Mutual Water Companies - California
Mutual water companies service approximately 1.3 million people in California or about 3.5 percent of the population. They provide water service in rural areas that have no alternative source of water and in some urban pockets. Most mutual water companies are organized as private non-profit corporations under the California Corporations Code. They are not subject to the Davis-Stirling Act, but they are subject to the California Department of Public Health and must comply with the requirements of the State Water Resources Control Board and the Regional Water Quality Control Board. The California Corporations Code requires mutual water companies to hold annual shareholder or member meetings, elect directors, and distribute financial statements to shareholders and members every year. Shareholders and members have the right to inspect the books and records of the corporation, including the accounting records.
FAQ - Mutual Water Companies
Following are frequently asked questions and answers relating to mutual water companies in California. This is not intended as legal advice. For legal advice, you should contact an attorney who specializes in mutual water companies:
What is a mutual water company?
Under California law, a mutual water company is defined as a corporation organized or engaged in the business of selling, distributing, supplying, or delivering water for irrigation or domestic purposes that provides in its articles or bylaws that the water shall be sold, distributed, supplied, or delivered only to owners of its shares, as specified.
Why do some mutual water companies have members and others have shareholders?
Mutual water companies can be formed either as non-profit mutual benefit corporations which have members, or as general corporations which have shareholders. General corporations can apply for fax free status so there are few differences.
What does stock in a mutual water company represent?
The stock in a mutual water company is evidence that you are a member of the corporation and entitled to receive your share of water and any services provided. Stock is appurtenant to the land which means it is transferred when the land is transferred.
Are mutual water companies in California regulated by the Davis-Stirling Act?
No. However, if a mutual water company exists for the purpose of serving the owners in a California homeowner association, the association will be subject to the Davis-Stirling Act.
Are mutual water companies in California required to hold secret ballot elections for directors?
Yes. While they are not subject to the Davis-Stirling Act, mutual water companies must elect their directors using a secret ballot process similar to the one used by homeowner associations. See: HOAlnspectorofElections.org
Should a California mutual water company adopt election rules to specifically address the election of board members?
Yes. While the bylaws of most mutual water companies address the election of directors, they often fail to address important issues such qualifications of board members and the precise election procedures to be followed.
Who do you recommend for taking minutes at our annual meeting of shareholders and board meetings?
Mutual water companies should contact HOA Recording Secretary Services. They take meeting minutes by Zoom which saves mutual water companies money.
Are directors of a mutual water company required to set aside reserves for repairs and replacements?
Yes. Directors of water companies are required to set aside reserve funds for repairs and replacements to its water production , transmission, and distribution facilities in order to maintain the ability to provide continuous operations. Most mutual water companies hire reserve study providers such as Pacific Reserve Studies.
If a shareholder or member of a mutual water company becomes delinquent in paying their assessments, can the corporation file a lien against their property?
Yes, however, the corporation can deny delivering water to the shareholder or member, sell or transfer the share or membership to another person, or cause the share or membership to be forfeited to the corporation. These are usually more effective options.
Is there a legal limit on the size of assessment increases for mutual water companies?
No. Bylaws may establish limits, but the law does not.
How many people are served by mutual water companies in California?
Approximately 1.3 million people are served by nearly one-thousand mutual water companies in California. Some are small and some serve several thousand people.
Are mutual water companies required to conduct an annual review of the company's reports and financial records?
Yes. mutual water companies must adopt an annual budget and must hire a public accountant or Certified Public Accountant to perform a review of the water company's financial records and reports. The accounting records generated by our management firm make the job of the accountant easier and minimizes the cost of the review.
How are mutual water companies governed?
The shareholders or member elect a board of directors, usually each year, by means of a secret ballot process. The board will hire have a management company and will consult with an attorney that specializes in water law on an as needed basis. Most mutual water companies are non-profit mutual benefit corporations with articles of incorporation and bylaws which board members must follow when making decisions. Some are general corporations that can receive tax exempt status. They are governed in the same way. The elected board will elect a president, secretary, and treasurer.
What is AB 54?
AB 54 is a California state law that went into effect on January 1, 2012. Most importantly, it imposes requirements on mutual water companies and directors, including a requirement that all directors of mutual water companies receive a minimum of two hours of training in ethics and various laws. Within six months of being elected. AB 240 added a requirement that the training be taken every six years.
What is AB 240?
AB 240 is a California state law that went into effect on January 1, 2014. The law established new requirements for mutual water companies that cover the following topics: (1) Open meeting requirements, (2) Executive sessions, (3) Agenda requirements, (4) Exceptions to agenda requirements, (5) Meeting minutes, (6) Emergency meetings, (7) Inspection of records, (8) Financial requirements, (9) Authority to record liens, and (10) Board training requirements.
How can the membership of our mutual water company be certain that our annual board elections are being conducted fairly? Some of our shareholders are concerned.
If your board wants to ensure that your annual election of board members is being conducted fairly. They can hire a professional inspector of elections to conduct a secret ballot election. See: HOAlnspectorofElections.org
If a shareholder or a member of a mutual water company has their property foreclosed, can the water company require that the new owners pay any past due assessments before providing water services?
Is insurance available to protect the board members of a mutual water company?
Are mutual water companies in California subject to the Brown Act?
No. Board meetings and shareholder or member meetings are not public meetings and therefore, are not subject to the Brown Act.
Is there a trade organization in California for mutual water companies?
Yes. The California Association of Mutual Water Companies, located in Fullerton, California has an excellent website. They provide water company board members with the legally required training and other valuable information.
Are mutual water companies regulated by the California Public Utilities Commission (CPUC)?
Some are, but most are not. In order for a California mutual water company to avoid CPUC oversight and regulations, it must meet one of two tests· (1) It must deliver water exclusively to its shareholders or members at cost, and (2) It cannot have expressed or impliedly held itself out as engaging in the business of supplying water to the public.
What are the laws in California that apply to mutual water companies?
The California Corporations Code including special sections 14300 and 14310 is the main body of law that applies to mutual water companies. In addition, AB 54 and AB 240 include important provisions that apply to all California mutual water companies.
Do shareholders and members of mutual water companies have limited liability?
Yes. You should discuss this subject with an attorney for more Information.
Can a mutual water company be formed to supply water to agriculture shareholders?
Absolutely. Mutual water companies can supply water to residential shareholders/members or agricultural shareholders/members. Rarely do they do both.
Do mutual water companies have the right to access individual lots in order to make water line repairs?
Mutual water companies normally have recorded easements that permit them to have reasonable assess to make repairs.