David I. Kempler, Esq., Elizabeth Carrot Minnigh, Esq., and R. Erica Roque, Esq.
Buchanan Ingersoll & Rooney PC, Washington, DC
As part of a complete overhaul of the District of Columbia's laws governing entities, including nonprofit organizations, the Council of the District of Columbia enacted revised Title 29 of the District of Columbia Code, "Business Organizations." The revised Business Organizations law takes a "hub-and-spoke" approach, with Chapter 1, "General Provisions," being the hub, which provides the provisions applicable to all District of Columbia entities, and Chapter 4, "Nonprofit Corporations," being one of the spokes, which provides specific rules for nonprofit corporations.
The new Nonprofit Corporation Act of 2010 (the "new Act") applies to all post-1962 Act nonprofit corporations as of January 1, 2012. Pre-1962 nonprofit corporations, often referred to as "old Act" corporations, will have until January 1, 2014 to file a notice stating that they do not wish to be governed by the new law, or if they fail to file notice by that date, will become subject to the new Act.
Although the majority of the provisions of the new Act may be superseded by provisions in the Articles of Incorporation or bylaws of an organization, post-1962 Act nonprofit corporations (or old Act corporations not intending to file the required notice) should review their current Articles of Incorporation, bylaws and governance policies to determine whether their governing documents require, or could benefit from, any updates in light of these new provisions. The following is a brief overview of some of the changes under the new Act that may be relevant in such a review.
- §29-102.11: Biennial reports for nonprofit corporations are due April 1st, rather than January 15th.
- §29-401.02(7): A membership corporation may appoint "delegates" to vote in a representative assembly for the election of directors or on other matters.
- §29-401.02(24): An individual or entity is a "member" for purposes of the new Act if they are granted voting rights, but they are not considered a "member" if they are granted voting rights only as a delegate.
- §29-401.03: Unless the organization's Articles of Incorporation or bylaws provide otherwise, notice must be given in the form of a record. While not defined, permissible forms of records would seem to include written notices, e-mails, faxes, and telegrams. A nonprofit corporation may also provide for oral notice in its Articles of Incorporation or bylaws.
- §29-403.03: If authorized in the organization's Articles of Incorporation or bylaws, in the event of an emergency, the board of directors may assume emergency powers to modify lines of succession and relocate offices. Additionally, unless the organization's Articles of Incorporation or bylaws provide otherwise, notice of any emergency meeting needs only to be given as practicable and one or more officers present at the meeting may be deemed directors for purposes of the emergency meeting. An emergency exists when a quorum of directors cannot be assembled because of a catastrophic event.
- §29-405.01-02: If authorized in the organization's Articles of Incorporation or bylaws, members may hold any annual, regular, or special meetings electronically.
- §29-405.02: A special meeting of the members may be called by 10% of members, or such other amount up to 25% as the Articles of Incorporation or bylaws may specify.
- §29-405.03:The Superior Court is authorized to order a meeting of the members upon the application of any member if:
- an annual or regular meeting has not been held within the earlier of 6 months after the end of the corporation's fiscal year or 15 months after its last meeting, or
- the member demanded a special meeting and such meeting has not been held within 30 days.
- §29-405.05: Unless the organization's articles of organization or bylaws provide otherwise, notice must be given no fewer than 10 days, but no more than 60 days before each annual, regular, or special meeting of the members (before the new Act, notice had to be given no fewer than 10 days, but no more than 50 days before the meeting).
- §29-405.20: After fixing a record date, a membership corporation must prepare an alphabetical list of members entitled to notice of a meeting of members, including the address of and number of votes each member is entitled to cast at that meeting. The corporation must make the list available for inspection by members or members' agents, unless the corporation states in its notice of meeting that the corporation has elected to proceed under §29-405.20(f), whereby a member's demand for inspection must state a proper purpose, and the corporation may offer a reasonable alternative method of achieving the purpose, within 10 business days. However, the refusal or failure to prepare or make available such a list does not affect the validity of action taken at the meeting.
- §29-405.24, .26: Unless the organization's Articles of Incorporation or bylaws provide a higher or lower quorum or voting requirement, a member quorum is now a majority of votes entitled to be cast (instead of 1/10 of the votes entitled to be cast). A majority of votes entitled to be cast on a matter by a voting group of members constitutes a quorum of that voting group for action on that matter.
- §29-405.27: Directors of a membership corporation are elected by a plurality (instead of a majority) of the votes cast by the members entitled to vote in the election at a meeting at which a quorum is present. However, under §29-414.03, members entitled to cumulate their votes for directors prior to the new law are permitted to continue to do so.
