Effective September 1, 2019, HOAs and Non-Profit Corporations now have a new tool to fix mistakes in corporate procedure, such as voting, or action taken without authorization—saving HOAs and Non-Profit Corporations from costly litigation arising from such mistakes.
The New Law
This familiar scenario has been the subject of countless lawsuits: an HOA has an election meeting, the members vote to elect a board member, and days or even weeks later, an angry homeowner disputes that a quorum was present, and seeks to undo the election. Litigation follows. Under the new ratification law, Texas Business Organizations Code § 22.501, et. seq., the HOA could simply obtain a quorum and the members can vote to ratify the election, thereby nullifying the objection and making the lawsuit moot. This is an effective tool and has the potential to save tens of thousands of dollars spent defending lawsuits brought after a technical mistake is made.
The new law provides that “a defective corporate act is not void or voidable solely as a result of a failure of authorization if the act is: (1) ratified in accordance with this subchapter; or (2) validated by the district court in a proceeding brought under Section 22.512.” The law goes on to define ‘defective corporate acts” as: (1) an election or appointment of directors that is void or voidable due to a failure of authorization; or (2) any act or transaction purportedly taken by or on behalf of the corporation that is, and at the time the act or transaction was purportedly taken would have been, within the power of a corporation to take under the corporate statute, but is void or voidable due to a failure of authorization.”
Own Up to the Mistake, and Fix it
In order to fix the defective act, the board (or the members, when the Declaration provides for action by the members) simply need to adopt a resolution stating: (1) the defective corporate act or acts to be ratified; (2) the date of each defective corporate act; (3) the nature of the failure of authorization with respect to each defective corporate act to be ratified; and (4) that the board of directors approves the ratification of the defective corporate act or acts. The quorum and voting requirements for the resolution are the same as the quorum and voting requirements applicable at the time of the adoption of the resolutions for the defective corporate act proposed to be ratified.
Notify, Notify, Notify
The new law provides for notification requirements that may differ from the dedicatory documents. If a vote of the members is required, the law requires notice of the time, place, if any, and purpose of the meeting shall be given at least 20 days before the date of the meeting to: (1) each member with voting rights as of the record date of the meeting, at the address of the member as it appears or most recently appeared, as appropriate, on the corporation’s records; and (2) each member with voting rights as of the time of the defective corporate act, except that notice is not required to be given to a member whose identity or address cannot be ascertained from the corporation’s records.
The notice must contain: (1) copies of the resolutions adopted by the board of directors under Section 22.503 or the information required by Sections 22.503(a)(1)-(4); and (2) a statement that, on member approval of the ratification of the defective corporate act made in accordance with this subchapter, the member’s right to challenge the defective corporate act is limited to an action claiming that a court of appropriate jurisdiction, in its discretion, should declare: (A) that the ratification not take effect or that it take effect only on certain conditions, if that action is filed with the court not later than the 120th day after the applicable validation effective time; or (B) that the ratification was not accomplished in accordance with this subchapter.
Verify and Certify…
If a defective corporate act ratified under the new law is one that requires a corporate filing with the State, a separate certificate of validation is required for each defective corporate act. The certificate of validation must include: (1) each defective corporate act that is a subject of the certificate of validation, including: (A) the date of the defective corporate act; and (B) the nature of the failure of authorization with respect to the defective corporate act; (2) a statement that each defective corporate act was ratified in accordance with this subchapter, including: (A) the date on which the board of directors ratified each defective corporate act; and (B) if the corporation has members with voting rights, the date, if any, on which the members approved the ratification of each defective corporate act or, if the management of the affairs of the corporation is vested in its members under Section 22.202, the date on which the members ratified each defective corporate act.
And Notify (Again)
For each defective corporate act ratified by the members, notice of the ratification shall be given promptly to: (1) each member having voting rights as of the date the governing authority adopted the resolutions ratifying the defective corporate act; or (2) each member having voting rights as of a date not later than the 60th day after the date of adoption, as established by the governing authority. Notice shall also be given to each member having voting rights as of the time of the defective corporate act, except that notice is not required to be given to a member whose identity or address cannot be ascertained from the corporation’s records.
The notice must contain: (1) copies of the resolutions adopted by the governing authority; and (2) a statement that, on ratification of the defective corporate act made in accordance with this subchapter, the member’s right to challenge the defective corporate act is limited to an action claiming that a court of appropriate jurisdiction, in its discretion, should declare: (A) that the ratification not take effect or that it take effect only on certain conditions, if the action is filed not later than the 120th day after the later of the applicable validation effective time or the time at which the notice required by this section is given; or (B) that the ratification was not accomplished in accordance with this subchapter.
Easy? No; Effective? Yes
Of course, HOAs should strive to get decisions right the first time. But with ever-changing technical requirements, and ever-litigious homeowners, the new law will allow boards to take a mulligan on a defective corporate act, wind-back the clock, and get back to the business of improving communities, without the specter of expensive litigation hanging over every decision.
