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Former statutory law permitted classification of members by analogy to the Business Corporation Act. By such analogy, under the former act membership could be classified only in the articles of incorporation. See Section 33-6-101. Accordingly, the ability to classify members in the bylaws is a change from former law.

Classification could be limited to articles provisions by corporations wishing to do so.

Section 33-31-611. Transfers.

(a) Except as set forth in or authorized by the articles or bylaws, no member of a mutual benefit corporation may transfer a membership or any right arising therefrom.

(b) No member of a public benefit or religious corporation may transfer a membership or any right arising therefrom.

(c) Where transfer rights have been provided, no restriction on them is binding with respect to a member holding a membership issued before the adoption of the restriction unless the restriction is approved by the members and the affected member.
OFFICIAL COMMENT

Subdivision (a) provides that a membership in a mutual benefit corporation cannot be transferred unless the articles or bylaws provide for transfers. This comports with the reasonable expectations of members of most mutual benefit corporations. A corporation's articles or bylaws may provide for transfers if the members want transferable memberships. The articles or bylaws may impose limitations, conditions, and fees as a condition to transferring memberships.

Subdivision (b) requires the concept that memberships in public benefit and religious corporations are not securities, do not represent a valuable asset, are personal to each member, and should not be sold for value. Moreover, subdivision (b) prohibits a member of a public benefit or religious corporation from giving a membership to another person. This prevents members from passing membership rights to their friends or relatives without regard to their qualifications.

Subdivision (c) is particularly important to members of mutual benefit corporations if their memberships represent a valuable asset. It provides that no restriction on transfer can be imposed after the fact without approval of the members and the affected member. A class vote may be required. See sections 10.04, 10.05, 10.21 and 10.22.

The statutory prohibition on transfer of memberships and membership rights by members of religious and public benefit corporations is a change from former law.

Section 33-31-612. Member's liability to third parties.

A member of a corporation is not, as such, personally liable for the acts, debts, liabilities, or obligations of the corporation.
OFFICIAL COMMENT

Section 6.12 sets forth the general rule that members have no personal liability to third parties for the corporation's acts, debts, liabilities, or obligations. Following incorporation members have limited liability in the absence of: (i) facts allowing a court to pierce the corporate veil; or (ii) a legally enforceable obligation of a member to the corporation. See section 2.04 as to the liability of persons purporting to act as or on behalf of a corporation that has not been formed.
SOUTH CAROLINA REPORTERS' COMMENTS

The protection provided to members of nonprofit corporations by Section 33-31-612 lies at the heart of the nonprofit corporation act. The wording of Section 33-31-612 is intended to give members of nonprofit corporations no less protection than is given to shareholders of business corporations under Section 33-6-210(b). See the Official Comment and the South Carolina Reporter's Comments to Section 33-6-210. Section 33-31-612 appears in the Model Act as Section 6.12. Section 6.13 of the Model Act addresses the circumstances under which a member of a nonprofit becomes "liable" to the corporation for dues or assessments. Section 6.14 provides that judgment creditors of a nonprofit corporation may bring a deficiency action against members for such "liabilities". The committee felt that the provisions of Sections 6.13 and 6.14 modified to an unwarranted degree the present law of South Carolina and, after extensive discussion, the committee agreed not to recommend adoption of Sections 6.13 and 6.14.

Section 33-31-620. Resignation.

(a) A member may resign at any time.

(b) The resignation of a member does not relieve the member from any obligations the member may have to the corporation as a result of obligations incurred or commitments made before resignation.
OFFICIAL COMMENT

Section 6.20(a) sets forth the basic right of a member to resign from a nonprofit corporation at any time. A nonprofit organization cannot force

Resignation from membership will not allow a person to avoid liability for goods or service already provided or for ongoing obligations to which the member agreed prior to resignation. Section 6.20(b). This provision is particularly important to corporations that provide benefits or services to members' businesses. The member in joining the organization may promise to use its facilities or services for a specified period of time. While section 6.20(a) allows a member to resign at any time, section 6.20(b) allows the corporation to enforce or obtain damages for violation of a member's agreement.
SOUTH CAROLINA REPORTERS' COMMENTS

This provision had no counterpart in former statutory law.

Section 33-31-621. Termination, expulsion, and suspension.

(a) No member of a public benefit or mutual benefit corporation may be expelled or suspended, and no membership or memberships in such corporations may be terminated or suspended except pursuant to a procedure that is fair and reasonable and is carried out in good faith.