- §29-405.28: A nonprofit corporation may appoint one or more election inspectors to manage elections.
Board of Director Provisions
- §29-406.12: Pursuant to the organization's Articles of Incorporation, some, but less than all, of the powers, authority, or functions of the board of directors may be vested in a designated body. Pursuant to the organization's Articles of Incorporation or bylaws, some, but less than all, of the rights or obligations of the members may be vested in a designated body. The articles or bylaws may prescribe qualifications for members of such designated body.
- §29-406.24: A quorum for directors is a majority of directors then in office, unless the organization's Articles of Incorporation or bylaws authorize a different quorum requirement for directors, which is not less than the greater of 1/3 or two directors (before the new Act, an organization could authorize a different quorum of only at least 1/3). If a quorum is present at a vote, the affirmative vote of the directors present is an act of the board unless a greater number is required by the organization's Articles of Incorporation or bylaws.
- §29-406.25: The minimum number of directors on a committee is now one (instead of two).
- §29-406.30-31: The new Act codifies fiduciary duties of directors of nonprofit corporations, including the duty of care and the duty of loyalty, which were previously imposed on directors by case law.
- §29-406.32: While the general prohibition against loans to directors and officers remains, there are now exceptions explicitly carved out for reimbursable expenses, advances to pay life insurance premiums if secured by the cash value of the policy, loans or advances pursuant to employee benefit plans, loans secured by a principal residence of an officer, and loans to pay relocation expenses.
- §29-406.40:The requirements for specific offices for a president, secretary, and treasurer are replaced by a requirement to have a minimum of two separate officers: one responsible for management of the corporation and one responsible for the financial affairs of the corporation. The one responsible for management may be referred to as the President or such other term specified in the Articles of Incorporation or bylaws, and the one responsible for the financial affairs may be referred to as the Treasurer or such other term specified in the Articles of Incorporation or bylaws. The Articles of Incorporations, the bylaws, or the board of directors must assign one of the officers the responsibility for taking meeting minutes and maintaining records.
- §29-406.50-58: To the extent that a director or officer is successful in any proceeding against the director or officer because of that position, the new Act requires a nonprofit corporation to indemnify the director or officer against reasonable expenses incurred by the director or officer in the proceeding. The new Act also permits nonprofit corporations to indemnify directors and officers who followed relevant standards of conduct and to provide for broader indemnification in its Articles of Incorporation. The new Act also now allows for a court to order indemnification even if the relevant standard of conduct is not met.
- §29-406.70:Unless the organization otherwise provides in its Articles of Incorporation or bylaws, conflict-of-interest transactions will not be voidable if the organization follows appropriate procedures in approving the transaction, or if the transaction is fair to the organization at the time it was authorized, approved, or ratified by the board of directors or members.
- §29-406.80:A director who takes advantage of a business opportunity of the organization can avoid liability if, prior to taking advantage of such an opportunity, the director brings it to the attention of the organization and appropriate actions are taken by the disinterested directors to disclaim the organization's interest in such an opportunity. The fact that a director failed to bring the business opportunity to the attention of the organization does not support an inference that the opportunity should have been first presented to the organization or alter the burden of proof otherwise applicable.
- §29-407.01-6: A foreign nonprofit corporation may become a domestic nonprofit corporation if the domestication is authorized by the law of the foreign jurisdiction, and a domestic nonprofit corporation may become a foreign nonprofit corporation if the domestication is permitted by the laws of the foreign jurisdiction. In either case, domestication requires formal adoption of a domestication plan.
Amendments of Articles of Incorporation and Bylaws
- §29-408.03-04: Except for purely non-substantive, administrative type changes, if a nonprofit corporation has members, the members must approve amendments to the Articles of Incorporation.
- §29-408.40: The Articles of Incorporation may require third-person approval for amendment, in addition to approval by the board and members, if any. Similarly, the Articles of Incorporation or bylaws may require such third-person approval for amendment of the bylaws.
- §29-409.04: After adopting a plan of merger, the board of directors must submit the plan to the members for their approval.
Dispositions of Assets
- §29-410.01: The approval of the members is not required for most sales or dispositions of assets.
- §29-413.01-03: Unless expressly limited or abolished by the Articles of Incorporation or bylaws, nonprofit corporations are now explicitly required to maintain certain records at their principal office, and to allow members to inspect and copy records (or receive copies, including electronic delivery).
- §29-413.20: A nonprofit corporation must furnish a financial statement to its members upon request, unless otherwise stated in the Articles of Incorporation or bylaws.
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