How a Nonprofit Can Attract A Regulatory Probe … Fast
06.08.2023 | Linda J. Rosenthal, JD
In “Bylaws are Sometimes Like a Decades-Old Hairstyle,” we pointed out that many nonprofits continue to operate, year after year, under the same bylaws that were prepared and adopted when the organization was formed. In some cases, these crucial operating rules have remained the same for 25 years, or even 50 years or longer.
Why is that a problem? Organizational missions evolve, circumstances change, and groups grow in size from small startups to large community institutions.
And if the bylaws were from a “canned” source – form bylaws from an attorney’s dusty old file cabinet or the internet, or borrowed from another nonprofit – they probably weren’t workable or satisfactory in the first place. Bylaws are not a “one-size-fits-all” type of legal document. They should be custom-tailored to each organization’s particular needs, subject to certain mandatory legal provisions or rules.
Sometimes, too, the law changes and nonprofits must amend their bylaws to comply with these new restrictions or requirements.
In that earlier blog post, we gave a recent example illustrating this second point. There was an amendment to California Corporations Code section 5047, effective 2010, that amended the definition of “director” for California Public Benefit Corporations. This is how we explained that amendment:
For instance, nonprofits sometimes give honorary titles to key supporters or professionals — (titles like “honorary directors,” “directors emeritus,” “advisory directors”) — or make them non-voting directors who have the same powers and duties as other directors other than the vote. These positions are often mentioned in the bylaws. The new law clarifies that this is not allowed.
…From a practical standpoint, a reference to an ex officio board position means that person has the right to vote, unless specified to the contrary . . [and] that someone without voting rights on the board is not a director. Such person could be an invitee to board meetings, but would not be bound by all of a director’s fiduciary duties. Previously the language turned on a person’s ability to ‘act’ as a director….
So, lifting a bit from the current statute’s text:
If the articles or bylaws designate that a natural person is a director or a member of the governing body of the corporation by reason of occupying a specified position within or outside the corporation, without limiting that person’s right to vote as a member of the governing body, that person shall be a director for all purposes and shall have the same rights and obligations, including voting rights, as the other directors.
05.31.2023 | Linda J. Rosenthal, JD