(b) A procedure is fair and reasonable when either:

(1) the articles or bylaws set forth a procedure that provides:

(i) not less than fifteen days prior written notice of the expulsion, suspension, or termination and the reasons therefore; and

(ii) an opportunity for the member to be heard, orally or in writing, not less than five days before the effective date of the expulsion, suspension, or termination by a person or persons authorized to decide that the proposed expulsion, termination, or suspension not take place; or

(2) it is fair and reasonable taking into consideration all of the relevant facts and circumstances.

(c) Any written notice given by mail must be given by first class or certified mail sent to the last address of the member shown on the corporation's records.

(d) A proceeding challenging an expulsion, suspension, or termination, including a proceeding in which defective notice is alleged, must be commenced within one year after the effective date of the expulsion, suspension, or termination.

Section 6.21 codifies the judicially developed requirement that expulsions, suspensions and terminations in public benefit and mutual benefit corporations must take place by means of a fair and reasonable procedure. Subsection (b)(1) provides a procedural "safe harbor" for corporations that meet its requirements.

If the "safe harbor" provisions are not met, a court may still uphold the procedural aspects of a termination on the ground that they were "fair and reasonable taking into consideration all the relevant facts and circumstances." Subsection (b)(2).

Section 6.21 does not deal with the question of the substantive grounds for termination. Nor does it negate the requirements that the procedure be carried out in good faith and not conflict with the corporation's internal procedures.

To provide finality subsection (d) requires that a proceeding challenging an expulsion, suspension or termination be commenced within one year after the date of the expulsion, suspension or termination.

A person who has been expelled or suspended is liable for dues, assessments and fees based on commitments made or obligations incurred prior to the expulsion or suspension. If the person has contracted or agreed to make payments to the corporation regardless of his or her status as a member, that obligation continues even though the person is suspended or is no longer a member.

In general, courts have not evaluated the fairness and reasonableness of procedures used by religious corporations to expel or suspend members. Section 6.21 does not expand or contract the rights of members of religious corporations in regard to termination, expulsion or suspension.
SOUTH CAROLINA REPORTERS' COMMENTS

Prior statutory law contained no provisions analogous to this section. To the extent that membership in a nonprofit corporation was a vested right, common-law courts could well have required some form of due process, not dissimilar from that required by this section, to attend expulsion. The due process provided for in Section 33-31-621 is procedural only.

This section is not intended to raise any inference that one expelled from a corporation loses any economic interest which has vested in the member in conformity with statute.

Section 33-31-622. Purchase of memberships.

(a) A public benefit or religious corporation may not purchase any of its memberships or any right arising therefrom.

(b) A mutual benefit corporation may purchase the membership of a member who resigns or whose membership is terminated for the amount and pursuant to the conditions set forth in or authorized by its articles or bylaws. No payment shall be made in violation of Article 13.
OFFICIAL COMMENT

Section 6.22 distinguishes public benefit and religious corporations from mutual benefit corporations by prohibiting the former from purchasing any of their memberships.

The assets of public benefit and religious corporations are held for a public, charitable or religious purpose and may not be distributed to members upon dissolution or while the corporation is operating. Allowing public benefit and religious corporations to purchase memberships would invite evasion of this rule.

Members in mutual benefit corporations may have an economic interest in the corporation and their memberships may represent a valuable asset. Upon dissolution, any surplus may be distributed to members in the absence of some other distribution provision. Consequently, there is no need for an absolute prohibition on purchase of memberships. In fact there is a need to authorize such purchases under specified conditions. For example, country clubs and other mutual benefit organizations often issue memberships and agree to repurchase them if certain conditions are met.

Certain protections must be provided to the creditors of the corporation to ensure that the assets are not improperly diverted to members thereby rendering the corporation unable to meet its liabilities. Consequently, the provisions of chapter 13 relating to prohibited distributions are specifically referenced in section 6.22.

If a mutual benefit corporation has members, a bylaw provision authorizing purchase of memberships must be approved by the members. See sections 10.21 and 10.22.
SOUTH CAROLINA REPORTERS' COMMENTS

The prohibition on transfers of memberships in religious and public benefit corporations had no direct counterpart in the former act. The limitation of subsection (b) on illegal distributions of mutual benefit corporations is analogous to the limitation on distributions to shareholders of Section 33-6-400 of the Business Corporation Act.

Section 33-31-630. Derivative suits.

Derivative suits may be maintained on behalf of South Carolina corporations in federal and state court in accordance with the applicable rules of civil procedure.
OFFICIAL COMMENT

[The Model Act provisions were not adopted in South Carolina.]

