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Mar

16

2021

From The Blog

Legal Opinion on Board Decision and Definition of a Member

Authority to Expand the Board and Appoint Directors

On March 1, the KICA Board of Directors voted to expand from seven to nine directors. Before the decision was made, the board received a  legal opinion of Jett Law Group’s Allison Jett to clarify and confirm the legal authority of the board to increase the number of directors and appoint members to fill the vacant seats. The legal opinion states that the various governing documents allow the board to set the number of board members  “as it deems appropriate,” by adding 2 or 4 additional seats for a total of 9 or 11 directors. There is no restriction or limitation on how, when or why the board can make this determination of appropriateness.

The legal opinion states, “If the Board votes to increase the number of directors, once approved, the new seats are vacant. The sitting Board gets to decide how to fill the vacancies. It may choose to fill the seats by majority vote of the Board, or at the next meeting of the Members. If the Board decides to fill the vacancies, it can do so by selecting the persons of their choosing.”

Excerpts from Legal Opinion

Allison C. Jett, Licensed in GA & SC, Jett Law Group

There are three sources of materials that we are guided by when reviewing the possibility of board expansion. These include: The South Carolina Nonprofit Act; The Declaration of Covenants and Restrictions of The Kiawah Island Community Association, A/K/A the “KICA Covenants”; and The Kiawah Island Community Association Bylaws, A/K/A the “KICA Bylaws”. I will discuss the relevant provisions of each in turn.

The South Carolina Nonprofit Act: SC Code § 33-31-811 creates default rules for filling board positions and addresses the issue of vacancies on a board created by the expansion of the board. Specifically, it provides as follows:

Unless the articles or bylaws provide otherwise, and except as provided in subsections (b) and (c), if a vacancy occurs on a board of directors, including a vacancy resulting from an increase in the number of directors:

(1) the members, if any, may fill the vacancy; if the vacant office was held by a director elected by a class, chapter, or other organizational unit or by region or other geographic grouping, only members of the class, chapter, unit, or grouping are entitled to vote to fill the vacancy if it is filled by the members;

(2) the board of directors may fill the vacancy; or

(3) if the directors remaining in office constitute fewer than a quorum of the board, they may fill the vacancy by the affirmative vote of a majority of all the directors remaining in office.

(b) Unless the articles or bylaws provide otherwise, if a vacant office was held by an appointed director, only the person who appointed the director may fill the vacancy.

(c) If a vacant office was held by a designated director, the vacancy must be filled as provided in the articles or bylaws. In the absence of an applicable article or bylaw provision, the vacancy may not be filled by the board.

(d) A vacancy that will occur at a specific later date, by reason of a resignation effective at a later date under Section 33-31-807(b) or otherwise, may be filled before the vacancy occurs but the new director may not take office until the vacancy occurs.

Emphasis supplied.

Because subsection (a) says “Unless the articles or bylaws provide otherwise”, it is clear that this statute is only implicated if the KICA Covenants or the KICA Bylaws are silent on the issue. In our case, we have helpful guiding language in both.

The KICA Covenants: Article III, Section 3 states: “The Association shall be governed by a Board of Directors consisting of Three (3), Five (5), Seven (7), Nine (9), or Eleven (11) members. Initially the board shall consist of Three (3) Members, with the number in subsequent years to be determined by the Board of Directors as provided for in the Bylaws of the Association.” (Emphasis supplied).

The KICA Bylaws: Article III, Section 1 of the Bylaws does provide, in part, “The individual directors must be natural persons¹ who have a right of easement of enjoyment in and to the Common Property pursuant to Article IV, Section 1, of the declaration of Covenants and Restrictions of the Kiawah Island Community Association, Inc. Such persons are not eligible to serve on the board if they are guests or tenants of a Member or the right of easement of enjoyment arises from a Member in default of any of his obligations under the By-Laws.”

¹KICA has historically interpreted the term “natural persons” to include an individual who is the principal of an entity who holds such a right of easement and enjoyment. In keeping with that interpretation, KICA Directors have previously included representatives of Trusts, Limited Liability Companies, and other corporate entities.

Article III Section 2 of the Bylaws provides, in pertinent part, that “Initially the number of directors shall be three (3) with the number of directors in subsequent years to be set by the Board of Directors at three (3), five (5), seven (7), nine (9) or eleven (11) Members as the directors deem appropriate. … Any vacancy occurring in the initial or subsequent Board of Directors may be filled at any meeting of the Board of Directors by the affirmative vote of a majority of the remaining directors, though less than a quorum of the Board of Directors, or by a sole remaining director and, if not previously filled, shall be filled at the next succeeding meeting of the Members of the Corporation….” (Emphasis supplied).

ANALYSIS

Both the SC Nonprofit Act and the KICA Covenants defer to the KICA Bylaws on filling vacancies, including vacancies created by increasing the number of directors. The KICA Bylaws allow the KICA Board to set the number of Board members “as it deems appropriate.” If the Board wanted to increase the number of members, it could do so by adding 2 or 4 additional seats for a total of 9 or 11 Directors. There is no restriction or limitation on how or when or why the Board can make this determination of appropriateness.

