NAMI: The Legal Side of Reaffiliation

Courtney A. Hollander

Student Attorney, Law & Entrepreneurship Clinic

Overview

● Part I: The Nonprofit Director

● Part II: Directors and Reaffiliation

● (Time Permitting): Review of handout titled, Missteps of Nonprofit Directors and Officers: Concepts, Examples and Lessons to be Learned

Part I: The Nonprofit Director●Principles of Nonprofit Governance and Management

●What does it mean to be a Director?

●Director Duties○ Duty of Care

■ The Business Judgment Rule

○ Duty of Loyalty

○ Duty of Obedience

●Director’s Rights

●Director / Officer Liability

●Member / Volunteer Liability

●Indemnification

Principles of Nonprofit Governance and Management

● Comply with applicable federal and state laws

● Create and maintain internal controls (i.e., conflict of interest policy)

● Maintenance of business records, including financial data

● Transparency to the public

● Board governance that is effective, consistent and responsible

● Responsible fiscal spending

● Periodic mission statement review to assure compliance

● Accurate and truthful public solicitation

***These principles fall under the control of a Board of Directors.

What does it mean to be Director?

● Act on behalf of organization’s mission

● Direct activities, but do not perform them

***But remember, the Board as a whole is greater than the sum of its Directors

Image: Istvan Banyai via The Wall Street Journal

Director Duties●In broad terms, manage the

corporate enterprise

○Wis. Stat. § 181.0801(2):

■“. . . all corporate powers shall be exercised by or under the authority of, and the affairs of the corporation managed under the direction of, its Board.”

●Oversee:

○Selection of competent senior management

○Establishment of policies, norms and procedures

○Formation, or review of, business strategy

○Organizational performance and monitoring

Director Duties cont’d● Common law duties (aka Fiduciary Duties):

○ 1.) Duty of Care

■Act in a fully informed manner after the exercise of due diligence appropriate under the circumstances.

○ 2.) Duty of Loyalty

■Act in the best interest of the organization and its members, and subordinate any personal interest in matters that come before the Board to the corporate interest.

○ 3.) Duty of Obedience

■Carry out the purposes of the organization and comply with all applicable federal and state laws.

Duty of Care● To fulfill:

○ Review and consider reasonably available material information

○ Apply best judgment based on facts and information before you

● Rely on the reports of others when:

○ 1.) Individual is selected with a reasonable degree of care

○ 2.) Individual is reporting in an area of professional expertise

○ 3.) Director relies in good faith

○ 4.) No red flags present themselves

*** Codification: Wis. Stat. § 181.0850

Duty of Care, Practically Speaking● Attend meetings regularly

● Avoid haste, or its appearance, when making decisions

● Adequately prepare

● Ask questions

● Exercise independent judgment

○ (but remember, the interests of the corporation must take precedence)

● Avoid giving approval without doing your homework

The Business Judgment Rule● A safe harbor under the Duty of Care

○ “Limits judicial review of corporate decision-making when corporate directors make business decisions on an informed basis, in good faith and in the honest belief that the action taken is in the best interests of the company.”

● Protects the Director when a decision later proves to be unwise

● Purpose:

○ 1.) Encourage participation by limiting liability

○ 2.) Recognition that business decisions involve taking risk

The Business Judgment Rule, Cont’d● Courts do not review review results, but rather review procedure

● Requirements:

○ 1.) Board decision to act, or refrain from acting

○ 2.) Board majority had no financial interest in the decision

○ 3.) Decision reached with the duty of care

■Documentation becomes key here

●Never underestimate the importance of meeting minutes

○ 4.) Decision made in good faith, in the best interest of the organization

Duty of Loyalty● Conflict of Interest: As a Director, you must disclose material or

personal interests in a matter to the Board and excuse yourself from voting on those matters.

● Organizational Opportunities: Discretion must favor the organization even if an opportunity could otherwise be beneficial to you.

● Exercise of Independent Judgment: (with the organization’s best interests in mind)

● Confidentiality: Keep all information confidential that is not part of the public record.

○Remember, Director ≠ Spokesperson unless express designation is made

Duty of Obedience

● Abide by the organization’s purpose and work to further it

● Abide by applicable federal and state laws

○ If knowledge of an illegal activity, either with or without Board approval, you must act on that knowledge.

■Contact the Executive Director or President and report the happenings

■Depending on the seriousness of the allegation, it may be in your best interest to seek outside counsel and/or resign from the board.