1. Who May Bring Derivative Suits

Section 6.30 authorizes any director or members of domestic or foreign corporations holding five percent or more of the voting power or fifty members, whichever is less, to bring a derivative suit on behalf of the corporation. Each complainant must be a member or director at the time of the proceeding, but does not have to have been a member or director at the time of the complained-of act. The five percent or fifty-member test and the discretion a court has to award expenses (including counsel fees) if it finds that the suit was commenced without reasonable cause, should prevent strike suits and suits by a single or insignificant number of members.

2. Prior Demand on Board

In most instances prior demand on a corporation's board is a condition precedent to bringing a derivative suit. The demand allows the directors to investigate the claim and to act on behalf of the corporation if they find that action is warranted. If the corporation's investigation is in progress when the proceeding is filed, the court has discretion to stay the suit until the investigation is completed.

In some instances it is not necessary to make a demand on the directors prior to bringing suit. Where a demand would be useless the person bringing the action need only allege the reasons a demand was not made. A demand would be useless, for example, if the suit was against all the directors for entering into a conflict of interest transaction.

There is no requirement of a demand on a corporation's members.

Section 6.30 does not answer the vexing question of the effect of a determination by an independent majority of the board not to sue. This question is left to a case-by-case determination by the courts.

3. Miscellaneous Procedural Matters

Section 6.30 does not require those bringing a derivative suit to post a bond for expenses of the corporation or its officers or directors. On balance a bond requirement does more to deter meritorious suits by those unable to afford a bond, than to provide protection to the corporation and its officers.

To ensure that settlement of a derivative suit is fair to the corporation and all its members, common law requires court approval of any settlement or discontinuance of the action. If a court determines that a proposed discontinuance or settlement will substantially affect the interests of a corporation's members, it may require notice of the settlement to be sent to the members. The court has discretion to determine who is to pay for the cost of giving notice. If notice is required, a court should consider the possibility of giving notice by means of a corporate magazine or newsletter See section 1.41.

5. Award of Costs and Counsel Fees

A court has discretion to require the complainants to pay the defendant's reasonable expenses (including counsel fees) if it finds that the proceeding was commenced frivolously or in bad faith. Section 8.30(d). This provision is particularly important in the case of public benefit or religious corporations that may spend funds defending a lawsuit rather than devoting them to their public, charitable or religious purposes.

A court also has discretion to award reasonable expenses (including counsel fees) to complainants if: (1) they were successful in whole or in part (success requires that the corporation take some action that the complainants sought or receive some economic or other benefit); or (2) anything was received by the corporation as a result of a judgment.

If the complainants are members of a public benefit corporation they cannot receive anything of economic value as a result of a derivative suit. Members of mutual benefit or religious corporations may receive something of value so long as that which they receive is not a prohibited distribution.

6. Notice to the Attorney General

The attorney general must be given notice of any derivative suit involving a public benefit corporation or assets held in charitable trust by a mutual benefit corporations. The notice provides the attorney general an opportunity to learn of and evaluate the dispute. After an evaluation the attorney general may, but does not have to, join in any such action. See section 1.70.

7. Exhaustion of Internal Remedies

Some nonprofit corporations have procedures for resolving internal disputes. In general these procedures should be exhausted prior to bringing a derivative suit.

8. Constitutional Limitations

Federal or state constitutional provisions may prohibit courts from considering derivative suits brought on behalf of religious corporations.

South Carolina Rule of Civil Procedure 23(b)(1) and Federal Rule of Civil Procedure 23(b)(1) apply to South Carolina nonprofit corporations, and this has not been changed. See the South Carolina Reporter's Comments to Section 33-7-400 of the Business Corporation Act.

Rule 23(b)(1) contains the following elements:

-- One or more members may bring a derivative action.

-- The complaint must be verified.

-- The plaintiff must have been a member at the time of the harm complained of.

-- The complaint must allege with particularity any effort made to obtain action from the board "and the reasons for his failure to obtain the action or for not making the effort."

-- The plaintiff must fairly and adequately represent the interests of the members in enforcing the corporation's right.

