NONPROFIT GOVERNANCE SUBCOMMITTEE

Transcription

1 NONPROFIT GOVERNANCE SUBCOMMITTEE A Joint Subcommittee of the Corporate Governance and Nonprofit Organizations Committees of the Business Law Section Meeting of August 10, 2008 Minutes The meeting was called to order at 4:00 PM at the Hyatt Grand, New York by Subcommittee Co-Chair Michael Malamut. Corporate Governance Chair Carol Hansell of the Davies Ward Phillips & Vineberg, LLP, Toronto, Ontario, and Subcommittee Co-Chairs John Stout of Fredrikson & Byron, PA, Minneapolis, Minnesota, and Michael Malamut of Kopelman & Paige, PC, Boston, Massachusetts in attendance. Full attendance sheet attached. A. Introductions Co-Chairs John Stout and Michael Malamut introduced themselves gave a brief history and description of the subcommittee, for which this is the fourth face-to-face meeting. The Subcommittee welcomed Corporate Governance Committee Chair Carol Hansell and the members in attendance introduced themselves described their backgrounds and experience in nonprofit governance. The following matters were discussed: B. Housekeeping A number of housekeeping matters were addressed at the beginning of the meeting. The Subcommittee has now been in existence for 2 years (4 face-to-face meetings), long enough to begin working more formally and regularize its procedures and communications efforts. 1. Introduction of a Subcommittee webpage, linked to the Nonprofit Organizations & Corporate Governance Committee webpages on the ABA website. Initial webpage content would include: the Subcommittee charge and a brief history of the Subcommittee prior Subcommittee meeting minutes Subcommittee work to date, including comments submitted to the ABA Task Force on the Model Nonprofit Corporations Act (3d ed.) (MNCA), introduction to the policy forms collection project, and materials submitted to the August 9, 2008, seminar Government-Guided Good Governance links to documents involving recent developments in nonprofit governance, such as (a) the ABA s MNCA (3d ed) (approved yesterday), (b) the National Conference of Commissioners of Uniform State Laws

2 (NCCUSL) Revised Uniform Unincorporated Nonprofit Associations Act (RUUNAA) (approved, not yet published), (c) NCCUSL Uniform Act on Regulation of Charities (in drafting stages), (d) the Internal Revenue Services revised Form 990 (approved December, 2007) and related Instructions (to be released shortly), and (e) the American Law Institute s (ALI) Principles of Nonprofit Organizations (PNO) project (still in drafting stages) 2. Preparation of a comprehensive Subcommittee member list, composed of Business Law Section members who have attended past meetings or who have expressed an interest in the Nonprofit Governance Subcommittee. This member list would be linked to the Subcommittee webpage. 3. Creation of a Subcommittee listserv, for Subcommittee communications and informal discussion of new developments in nonprofit governance. 4. Subcommittee meeting time. Some members expressed concern that the Subcommittee s meetings have been scheduled on the Business Law Section s master calendar for late in the program, for example today s meeting late in the afternoon on the third day of a four day conference. Subcommittee members active in the Nonprofit Organizations Committee indicated that most other nonprofit-related meetings ended on the second day of the conference, while Corporate Governance Committee members indicated that many of their meetings clustered at the end of the conference. By consensus, the group agreed to request the Business Law Section s meeting planners to plan Subcommittee meetings for somewhat earlier in the conference, for example the morning of the third day. Corporate Governance Committee Chair Carol Hansell agreed to facilitate the accomplishment of the Subcommittee s goals on these housekeeping issues. C. Updates on Recent Developments Lisa Runquist, of Runquist & Assocs., Northridge, CA, who serves as the ABA liaison to the NCCUSL UUNAA and the ALI PNO updated Subcommittee members on the status of these projects. She also informed Subcommittee members about the new NCCUSL project on Regulation of Charities. She emphasized that the members of the Subcommittee could be particularly helpful in collaboration on comments on the ALI project from the practitioner s perspective. The co-chairs will communicate with ALI PNO reporter, Professor Evelyn Brody, to involve Subcommittee members, individually and through the Subcommittee, in the commentary process. Nonprofit Governance Subcommittee Page 2

