Noteworthy Developments in
Nonprofit Corporation Law
Michael W. Peregrine
Gardner, Carton & Douglas
April 25, 2003

WELCOME

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.

The Outline/Bibliography/
Other Resources

Part I
Recent Noteworthy Case
Law Developments

Health Midwest:
–
Kansas Litigation
–
Missouri Litigation

•
CareFirst: the opinion of the Insurance
Commission.

HealthPartners
–
Business Compliance Review
– “Appointment of Directors” Litigation

•
Note: The Implications of the
HealthSouth Controversy.

•
Note: Recently Released OIG/AHLA
Guidance.

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
Restricted Gifts
– “Zone of Insolvency” Issues

The Virginia Experience

Allina Health System
–
Affiliate Divestiture
–
Waste of Charitable Assets
–
Impact on Management, Governance

Emerging Issues:
–
Parent/Subsidiary Conflicts
–
Charitable Solicitation Concerns
–
Imprudent Investment

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
Health Systems.

Part II
The Impact of the “Corporate
Responsibility Environment”

And Just What Is That
Environment?

The National Association of State Charity Officials

Key Developments
–
Powers Report
–
NYSE Report
–
Sarbanes
– NASCO Focus
–
IRS Announcement

“The Powers Report”
Report by the Special Investigative
Committee of the Board of Directors of
Enron Corp.
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
Independent Directors
–
New Audit Committee Requirements

– Encouraging Focus on Good Corporate
Governance
–
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
Conduct
–
Ethical obligations for corporate counsel
–
Financial disclosure protections for investors

NASCO
–
Focus at state level of oversight of charitable corporations and protection of charitable assets, and the duties and obligations of officers and directors.

IRS
–
Modification of Form 990 Return to Include
Questions Related to the Integrity of the
Organization’s Financial Statements.

Part III
The Relevance to Nonprofits

– Need to preserve charitable assets
–
Preserve reliability of financial statements
• Donors’ reliance
• “Early warning systems”
–
Bondholders

– State charity officials perceive an enhanced oversight obligation over nonprofit charities following AHERF
– The “Few Bad Apples” Analogy

Part IV
Lessons Learned;
Governance Guidelines

Conclusion