes actions on which members can act (e.g., removal of At-Large Directors, amendments of bylaws) but which also includes general discussions of matters relating to the corporation's purposes or policies (even though the members cannot vote on such matters). However, as a general proposition management can select the date, time and location of the meeting (as long as it is held within 90 days of the date the request is received). Thus, for ICANN, such special meetings, if ever called, likely could be scheduled in connection with its regular public meetings. Thus, this right does not provide a strong reason for opting for a NMS.
Written notice of meetings -- Email notice should be sufficient (See 5015 setting forth the effective time of notice by email) and should not be unduly burdensome. Consequently, this right does not provide a strong reason for opting for a NMS.
No voting by written ballot if cumulative voting -- with only three At Large directors being selected at any one time (once we are into a regular election cycle), cumulative voting provides little real benefit. Thus, written ballots can be used, and this does not support opting for a NMS.
Proxies -- Proxies are useful in enhancing the ability to get a quorum at a members meeting because a quorum is determined by those present in person or by proxy; however, proxies present complicated verification issues and often are subject to abuse. California law allows proxies to be limited by the articles or bylaws to require, for example, that only the corporate secretary can be the proxy holder and to require that they grant only specific (not general) authority. Additionally, proxies can be prohibited under California law. Consequently, this issue does not provide a basis for opting for a NMS.
Derivative Actions -- In a derivative action, a member rings a suit to enforce a right of the corporation. The right being enforced is that of the corporation -- not of he member. The complaint must allege with particularity either the plaintiff's efforts to obtain action by the board or the reasons for not making such efforts. Plaintiffs may be required to post a bond. The right to bring derivative actions cannot be taken away from Statutory Members. However, as the MAC recognized, this is subject to abuse, and given the numerous and various process and substantive protections set forth in the ICANN bylaws and articles, and the unique nature of the entity, it is not clear that this "right" is one that is either necessary or appropriate. Thus, this issue does provide a strong reason for considering a NMS.
Amendments to Articles -- The requirement that amendments to the Articles be approved by the members does not appear to be a significant reason for opting for a NMS, since it is unlikely the Articles (as opposed to the Bylaws) will need frequent amendment.
Annual report to members -- Must include financial statements and information about transactions with "interested persons" and of indemnifications. Given ICANN's general openness requirements and the fact that this requirement should not involve significant additional costs, this provides no basis for opting for a NMS.
Member inspection of membership lists and accounting books and records -- The member must specify the reason for the inspection request and it must be for a purpose reasonably related to the person's interest as a member. The corporation can deny access to the membership list if the corporation provides a reasonable alternative method of achieving the identified purpose. Note that a membership list may not be used for any purpose that the user does not reasonably believe in good faith will benefit the corporation or for a commercial purpose. Exemplary damages may be awarded against a user who violates the use restrictions fraudulently or maliciously. Notwithstanding these points, the potential for misuse of this information provides some justification for considering a NMS.
Bylaw amendments -- Although Statutory Members have the right to amend the bylaws, the bylaws may provide that such amendments may occur only with the approval in writing of a specified person or persons other than the Board or the members. As a consequence, this right of Statutory Members could be limited by requiring the approval of, for example, the Supporting Organizations (to balance the powers of the membership and the Supporting Organizations) or, as another example, the Commerce Department (and this limitation further could apply only to amendments not approved by the Board). Nevertheless, this issue should be carefully considered in determining whether to opt for an NMS.
Statutory Members can remove directors elected by them. This same right should exist with a NMS, so it provides no basis for opting for a NMS.
Quorum requirements -- Whether there are Statutory Members or Nonstatutory Members, a quorum requirement is a good idea to prevent a very small minority from calling a meeting and taking action.
Member actions regarding validity of elections -- This right cannot be limited for Statutory Members. If it is thought desirable to have elections challenged only through the review procedures set forth in the Bylaws, this provides support for considering a NMS.
Thus, a NMS would (1) allow derivative actions to be eliminated or restricted; (2) allow access to membership or financial information outside the processes established by ICANN to be limited; (3) provide a basis for a uniform and balanced Bylaws amendments process that did not favor either the At Large members or the SOs; and (4) allow ICANN participants to establish their own requirements and procedures for challenging the validity of elections tailored to the specific characteristics of ICANN. Whether these benefits are sufficient to justify the additional complexity of a NMS is a matter for the Board and ICANN stakeholders.
V. The Options for Creating a NMS.
If a decision is made to create an NMS, ICANN would be treading on relatively clean ground. As is the case with many issues arising out of the ICANN context, there is little legal precedent available to guide decisions here. Normally, the purposes of having Nonstatutory Members are to, for example, allow people to join a nonprofit corporation to make contributions or get on a mailing list or play golf or the like -- not to select directors. Thus, Nonstatutory Members as contemplated as a possibility for ICANN would be an unusual approach, and could not be based on clear legal precedent.
Nonetheless, the following sets forth some possible structures that ICANN could use to try to create a NMS:
As described above, California law defines a "member" (i.e., a Statutory Member) as "any person who, pursuant to a specific provision of a corporation's articles or bylaws, has the right to vote for the election of a director or directors . . . ." (emphasis added). Consequently, ICANN could simply set up its membership by Board resolution rather than in the articles or bylaws. The bylaws would presumably say that the At-Large Directors will be selected pursuant to a means to be determined by the Board. One downside to this structure is that any Board could rescind or alter a prior resolution and, consequently, the structure would be subject to easy change (although perhaps this could be addressed through a Bylaw provision saying that Board resolutions relating to the formation of the membership and voting procedures can be altered only by a two-thirds vote).
Another possibility that would not leave as much discretion in the hands of the Board would be to form an "Individuals' Supporting Organization" that has a general assembly (basically any individual who wants to join and meets whatever membership criteria that are established). The general assembly could select a governing council that could then designate the directors. This structure, which is similar to the other SOs, has the disadvantage of separating individual members from the actual director selection to some extent, but this is probably essential to the validity of any NMS.
Perhaps there are other devices that more creative minds could devise. Unfortunately, there is little precedent to guide this analysis. Of the above, alternative 1 seems most likely to be found to be consistent with California law. However, as noted, it may be subject to change and thus may not be a stable long-term solution. Alternative 2 is more stable and also seems consistent with California law, although it should be clear that this judgment is based more on logic than legal precedent.
If the Board feels that the benefits to ICANN of being able to set the specific parameters of membership, rather than have the California statutory default terms imposed, are significant, it should consider adopting one of the alternatives described above at its Santiago meeting, after posting this analysis for public comment. It would be useful to have comments on the general issues, as well as on other devices that might also provide increased flexibility to design a custom-fit membership system that is consistent with California law.