3 Lawrence Beaser of Blank Rome, LLP, Philadelphia, PA, incoming Chair of the Subcommittee on the Model Nonprofit Corporation Act, described the MNCA project. The final version of the third edition of the MNCA was adopted at this annual meeting. Going forward, continuing revision of the MNCA will be an ongoing project, much like the Revised Model Business Corporation Act (RMBCA). In response to Subcommittee member questions, Larry Beaser will coordinate making available a comparison between the 1988 Revised Model Nonprofit Corporation Act (RMNCA) (2d ed.) and the 2008 MNCA (3d ed.), in particular in regard to governance issues and issues where existing nonprofit corporations in 1988 RMNCA states will have to change their practices and/or governing documents. A similar comparison, concentrating on traps for the unwary, will focus on differences between the 2004 RMBCA and the 2008 MNCA. The Business Lawyer would be a possible target publication for these comparisons. D. Nonprofit LLC Recognition The adoption of the new MNCA (3d ed.) focused attention on the status of nonprofit LLCs. The MNCA provides a great increase in the flexibility of the nonprofit corporate form, but its formality does not suit all nonprofit organizations. The LLC form has been increasingly used for business ventures. Its tremendous flexibility makes it attractive for nonprofits as well, particularly for organizations that are not able to operate under the governance constraints of the corporate form for a number of reasons, including lack of sophistication, small size, need for greater flexibility, etc. The unincorporated nonprofit association (UNA) entity under RUUNAA is novel and unfamiliar, lacks the formality and filing requirements associated with LLC form (helpful for obtaining funding and assuring participants of liability limitations), and has no precedents supporting entity recognition outside states of adoption. Many state LLC enabling statutes allow formation of nonprofit LLCs. The concern is that the Internal Revenue Service (IRS) has published guidance that limits recognition of LLCs as tax exempt to entities whose membership is composed solely of entities that have themselves obtained tax-exempt status. This position by the IRS has limited the use of the LLC form among nonprofits and poses a particular barrier for use of the LLC form by traditional individual-membership-based organizations such as sports federations, congregational churches, and professional education groups. It is also an obstacle for stand-alone memberless, board-governed LLCs parallel to memberless nonprofit corporations. Lisa Runquist believes that the IRS will only address this issue and update its current position in the context of an application for exempt status. She indicated her willingness to work on setting the precedent and requested ideas from the Subcommittee on new membership-based entities in formation or existing entities wishing to convert to LLC status that would be willing to become involved in the process. Co-Chair Michael Malamut will Nonprofit Governance Subcommittee Page 3

4 contact IRS Tax Exempt/Government Entity Advisor Ron Schultz, who was a panelist in the Government-Guided Good Governance program that originated in the Subcommittee, and discuss the IRS s receptiveness to updating its position on tax-exempt LLCs. E. IRS-Suggested Nonprofit Governance Practices Henry Lesser of DLA Piper s Silicon Valley office attended the Government-Guided Good Governance program and found that much of the business bar was unaware of the recent developments discussed in the program, which involved the IRS s efforts at regulation through disclosure in the new Form 990, the annual return applicable to most tax-exempt entities. The new form contains an entire section, with 28 questions, focusing exclusively on governance. The Form encourages adoption of a number of policies that many unsophisticated tax-exempt organizations (and even some large and sophisticated organizations) have yet to adopt, such whistleblower and joint venture policies. Narrative explanations are requested for a number of responses. The new Form is applicable for tax years ending December 31, 2008, or later, with certain financial limitations based on a three-year phase-in. By the end of the phase-in period with tax years ending after December 31, 2010, all tax-exempts with income over $200,000 or assets over $500,000 will have to file the new Form. Moreover, smaller organizations will face pressure to conform to governance best practices applicable to larger tax-exempts. This is a development at the intersection of corporate law, governance, tax, and transactional pro bono work. Because many business lawyers only dabble in nonprofit work, either on a pro bono basis or because a small percentage of their client entities are nonprofits, significant numbers are unaware of these developments. Many tax practitioners, both lawyers and accountants, are in a similar position, and will be surprised when they download the new Form 990 to fill it out and see that the form has been changed substantially and expects considerable work in the development and adoption of governance policies by their tax-exempt clients. Henry Lesser agreed to serve as Chair of a Subcommittee Task Force on educating the business bar about the new suggested governance practices. He will work with Section Chair- Elect Nat Doliner in implementing the education/ consciousness raising campaign. Working with the Subcommittee Co-Chairs, the Task Force will: Draft a 2 3 page informational article for the esource monthly Section newsletter on governance practices encouraged by the Form 990. Lisa Runquist and Michael Malamut volunteered to work on this effort. Plan a Section-sponsored webinar to get the word out about the Form 990 governance initiative and suggest strategies for implementation Nonprofit Governance Subcommittee Page 4

5 Forms. The Subcommittee collected sample governance policies last year, which are currently slated to be incorporated in upcoming Section publications on nonprofit governance and management. Working on this base, the Task Force should explore the possibility of posting or disseminating simple sample forms for modification and use by small and unsophisticated nonprofits. F. Announcements (1) One of the Subcommittee s constituting committees, the Nonprofit Corporations Committee, has received authorization to change its name to the Nonprofit Organizations Committee. (2) Suggested topics for future meetings: (a) Differences between for-profit and nonprofit governance; and (b) Inside the Nonprofit Boardroom, issues that arise behind closed doors. Respectfully submitted, Michael E. Malamut Co-Chair Nonprofit Governance Subcommittee Page 5