Request By:
Richard S. Holt, Esq.
404 Security Trust Building
271 West Short Street
Lexington, Kentucky 40507
Opinion
Opinion By: Robert F. Stephens, Esq., Attorney General; Mark F. Armstrong, Esq., Assistant Attorney General
We are in receipt of your letter in which you ask our opinion of the proper construction of KRS 271A.220 and 271A.665. KRS 271A.220 provides that the board of directors may take any action without a meeting required by KRS Chapter 271A if all the directors sign a written consent setting forth the proposed action.
Your first question is whether the actions to be taken at the organization meeting of the directors under KRS 271A.385 may be done so under the written consent provision of KRS 271A.220. It is our opinion that this question must be answered in the affirmative.
KRS 271A.220 specifically provides, ". . . [A]ny action required by this chapter to be taken at a meeting of the directors . . . may be taken without a meeting . . . [upon the unanimous written consent of the directors]." This language is clear and unambiguous in expressing the intent of the legislature, cf.
Gateway Const. Co. v. Wallbaum, Ky., 356 S.W.2d 247 (1962). As such, there is no room for statutory construction and the statute must be accepted as it is written,
Griffin v. Bowling Green, Ky., 458 S.W.2d 456 (1970).
Thus, as an initial proposition, the statute provides that any action of the directors required by KRS Chapter 271A may be taken without a formal meeting upon written consent. This would presumably include actions taken by the directors at the organization meeting which is required by KRS 271A.385. Of course, the literal reading of KRS 271A.220 cannot prevail if it would lead to an unreasonable conclusion,
Dept. of Revenue v. Greyhound Corp., Ky., 321 S.W.2d 60 (1959). We do not believe it is an unreasonable result to conclude that the organization meeting required by KRS 271A.385 can be replaced with a written consent under KRS 271A.220. This statute is identical to the provision of the Model Business Act, see Model Bus. Corp. Act Ann. 2d [1973 Supp.] § 44. In the Comment to this provision, it is pointed out that:
"Normally and at common law directors may act only at a meeting, on the theory that consultation and exchange of views is an integral part of the functioning of a board of directors. Accordingly, the permission in the Model Act and in the statutes of several jurisdictions for directors or committees to act by written consent without a meeting represents a departure from traditional procedure.
"Good reasons exist for such a provision. In a close corporation the need for the normal rule frequently does not exist or may be satisfied in other ways. In other cases, where formal action has been preceded by full discussion or where the action is merely ministerial in nature, the reason for the normal rule is lacking. Moreover, the superimposed requirement of unanimous consent precludes the stifling of opposing argument." Model Bus. Corp. Act Ann. 2d § 44 P2 (1971).
It is not unreasonable to suppose the initial directors have previously agreed on the selection of officers, issuance of stock, adoption of by-laws and the other actions usually taken at the organization meeting of directors provided in KRS 271A.385, compare 8 Fletcher Cyc. Corp. (Perm. Ed.) § 3749.
Your second question is whether the annual meeting of directors may be conducted through the written consent of the directors provided by KRS 271A.220. There is no requirement that the directors meet annually, compare KRS 271A.140(2). It is, however, common practice for corporate directors to have an "annual" meeting in addition to other meetings. The written consent statute, KRS 271A.220, only speaks in terms of "required" meetings.
Nevertheless, we are of the opinion that KRS 271A.220 extends beyond meetings required under KRS Chapter 271A and includes any corporate meetings of the directors whether required or not. To restrict KRS 271A.220 to only "required" meetings would be an unreasonable result,
Dept. of Revenue v. Greyhound Corp., supra. Further, this restricted interpretation of the statute would clearly violate its spirit and purpose, cf.
City of Louisville v. Helman, Ky., 253 S.W.2d 598 (1952), as stated supra, see Model Bus. Corp. Act Ann. 2d § 44 P2 (1971). 1
Thus, we are of the opinion that the written consent provisions of KRS 271A.220 applies to any meeting of the board of directors whether or not specifically required to be held by KRS Chapter 271A. However, it must be clearly understood that under the ordinary rule:
"The law believes that the greatest wisdom results from conference and exchange of individual views, and it is for that reason that the law requires the united wisdom of a majority of the several members of the board in determining the business of a corporation. . . . The law proceeds upon the theory that the directors shall meet and counsel with each other, and that any determination affecting the corporation shall only be arrived at and expressed after a consultation at a meeting of the board attended by at least a majority of its members." 2 Fletcher Cyc. Corp. (Perm. Ed.) § 392 at 230-231. (footnotes omitted.)
Accordingly, ". . . where it is claimed that the statutes . . . permit the corporation to dispense with this eminently wise and just rule, the construction will be strictly against any such contention." Id., § 386 at 241-242. Thus, when the directors act without a meeting, the requirements of KRS 271A.220 must be scrupulously followed.