Although the term of directors added to the Board is not addressed specifically in the Bylaws, Article III Section 2 created staggered terms for the initial directors elected by the Members. Thereafter, directors elected by the members were elected to a three-year term in order to preserve the stagger. Because the members do not elect the persons to expand the Board and the need to maintain the stagger, the three-year term for elected directors does not apply to persons appointed to expand the Board unless or until the Director is elected by the Members.

If the Board votes to increase the number of directors, once approved, the new seats are vacant. The sitting Board gets to decide how to fill the vacancies. It may choose to fill the seats by majority vote of the Board, or at the next meeting of the Members². If the Board decides to fill the vacancies, it can do so by selecting persons of their choosing.

²This is a meeting with notice and quorum requirements outlined in the governing documents. Typically for KICA, this only occurs annually, though there have been occasional instances where special votes have happened between annual meetings.

View the Full Legal Opinion on Board Expansion

Definition of a Member 

After the decision to expand the board was made, a group of members initiated a petition for a referendum on the board’s decision. This generated confusion over the signature requirements for a successful petition, the definition of a member, and the differences between a petition and a vote as outlined in KICA’s governing documents. Ms. Jett advised KICA on this issue as well. 

The legal opinion states that “any petition calling for a referendum of a Board action must be signed by not less than 25% of those individuals or entities who hold fee simple title to Residential Lot, Family Dwelling Unit, Multiple Family Tract, Public and Commercial Site, Public and Commercial Unit, Development Unit Parcel, or Unsubdivided Land situated upon the Properties (as those terms are defined in the KICA Covenants), those who hold a life estate interest, or those who hold a long term contract for the sale of one of those properties.” 

In contrast, KICA’s voting rights are allocated to individual properties, not each deeded owner. “A vote is a very different action under the KICA Covenants than the signing of the referendum petition. The KICA Covenants in Article III, Section 2 establish 5 separate types of voting rights, denominated as Type A, B, C, D, and E.”

Excerpts from Legal Opinion

Allison C. Jett, Licensed in GA & SC, Jett Law Group

Under Article III, Section 5 a referendum on any Board action can be triggered “by presenting to the secretary of the Board within thirty (30) days of the taking of such action or ratification by the Board of its intent to take such action a petition signed by not less than twenty five per cent (25%) of the Members.” Importantly, the act being performed here is not a vote, but rather a signing of the petition. Qualification to sign the petition is reserved to “Members” as defined by the KICA Covenants. 

Article I(n) of the KICA Covenants provides that “’Member’;” shall mean and refer to all those Owners who are Members of the Association as defined in Section 1 of Article III.” That Article III, Section 1 defines membership as follows: “Every Owner except Owners which are exempt from the payment of assessments shall be a Member of the Association. The Company shall be a Member of the Association.” 

This provision defining a Member as an Owner (with capitalization as a defined term), takes us therefore, to the definition of “Owner” in the KICA Covenants. That definition can be found at Article I(l) and reads as follows: 

“Owner” shall mean and refer to the Owner as shown by the real estate records of Charleston County, South Carolina, whether it be one or more persons, firms, associations, corporation, or other legal entities, of fee simple title to any Residential Lot, Family Dwelling Unit, Multiple Family Tract, Public and Commercial Site, Public and Commercial Unit, Development Unit Parcel, or Unsubdivided Land situated upon the Properties but, notwithstanding any applicable theory of a deed of trust, shall not mean or refer to the mortgagee, his or its successors or assigns, unless and until such mortgagee has acquired title pursuant to foreclosure or a proceeding or deed in lieu of foreclosure; nor shall the term “Owner” mean or refer to any lessee or tenant of an Owner. In the event that there is of record a deed granting one or more parties life estate in any lot or parcel of land within the Properties, the Owner of such lot or parcel of land shall be the holder or holders of the life interest, regardless of who holds the fee interest. In the event that there is record of a long-term contract of sale covering any lot or parcel of land within the Properties, the Owner of such lot or parcel of land shall be the purchaser under said contract and not the fee simple title holder. A long-term contract of sale shall be one where the purchaser is required to make payments for the property for a period extending beyond nine (9) months from the date of the contract, and where the purchaser does not receive title to the property until such payments are made but the purchaser is given the use of said property. 

Therefore, under this series of provisions and definitions, any petition calling for a referendum of a Board action must be signed by not less than 25% of those individuals or entities who hold fee simple title to Residential Lot, Family Dwelling Unit, Multiple Family Tract, Public and Commercial Site, Public and Commercial Unit, Development Unit Parcel, or Unsubdivided Land situated upon the Properties (as those terms are defined in the KICA Covenants), those who hold a life estate interest, or those who hold a long term contract for the sale of one of those properties. 

If a petition for referendum is presented to the Secretary of the Board within the requisite 30 days that meets the 25% of the Members threshold, then there is to be a vote on whether or not to approve the action taken by the Board. The action taken by the Board will be sustained if “51%, or more, of the votes actually returned to the Association within the specified time¹ shall be in favor of such action….” A vote is a very different action under the KICA Covenants than the signing of the referendum petition. The KICA Covenants in Article III, Section 2 establish 5 separate types of voting rights, denominated as Type A, B, C, D, and E. 

¹The “specified time” is not spelled out in the KICA Covenants. Rather, this refers to the referendum vote setting a deadline within which the ballots must be returned in order to be counted. 

View the Full Legal Opinion on the Definition of a Member for a Referendum