Virginia Allows Nonstock Corporations to Use Virtual-Only Meetings

August 9, 2018

The Virginia General Assembly recently enacted legislation to expand access to virtual-only meetings of corporations. Effective July 1, 2018, Virginia nonstock corporations have the option to hold their meetings of members entirely in cyberspace.

When Delaware amended its General Corporation Law in 2000 to permit Delaware stock corporations to conduct virtual-only shareholder meetings, it started a trend that over half of all U.S. jurisdictions have adopted. As more jurisdictions have allowed stock corporations to hold virtual-only shareholder meeting, more companies have begun moving their annual meetings to the virtual-only format. According to Broadridge Financial Solutions Inc., in 2017, at least 212 companies held virtual-only annual meetings, an increase over the 155 and 90 virtual-only meetings held in 2016 and 2015, respectively. These numbers are projected to further increase in 2018. Broadridge and Computershare are now two of the leading service providers that offer virtual-only meeting support.

The benefits of a virtual-only shareholder meeting are not surprising. By conducting a meeting entirely via electronic communication, a corporation can reduce costs associated with its meeting, reduce its shareholders’ travel costs, increase the number of shareholders able to participate in the meeting, and allow a more orderly conduct of the meeting. There are, however, some concerns. Some shareholders fear that virtual-only shareholder meetings could result in companies censoring questions or input from concerned shareholders, while other shareholders have noted that virtual-only meetings eliminate one of the few opportunities for shareholders to meet face-to-face with a company’s management.

Given the benefits available and the ability of the company to mitigate concerns, Virginia recently expanded access to virtual-only annual meetings to nonstock corporations. Effective July 1, 2018, Virginia nonstock corporations with members can conduct meetings of members in the same virtual manner as Virginia stock corporations. In this regard, Virginia is one of the first jurisdictions to expand virtual-only meetings to nonstock corporations; Delaware currently excludes nonstock corporations from Section 211 of the General Corporation Law, the statute that permits virtual-only meetings.

Nonstock corporations are corporations that do not have owners entitled to share in a corporation’s profits, but rather are formed without the intent to generate a return of income. Consequently, most nonstock corporations are charitable, fraternal, political, religious, trade association or civil organizations, and many are exempt from taxation under Section 501(c) of the Internal Revenue Code. In addition, private clubs often are organized as nonstock corporations.

Like a stock corporation, a nonstock corporation is managed by a board of directors. Individuals and entities may have a nontransferable membership interest in a nonstock corporation; these “members” may have voting rights in the nonstock corporation but, unlike shareholders in a stock corporation, have no right to corporate profits. Nonstock corporations with members are required to hold annual meetings of their members, and the Virginia Nonstock Corporation Act requires (unless a nonstock corporation’s bylaws provide a different number or percentage) at least 1/10 of the voting members of a nonstock corporation to be present to constitute a quorum at an annual or special meeting. If there are no members in a nonstock corporation, the board of directors of a nonstock corporation is a self-perpetuating body that is appointed pursuant to the terms of the corporation’s governing documents.

It is to these nonstock corporations that the new virtual-only meetings legislation applies. Comparable to the legislation Virginia passed in 2017 that allowed stock corporations to hold virtual-only annual meetings, the legislation effective July 1 states that a nonstock corporation’s board of directors may determine that an annual or special meeting of members may be held entirely by means of remote communication.

There are many reasons why the Virginia General Assembly would want to expand access to virtual-only meetings to nonstock corporations. First, nonstock corporations frequently have a more difficult time getting their members to participate in meetings. While stock corporations must have a majority of shareholders present to constitute a quorum, nonstock corporations need only 10 percent of their members present, which suggests that the Virginia General Assembly recognizes that nonstock corporations have a more difficult time getting participation than stock corporations do. Furthermore, if a nonstock corporation has already elected to structure itself in a way where it has members, rather than a self-perpetuating board, then the corporation presumably would want the most participation possible from those members. By allowing nonstock corporations to conduct their meetings virtually, there is a very real chance these corporations can increase participation.

In addition to the above goals, there are other instances in which a nonstock corporation might want to take advantage of a virtual-only meeting of its members. For organizations with a large number of members or with members who live far apart, virtual meetings will be very useful. Virtual-only meetings provide an avenue for nonstock corporations to reduce the overhead costs associated with hosting a meeting of members while increasing the number of members who are able to participate. Deterrents may be the cost of meeting support, and the fact that members of nonstock corporations are likely to be individuals and not all individuals are comfortable using technology in novel ways. Widespread use of FaceTime® and other videoconferencing applications may turn this tide, however.

It remains to be seen whether Virginia nonstock corporations will begin conducting virtual-only meetings of members, and whether other jurisdictions will follow Virginia’s lead and allow nonstock corporations to conduct virtual-only meetings.

McGuireWoods regularly advises public, private and nonstock corporations in Virginia and beyond on corporate governance matters, including shareholder and member meetings.