You also ask our opinion of the proper interpretation of KRS 271A.665. This statute provides that any shareholder action may be taken without a formal meeting if the shareholders give their unanimous written consent to the action. Your first question is whether this written consent procedure may be used in lieu of the shareholder meetings specified in KRS 271A.295 regarding amendments to the articles of incorporation and in KRS 271A.140 regarding the annual meeting of shareholders.
KRS 271A.665 is identical to the Model Business Corporation Act, see Model Bus. Corp. Act Ann. 2d [1973 Supp.] § 145 P3.01. In the Comment to this section, it is stated:
"Action by shareholders is generally viewed as individual action and they may vote in their own interest. In this respect their position is in sharp contrast to that of directors. Nonetheless, at common law, under special charters as well as general corporation statutes, the requirement of shareholder action was deemed to mean action at a meeting duly held. The concept was as fundamental as that of the town meeting.
"As the practice of incorporating small business became more widespread, it was gradually recognized that the requirement of a meeting of a few shareholders was a useless formality that was widely ignored. Hence, at first gradually and then rapidly widening statutory authority for shareholders to act by written consent without a meeting was adopted." Model Bus Corp. Act Ann. 2d § 145 P2. 2
In our discussion of KRS 271A.220, supra, we adhered to the principle that a clearly expressed legislative intention must control, cf.
Gateway Const. Co. v. Wallbaum, supra. Accordingly, we conclude that shareholders may act to amend articles of incorporation as provided in KRS 271A.295 and to transact the business ordinarily acted upon at the shareholders' annual meeting as provided in KRS 271A.140.
Your second question is whether shareholders may give their written consent under KRS 271A.665 to a plan of merger or of consolidation as provided in KRS 271A.365 and to the sale of assets other than in the regular course of business as provided in KRS 271A.395 without the notice required by each of these statutes being given. We are of the opinion 3 that a shareholder's written consent given under KRS 271A.665 does not dispense with the necessity of written notice as required by KRS 271A.365 and 271A.395. This conclusion obtains because the written consent statute does not purport to extend to notice requirements. To broaden KRS 271A.665 to lift notice requirements creates forbidden exception which the legislature did not make, cf.
Bedinger v. Graybill's Executor & Trustee, Ky., 302 S.W.2d 594 (1957). Further, at best, KRS 271A.665 is a general statute which cannot prevail over the notice requirements specifically required by KRS 271A.365 and 271A.395 cf.
City of Bowling Green v. Board of Education, Ky., 443 S.W.2d 243 (1969).
In this regard, however, it may well be that by giving his written consent, the shareholder will be estopped to plead lack of notice, 5 Fletcher Cyc. Corp. (Perm. Ed.) § 2011. However, rather than rely upon a theory of estoppel (or implied waiver), it would be better practice to include an express waiver of notice as provided in KRS 271A.660 in the written consent given under KRS 271A.665.
Summary: It is our opinion that (1) the directors may give their written consent under KRS 271A.220 to an act in lieu of acting upon the matter at the organization meeting of directors as provided in KRS 271A.285; and (2) the directors may give their written consent under 271A.220 to an act in lieu of acting on the matter at the annual meeting of directors which is customarily held. We are also of the opinion that (3) the shareholders may give their written consent under KRS 271A.665 to amendments to articles of incorporation in lieu of approving the amendments at a shareholders' meeting as provided in KRS 271A.295; and (4) the shareholders may give their written consent under KRS 271A.665 to acts in lieu of approving these actions at the annual meeting of shareholders as provided in KRS 271A.140. Finally, we are of the opinion that (5) the written consent of shareholders given under KRS 271A.66k does not dispense with the necessity of giving the notices required in KRS 271A.365 and 271A.395. However, the notice may be waived by the shareholder under KRS 271A.660 in the written consent given under KRS 271A.665. Our opinion is limited to and extends no further than the expression of it in this Summary.
Footnotes
Footnotes
1 We are not unmindful of the fact that KRS 271A.220 speaks in terms of "action required by this chapter" whereas KRS 271A.665 speaks of actions required to be taken at meetings and any action which may be taken. It could be argued the shareholders can give written consent in lieu of formally meeting at all meetings whether or not required by KRS Chapter 271A; whereas, on the theory that an express mention of all meetings in the shareholder consent statute implies exclusion of voluntary meetings in the director statute, cf. Wade v. Commonwealth, Ky. 303 S.W.2d 905 (1957), directors can give their written consent only in lieu of required meetings. Because we can find no reason for the disparity in treatment of directors and shareholders and because the result would be unreasonable, i.e., written consent to required actions but not voluntary actions, we retain the opinion that the authority of the directors to give their written consent is not limited to only required actions.
2 This provision has also found to be useful in large, publicly-held corporations, see 5 Fletcher Cyc. Corp. (Perm. Ed.) § 1996 at 9.
3 Implicit in this opinion is a corollary holding that the written consent under KRS 271A.665 may be given in lieu of the meetings required in KRS 271A.365 and 271A.395.