Noteworthy Developments in
Nonprofit Corporation Law
Michael W. Peregrine
Gardner, Carton & Douglas
April 25, 2003
Goals of Presentation
To review the significant series of developments in nonprofit and charitable trust law that have occurred in the last several years.
To focus on specific developments with implications for the not-for-profit corporate director.
To provide specific recommendations for addressing these issues with nonprofit charitable clients.
Recent Noteworthy Case
CareFirst: the opinion of the Insurance
Business Compliance Review
– “Appointment of Directors” Litigation
Note: The Implications of the
Note: Recently Released OIG/AHLA
In Re Milton Hershey School Trust
– The “Public Interest” as a Trust Beneficiary
Liberalized Preliminary Injunction Criteria
Impact on Governance
The Banner Health System Litigation
Increase in value from contributions and benefits should be retained by the community
Littauer v. Spitzer
– “Good News” for Nonprofit “M&A”?
The AHERF Settlement
Continued Focus on Application of
– “Zone of Insolvency” Issues
The Virginia Experience
Allina Health System
Waste of Charitable Assets
Impact on Management, Governance
Charitable Solicitation Concerns
Notable Private Actions
Chairman of the Board v. Trinity
– Smithers v. St. Luke’s-Roosevelt Hospital
Eychaner v. Roosevelt University
– In re: Terra Foundation
– The Cleveland Clinic
Art Institute of Chicago
– United Way of National Capital Area
Barnes Foundation Museum
Note: Emerging Issue Conflicts of
Interest in Integrated Parent/Subsidiary
The Impact of the “Corporate
And Just What Is That
The National Association of State Charity Officials
– NASCO Focus
“The Powers Report”
Report by the Special Investigative
Committee of the Board of Directors of
February 1, 2002
Board and Management oversight failed for many reasons.
The concept of the related party transactions was flawed.
Board-adopted controls were inadequate and not adequately implemented.
Senior management did not exercise sufficient oversight.
Senior management did not respond adequately when issues arose that required a vigorous response.
The Audit and Compliance Committee of the Board carried out its assigned review in a cursory manner.
The Board was denied important information that might have led it to take action.
The Board did not fully appreciate the significance of some of the specific information that came before it.
NYSE Corporate Accountability Report
(June 6, 2002)
Increasing Role and Authority of
New Audit Committee Requirements
– Encouraging Focus on Good Corporate
New Control and Enforcement Mechanisms
Improving Board Education and Training
Sarbanes-Oxley Act (July 30)
Designed to protect the interests of investors and provide market stability.
Does not apply to nonprofits
– Oversight for public accounting industry
Rules for auditor/client relationship
– Penalties for corporate financial crimes
– Procedures for Executive and Board
Ethical obligations for corporate counsel
Financial disclosure protections for investors
Focus at state level of oversight of charitable corporations and protection of charitable assets, and the duties and obligations of officers and directors.
Modification of Form 990 Return to Include
Questions Related to the Integrity of the
Organization’s Financial Statements.
The Relevance to Nonprofits
– Need to preserve charitable assets
Preserve reliability of financial statements
• Donors’ reliance
• “Early warning systems”
– State charity officials perceive an enhanced oversight obligation over nonprofit charities following AHERF
– The “Few Bad Apples” Analogy