By Saul Bercovitch
Associate Executive Director, Governmental Affairs
California Lawyers Association’s Sections were hard at work in 2023 pursuing their legislative proposals, with four bills being enacted. The changes made by these bills, effective on January 1, 2024, are discussed below.
Business Law Section
Nonprofit Organizations Committee and Corporations Committee
AB 231 allows for fully remote non-emergency member meetings for California nonprofit public benefit, mutual benefit, religious, and cooperative corporations, in the same way that existing law allows for such non-emergency shareholder meetings for California for-profit corporations.
AB 1780 (Chen), enacted in 2022, provided for fully remote shareholder meetings but did not cover nonprofit or cooperative corporations. AB 769 (Grayson), also enacted in 2022, provided for fully remote shareholder meetings for California for-profit corporations and fully remote member meetings for nonprofit and cooperative corporations but was only effective from March 25, 2022, until June 30, 2022.
Challenges in accessibility that arose as a result of the COVID-19 pandemic demonstrated that provisions providing some flexibility for meetings of members of a California nonprofit or cooperative corporation during an emergency do not adequately recognize the need for such flexibility outside the context of an emergency. Such non-emergency flexibility is, however, currently provided for fully remote shareholder meetings of California for-profit corporations.
AB 231 treats member meetings of nonprofit and cooperative corporations the same way that it (and current law) treats shareholder meetings of for-profit corporations. The bill also clarifies that, notwithstanding the absence of consent from shareholders or members, as applicable, if the meeting is conducted on or before December 31, 2025, a corporation may offer, in addition to a remote audiovisual feed, an audio-only means by which a shareholder, member, or proxy holder may participate, provided that the choice between participating via audiovisual or via audio-only means is made by the shareholder, member, or proxy holder and the corporation does not impose any barriers to either mode of participation.
Nonprofit Organizations Committee
There is significant uncertainty under existing California corporate law for nonprofit and cooperative corporations about how to correct corporate actions that failed to comply with legal requirements when originally undertaken. This uncertainty was addressed for for-profit California corporations in SB 218 (Jones), enacted in 2022, but had not been addressed for nonprofit and cooperative corporations.
SB 446 is modeled on SB 218, which created a statutory mechanism that allows California for–profit corporations to ratify or petition the superior court to validate noncompliant but otherwise lawful corporate actions, bringing California in line with several other states that have established a framework to ratify or validate such actions. SB 446 extends the same statutory mechanism to nonprofit and cooperative corporations.
Trusts and Estates Section
SB 522 repeals the Uniform Principal and Income Act (UPIA) and replaces it with the Uniform Fiduciary Income and Principal Act (UFIPA).
UPIA directed a trustee on how to allocate money to beneficiaries of an estate or trust as either principal or income. UPIA was originally approved by the Uniform Law Commission in 1931 and revised twice in 1962 and 1997. Nearly every state has adopted a version of the UPIA. UFIPA is an updated version of this Uniform Law with a new name to differentiate it from its predecessor.
Traditionally, beneficiaries of trusts were either entitled to receive income earned by the trust investments or to inherit a share of the trust principal. The trustee’s allocation of receipts and expenditures to income or principal had a direct effect on the beneficial interests. The UPIA established accounting rules to guide trustees in making these allocations. In the last few decades, the distinction between income and principal has become less important for two reasons. First, the development of modern portfolio theory allows trustees to invest for the maximum total return, whether the return is in the form of income or growth of principal. Second, modern trusts are often drafted with more flexible terms giving trustees discretion to accumulate income or access principal when advantageous to further the purposes of the trust. The UPIA has not kept pace with modern developments. SB 522 modernizes the law of trusts and gives trustees additional flexibility to administer discretionary trusts.
In 2017, the Uniform Law Commission approved a Uniform Directed Trust Act. SB 801 enacts the California Uniform Directed Trust Act, based on the Uniform Directed Trust Act.
SB 801 addresses an increasingly common arrangement in contemporary estate planning and asset management known as a directed trust. A directed trust is distinguished from a traditional trust by granting a “trust director” or other trust officeholder the power to direct the trustee on how to invest trust assets, make distributions to beneficiaries, or carry out other functions of the trust (which would otherwise be powers held by the trustee).
SB 801 modernizes California’s probate law to ensure that those who hold the power to direct a trustee in a directed trust have the same fiduciary duties, responsibilities, and liability that trustees would have in a traditional non-directed trust.
Prior to the enactment of this bill, there was no existing statute in California governing this division of power, or the fiduciary duties and liabilities of the trust director and trustee in such an arrangement, which left open the possibility that parties could be liable for actions they have no control over, or that those otherwise responsible could be fully exonerated under the trust instrument.