FOR EMERGENCY USE ONLY: CURING CORPORATE NOTICE DEFICIENCIES THROUGH SUBSEQUENT ACTIONS

A skilled business attorney understands the importance of providing proper notice of a company’s annual meetings. Conformity with notice requirements is not merely tedious rigmarole, but rather an important procedural safeguard. What is more, failure to provide proper notice can render actions taken at the meeting improper, decisions unenforceable, and result in lengthy and expensive litigation.

Nonetheless, not all is lost if a limited liability company fails to provide proper notice. In fact, recently in Camden Systems, LLC v. 409 North Camden LLC the Court of Appeal held that limited liabilities companies, like corporations, have the authority to ratify their previously-unauthorized actions.

What Happened?

409 North Camden sent two notices to its members regarding its February 2021 annual meeting. The first notice was timely, but failed to specify the general nature of the business to be transacted, as required by the Corporations Code. The second notice was sufficiently detailed, but untimely.

Camden Systems LLC, a member of 409 North Camden, objected to any business being conducted at the February 2021 meeting due to the improper notice. Still, the annual meeting was held as noticed and each of the action items listed on its second notice was approved.

Camden Systems subsequently brought suit, naming the 409 North Camden members as defendants. The allegations were based in part on the improperly-noticed February 2021 annual meeting, and the actions taken as a result of that meeting.

During litigation, 409 North Camden sent an agenda for the upcoming February 2022 annual meeting. The agenda explained that a primary action item was to ratify each of the alleged unauthorized prior actions. At the meeting, a majority of the members voted to ratify each prior action.

Subsequently, the member defendants brought a motion for summary judgment and argued that even if the notice for the February 2021 meeting was defective, the actions at issue were subsequently ratified at the properly noticed February 2022 annual meeting.

In opposition, Camden Systems argued that the purported ratification in 2022 was ineffective because LLCs, unlike corporations, do not have the power to ratify earlier actions. In making this argument Camden Systems relied on the recent enactment of Corporations Code section 119, which pertains to ratifications by corporations, not LLCs. Camden Systems argued that while the Corporations Code expressly grants ratification powers to shareholders and boards, the Corporations Code does not grant any comparable power to members of a limited liability company.

What did the Court of Appeal say?

The Court of Appeal disagreed with Camden Systems and affirmed the trial court’s grant of summary judgment. The Court of Appeal specifically emphasized that Corporations Code section 17701.05 grants limited liability companies all the powers of a natural person in carrying out its business activities. Since a natural person has the authority to ratify a previous action, the Court reasoned, a limited liability company does as well.

The Court of Appeal also dismissed Camden Systems’ argument relating to Corporations Code section 119, finding that section 119 did not grant a new right of ratification to corporations; it merely established a procedure relating to such ratifications. In other words, prior to the enactment of section 119, corporations and limited liability companies had a ratification right and the enactment of section 119 did not alter this right.

In the end, the Court of Appeal emphasized that Camden Systems effectively received the remedy it initially sought by way of the subsequent February 2022 annual meeting—a procedurally proper vote on the actions taken by 409 North Camden.

What does Camden Systems v. 409 North Camden mean for businesses?

In sum, the Court of Appeal handed members of limited liability companies a significant get out of jail free card when it comes to improperly noticed meetings. However, despite the outcome in Camden Systems, limited liability companies should be wary that ratification is not always permitted. The Court of Appeal in this case still emphasized that ratification is generally not permitted when it will prejudice the rights of a third party. If you have any questions about corporate compliance issues, please reach out to the authors.