On its Web site, the venerable authority Merriam-Webster distinguishes two sometimes-simultaneous circumstances of special concern to boards: a “crisis” signifies “a critical or crucial time or state of affairs,” but an “emergency” is “a sudden unforeseen situation requiring prompt action to avoid disaster.”
Although boards might not be able to foresee all the particulars of an emergency, Section 110 of the Delaware General Corporation Law authorizes them to adopt, before or during such an event, “emergency bylaws,” which “may make any provision that may be practical and necessary for the circumstances of the emergency.”
In particular, boards should prepare bylaw provisions to govern situations in which they might not be able to contact, or determine the location of, or even the survival of, a significant number of their directors. (Perhaps the mildest of such disturbing possibilities would be a sudden collapse, locally and/or nationally, of telephone and Internet service.)
Under Section 110, which was added to the DGCL in 1967, emergencies include “an attack on the United States or on a locality in which the corporation conducts its business or customarily holds meetings of its board of directors or its stockholders, [a] nuclear or atomic disaster, [and a] catastrophe.”
In July 2020, the Delaware Legislature revised Section 110 (with effect retroactive to January 1, 2020) to specify that catastrophic situations include, but are not limited to, “an epidemic or pandemic, and a declaration of a national emergency by the United States government.”
Among other modifications to the corporation’s normal governance, Subsection 110(a) envisions changes to the process for calling a board or committee meeting, and the recharacterization of a quorum as “[t]he director or directors in attendance at [a board or committee] meeting, or any greater number fixed by the emergency bylaws.”
Although this Subsection provides that, before an emergency, the board can designate specific officers “or other persons” who could, in emergency conditions, be deemed directors “to the extent required to provide a quorum at any meeting of the board,” Subsection 110(g) creates a default rule that, once an emergency arises, “To the extent required to constitute a quorum at any meeting of the board. . . , the officers of the corporation who are present shall. . . be deemed, in order of ranks and within the same rank in order of seniority, directors for such meeting.”
Moreover, before or during an emergency, Subsections 110(b) and (c), respectively, enable the board to provide for lines of succession in case of the incapacity of specific “officers or agents of the corporation,” and to “change the head office or designate several alternative head offices or regional offices, or authorize the officers to do so.”
A number of major corporations have already included in their bylaws emergency provisions, or varying lengths and detail. To date, there appears to be no caselaw construing such provisions.
Boards adopting, updating, or revising emergency bylaw provisions might consider:
First, how will these define an “emergency”? Some companies simply characterize it (non)operationally, as any emergency condition or catastrophic event as a result of which a quorum of the Board or one of its standing committees cannot readily be convened.
Others combine the failure to assemble a quorum with a reference to Subsection 110(a), or language tracking its broader conditions (in the fourth and fifth paragraphs above): for example, noting that their emergency bylaws will be activated “In the event of any emergency, disaster or catastrophe, as referred to in Section 110 of the DGCL, or other similar emergency condition, as a result of which a quorum of the Board of Directors or a standing committee of the Board of Directors cannot readily be convened for action.”
However, the 2020 amendments to Section 110 allow an emergency to exist “irrespective of whether a quorum of the board of directors or a standing committee thereof can readily be convened for action.” Thus, the board could adopt a definition that would activate its emergency bylaws even if a catastrophe had occurred far from any personnel, facilities, or activities of the company and its board.
Second, does an event identified in Subsection 110(a)—for instance, “a declaration of national emergency by the United States government”—automatically activate the board’s emergency bylaws, or can the board decide not to apply them, or even to remove these provisions from the bylaws? Would the company ever have valid reasons to resist the activation of its emergency bylaws?
Third, if there is any question about the existence of an “emergency” under the board’s definition, who would make the determination? (If these are not all the same person,) the chair, the CEO, or the president? A majority of the directors attending a board or committee meeting to address the question? A majority of the members of a committee of the board? One or more particular directors or officers designated by the board? The most senior director(s) or officer(s) present?
Fourth, is the board required, or even expected, to formally declare that it has determined that an emergency (by its bylaws’ definition) exists, and that its emergency bylaws have been activated? If so, which external parties would be entitled to, or should otherwise expect, such notice, and how is notice to be given (or, at least, attempted)?
Would it be wise for a creditor, or potential creditor, to require in its contractual arrangement with a corporation that once the board has made such a determination, the creditor is entitled, within a specific time period (or, as soon as possible) not only to (attempted) notice (through a specified method or methods), but also to a copy of the board’s current bylaws, including any emergency bylaws?