Duty of Obedience, Cont’d● Where you can go wrong:

○ Failure to file tax returns

○ Failure to register to fundraise

○ Failure to collect and remit sales tax

○ Failure to remit employee taxes

■Hot-button issue and can create personal liability of Board members

Director’s Rights● Stem from the necessity of information in order to fulfill one’s fiduciary

duty

● Includes:

○ Access to management

○ Inspection of books and records

○ Advance notice of meetings-and materials necessary for decisions

○ Access to outside advisers

○ Right to dissent

○ Copies of meeting minutes and committee reports

Director / Officer Liability● Personal liability shield: Wis. Stat. § 181.0855

○ General shield from personal liability for the actions you take as a Director

○ Does not apply when:

■Conflict of Interest

■Violation of criminal law

■Transaction that creates a personal benefit

■Willful misconduct

Director / Officer Liability, Cont’d● Directors and officers can be held personally liable for failure to

“collect, account for and pay over” withholding taxes.

○ Codification: IRC § 6672(a)

● Officers can be held criminally liable for making false or fraudulent income tax returns, with the intent to defeat or evade assessment.

○ Codification: Wis. Stat. § 71.83(1)(b)(2)

Member / Volunteer Liability

● Members: No personal liability for organizational obligations

○ Codification: Wis. Stat. § 181.0612

● Volunteers: Liability is very limited

○ Codification: Wis. Stat. § 181.0670 and Volunteer Protection Act of 1997

○ Practices to minimize exposure

Indemnification● An obligation to compensate for losses or damages

○ Compensation will come from D/O insurance

● Codification: Wis. Stat. § 181.0872

○ “A corporation shall indemnify a director or officer, to the extent that he or she has been successful on the merits or otherwise in the defense of a proceeding, for all reasonable expenses incurred in the proceeding if the director or officer was a party because he or she is a director or officer of the corporation.”

Indemnification, cont’d

● Exceptions:

○ Willful failure to deal fairly with a conflict of interest

○ Violation of criminal law

○ Transactions creating improper personal benefit

○ Willful misconduct

● Application to employees, volunteers and agents

Part I: Conclusion

● As Directors you have rights and responsibilities delegated to you by common law, state law and federal law.

● Those rights and responsibilities play an intricate role in the reaffiliation process.

Part II: Directors and Reaffiliation

● State of Wisconsin Incorporation

● Bylaw revision and adoption

● Form 1023-EZ

● IRS Form 990-N

● Registering as a public charity

● Insurance

***As Directors you play an essential role in reaffiliation.

State of Wisconsin Incorporation● IRS looks for additional requirements beyond state form

○Statement of nonprofit purpose

○Prohibition on private inurement

○Prohibition on political, propaganda or legislative support

○Dissolution provisions● We can assist with amending/restating your Articles of Incorporation as needed

○Restating is generally preferred

○Filing fee for amendment or restatement: $25.00

Bylaw Revision and Adoption● Govern the internal workings of the organization

● Do not have to be filed with the state

● Items not covered in the bylaws are governed by statute

● Remember: Adoption of new bylaws must follow the procedure outlined in your existing bylaws

***If using our model bylaws, send them to Kyira before adopting them.

Form 1023-EZ

Form 1023-EZ

Form 1023-EZ

IRS Form 990-N● AKA the e-postcard

● Applies to organizations with $50,000 or less in annual gross receipts

● No penalty assessed for late filings

○ Failure to file on time for 3 consecutive years results in automatic revocation of 501(c)(3) status

● Due date: May 15th for organizations with FYE December 31st

● Link to file: http://epostcard.form990.org/

Registering as a Public Charity

● Premise: Charitable organizations who solicit funds are required to register with the State.

○ This includes local NAMI affiliates.

● After initial registration, annual renewal is required.

○ This includes an annual financial report.

Registering as a Public Charity - Forms○ Form #296 - Charitable Organization Application & Registration Statement

■ All NAMI affiliates must submit this form.

○ Form #308 - Charitable Organization Annual Report■ Alternatives:

● Form #1943 - Affidavit in Lieu of Financial Report

● Form #1952 - Wisconsin Supplement to Financial Report

○ On an annual basis, affiliates need to file one of:■ Form #308 (Base annual form for filing)

■ Form #1952 (May be filed in lieu of #308 if you include Form 990-EZ or 990)

■ Form #1943 (< $5,000 in solicitations -or- < $50,000 in solicitations in a single county)

*** The deadline for annual filings is 9 months after your fiscal year-end (December).

Insurance● State law allows, but does not require purchasing insurance

○ Wis. Stat. § 181.0883

○ However, proof of insurance is part of the reaffiliation process

● Directors and Officers

○ Most common claims:

■Mismanagement of assets

■Failure to provide services

■Employment-related issues such as discrimination, harassment and wrongful termination

● General Liability

○ Classic slip-and-fall

Conclusion● Part I:

○ As Directors you have rights and responsibilities delegated to you by common law, state law and federal law.

● Part II:

○ The reaffiliation process seeks to put all affiliates on the same track and mitigate the risks of mismanagement.

Questions ?