-- Once begun, a derivative action may not be dismissed without court approval; notice of dismissal must be given to the members.
See S.C.R. Civ. Pro. r.23(b)(1). The Model Act would require that a derivative action be brought by no less than five percent of the voting power or by fifty members, whichever is less. Model Act section 6.30. Other states which have adopted versions of the Model Act have enacted similar requirements; see, e.g., Ore. Rev. Stat. Ann. Section 65.174(1)(a) (two percent of the voting power or twenty members); Miss. Code 1972 Ann. Section 79-11-193(1)(a) (five percent or fifty members). Neither the Model Act nor the cited statutes, however, contain the requirement of rule 23(b)(1) that the plaintiff member be adjudged to represent fairly and adequately the interests of the members in enforcing the corporation's right. This provision of rule 23(b)(1) is intended to accomplish the purpose of the Model Act's higher standing requirement, that is, to minimize strike and nuisance suits.

Section 33-31-640. Delegates.

(a) A corporation may provide in its articles or bylaws for delegates having some or all of the authority of members.

(b) The articles or bylaws may set forth provisions relating to:

(1) the characteristics, qualifications, rights, limitations and obligations of delegates including their selection and removal;

(2) calling, noticing, holding, and conducting meetings of delegates; and

Section 6.40 authorizes corporations to operate with delegates rather than or in addition to members or a self-perpetuating board. The law in regard to delegates and their rights is not as well developed as that relating to members or self-perpetuating boards. For this reason section 6.40 does not set forth detailed provisions. It authorizes the articles or bylaws to set forth rules in regard to delegates, and carrying on corporate activities during and between meetings of delegates.

Once rules have been adopted they must be applied in a reasonable way considering the nature, size, customs and operations of the corporation.

If the corporation has a board, the board is bound by the provisions set forth in Chapter 8. Insofar as the delegates have been given the powers or some of the powers of members of the board, they have analogous rights, duties and obligations. See section 8.01.
SOUTH CAROLINA REPORTERS' COMMENTS

Prior statutory law contained no counterpart to this section.

Section 33-31-701. Annual and regular meetings.

(a) A corporation with members shall hold a membership meeting annually at a time stated in or fixed in accordance with the bylaws.

(b) A corporation with members may hold regular membership meetings at the times stated in or fixed in accordance with the bylaws.

(c) Annual and regular membership meetings may be held in or out of this State at the place stated in or fixed in accordance with the bylaws. If no place is stated in or fixed in accordance with the bylaws, annual and regular meetings must be held at the corporation's principal office.

(d) At the annual meeting:

(1) The president and chief financial officer shall report on the activities and financial condition of the corporation; and

(2) Unless this chapter or the articles of incorporation or bylaws require otherwise, notice of an annual meeting need not include a description of the purpose for which the meeting is called.

(e) At regular meetings, the members shall consider and act upon matters as raised consistent with provisions of the articles of incorporation or bylaws and, in addition, with the notice requirements of this chapter.

Section 7.01(a) requires all nonprofit corporations with members to hold annual meetings. The main activity at most annual meetings is the election of directors. However, directors may be elected by written ballot or written consent. See sections 7.04 and 7.08. Even if directors are not to be elected, it is still necessary to have an annual meeting to: (1) serve as a town forum in which the president and officers report on and answer reasonable questions concerning the activities and financial condition of the corporation; and (2) consider matters that may be raised consistent with the requirements of sections 7.05 and 7.23(b).

Some nonprofit corporations hold regular meetings of members in addition to holding an annual meeting of members. In some cases these regular meetings deal with matters that might otherwise be dealt with by the board of directors. Section 7.01(b) recognizes this practice and allows nonprofit corporations to hold regular meetings of members at times stated in or fixed in accordance with their bylaws. The Model Act does not require that any action be taken at these meetings. However, any action taken must be consistent with the notice requirements of sections 7.05 and 7.23(b).

If an annual or required regular meeting is not held, a member and, in the case of a public benefit corporation, the attorney general, may sue under section 7.03 to compel the corporation to hold the meeting.

Many nonprofit corporations operate informally and may not hold an annual or regular meeting required by their bylaws. The failure to hold an annual or regular meeting: (1) "does not affect the validity of any corporate action" (section 7.01(d)); and (2) the directors in office continue to serve until their successors are elected and qualify (section 8.05(b)). The corporation can continue to function. Actions taken by its board, officers and employees will be valid even though the corporation has not complied with he requirements of section 7.0. However, the directors' failure to call an annual or regular meeting might violate the duties set forth in section 8.30.

The bylaws may state the time and place of annual and regular meetings or may authorize the board or some other person to determine the time and place of annual and regular meetings. If the latter approach is used, the board or person calling the meeting has great discretion in establishing a convenient time and place for the meeting. This discretion must be exercised in good faith consistent with the duties set forth in section 8.30.

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