Would a provision allowing a creditor to terminate a contract upon the corporation’s declaration of an emergency be enforceable? By contrast, Sections 541(c)(1) and 365(e)(1) of the Bankruptcy Code (Title 11 of the United States Code) generally render unenforceable so-called “ipso facto” clauses, which purport to allow a party to terminate an agreement when the other party has entered bankruptcy proceedings. Should a corporation attempt to include in the contract a provision explicitly precluding the existence of an emergency as grounds for termination?
More generally, could a contractual provision legitimately include (or explicitly exclude) a corporation’s declaration of emergency as an event of default?
Fifth, should the board develop specific plans to identify to external parties (perhaps through some form of direct notification; and/or, if and when Internet access is available, through a Web page) the new designations and authorities of officers who have succeeded others, and/or the new location(s) of the company’s head office?
That might be preferable to, or at least a backup for, the somewhat circular certification system set our in the bylaws of one major company: “In the event of a national emergency or disaster which directly and severely affects the operations of the Corporation, . . . anyone dealing with this Corporation shall accept a certification by the Corporate Secretary or any three officers that a specified individual is acting as Chairman of the Board, Chief Executive Officer, President, Corporate Secretary, or Treasurer, in accordance with these Bylaws.”
Sixth, to prevent any confusion, should the officers themselves, before any emergency, privately and regularly be provided with an ordered list of the individuals in line to succeed current officers during an emergency?
In 1981, in the immediate aftermath of an attack on President Ronald Reagan, Secretary of State Alexander Haig erroneously told reporters at the White House, “Constitutionally, . . . [a]s for now, I’m in control here.” (Twenty years later, he clarified to 60 Minutes that “I wasn’t talking about transition. I was talking about the executive branch, who is running the government.”)
Seventh, because Section 110(g) envisions the completion of a quorum during an emergency by the elevation of (nondirector) officers to the status of director, “in order of ranks and within the same rank in order of seniority,” should each director and officer regularly be provided with a list of the rank and seniority order of corporate executives, to avoid any (further) confusion under emergency conditions?
Both the preparation of such a list and the drafting of emergency bylaws might clarify the corporation’s own definition of seniority.
One Fortune 500 company’s bylaws specify that, if no directors are available, “the emergency committee shall consist of the three most senior officers of the Corporation who are available to serve, and if and to the extent that officers are not available, the most senior employees of the Corporation. Seniority shall be determined in accordance with any designation of seniority in the minutes of the proceedings of the Board, and in the absence of such designation, shall be determined by rate of remuneration.” Other boards might designate seniority by, at least in part, the length of the individual’s service (in a given position, or perhaps in total) to the company.
Eighth, should the emergency bylaws, or (probably preferably, for security reasons) emergency procedures distributed to individual directors and officers, establish the procedures for their attempting to establish contact with each other in emergency conditions?
For instance, if, as a number of emergency bylaws provide, a meeting of the board can be called by any director, and a single director can constitute a quorum, it might be possible for two entirely separate subsets of the board to hold meetings independently, each without knowledge of the other, if none of the directors in each group is able to establish contact with any of the directors in the other. (In that situation, which group’s actions would take precedence if there is a conflict? The group that includes the most senior member of both groups?)
Ninth, to what degree should the emergency bylaws (or separate documents) set out special processes for attempting to establish contact with shareholders, during and/or immediately after an emergency, whether for purposes of electing (replacement) directors or otherwise?
Subsection 110(i)(i) [not a misprint] enables the board, during an emergency, to “take any action that it determines to be practical and necessary” with respect to shareholder meetings, including postponing such meetings. Moreover, “No person shall be liable, and no meeting of stockholders shall be postponed or voided, for the failure to make a stocklist available [to stockholders] if it was not practicable to allow inspection during any such emergency condition.”
Tenth, which individual or group determines, and how, that a particular emergency, however the board has defined it, has ended?
In addition to any emergency bylaw provisions that they have added or are adding to their existing bylaws, board might pre-draft sets of alternate provisions to be adopted during specific emergency circumstances, when, as permitted by the 2020 revisions to Section 110, “if a quorum cannot be readily convened for a meeting, . . . a majority of the directors present” could do so.
Boards and their counsel might also prepare different provisions and protocols for prospective local and/or firm-specific emergencies, such as the sudden incapacitation, in a traffic collision or airplane crash, of several of their directors, which would not necessarily qualify as an emergency under Section 110.
Among these grim ponderings, plans, and prospects, Subsection 110(d) provides personal protection: “No officer, director or employee acting in accordance with any emergency bylaws shall be liable except for willful misconduct.”
In that context, if not always in life, doing one’s honest best will be good enough.
[With thanks to Adeen Postar, Director of the Pence Law Library of the American University Washington College of Law, for clarifying the legislative history.]
