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Texas C-Bar Pro Bono Week Dallas Volunteer Attorney Project Critical Compliance and Ethics Issues for Nonprofit Tax-Exempt Organizations Darren B. Moore

Mar 26, 2015

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Texas C-Bar Pro Bono Week Dallas Volunteer Attorney Project Critical Compliance and Ethics Issues for Nonprofit Tax-Exempt Organizations Darren B. Moore Bourland, Wall & Wenzel, P.C. Attorneys and Counselors 301 Commerce Street, Suite 1500 Fort Worth, Texas 76102 (817) 877-1088 (817) 877-1636 (facsimile) E-mail: [email protected]@bwwlaw.com Bourland, Wall & Wenzel, P.C. Slide 2 Governance; State Standards of Care; Attorney General Oversight Prepared By: Darren B. Moore Bourland, Wall & Wenzel, P.C. 301 Commerce Street, Suite 1500 Fort Worth, Texas 76102 (817) 877-1088 (817) 877-1636 (facsimilie) E-mail: [email protected]@bwwlaw.com Bourland, Wall & Wenzel, P.C. Nonprofit Organizations 2012 Class #2 Slide 3 Charitable Trust Texas Trust Code; Common law Nonprofit unincorporated association Texas Business Organizations Code; Common law Nonprofit Corporation Texas Business Organizations Code; Common law Limited Liability Company Texas Business Organizations Code; Common Law What Law Applies? Slide 4 Who Owes the Duties? Directors At least 3 Voting rights carry responsibility Largely charged with making strategic decisions, evaluating, reviewing, overseeing and approving corporate actions Officers May hold multiple offices but same person may not be both President and Secretary Owe duties within the scope of implementing decisions and policies established by the Board Member In instances in which the organization is member-managed by a sole member, the member takes on the duties of a director Slide 5 Both trustees and directors owe basic fiduciary duties Duties owed by directors are not those owed by trustees (BOC 22.223) In reality, it is a matter of the degree of strictness to which the fiduciary is held All fiduciaries arent created equally Slide 6 Fiduciary Duties 1.Duty of Care 2.Duty of Loyalty 3.Duty of Obedience Additional duties may apply related to investment of assets Slide 7 Exercise care and skill of person of ordinary prudence in dealing with persons own property Liable for simple negligence Administer the trust in good faith according to its terms, the Trust Code, and where not inconsistent, the duties imposed on trustees at common law (Tex. Trust Code 113.051) Duty of Care - Trustees Slide 8 Administer trust property solely for the benefit of beneficiaries Avoid conflict of interest transactions even if fair to beneficiaries absent full disclosure and consent of beneficiaries If trustee cannot demonstrate full disclosure and consent, transaction may be set aside regardless of fairness Certain transactions may be set aside irrespective of disclosure Duty of Loyalty - Trustees Slide 9 Act in good faith Use care that a person of ordinary prudence would use in same or similar circumstances (reasonable skills) Make decisions reasonably believed to be in the best interest of the corporation Reasonableness based on objective facts available to the decision maker Duty of Care - Directors Slide 10 Directors of nonprofit corporations are not liable where they exercise their business judgment in making decisions on behalf of organization. Parameters not clearly defined (compare for profit context) Statutory law governing nonprofit corporations simply refers to the duty of care Essentially means directors are not liable for simple negligence absent fraud, illegality or a disabling conflict of interest Duty of Care: Business Judgment Rule and Directors Slide 11 Investment: Uniform Prudent Investor Act Consider investment portfolio as a whole Diversify investments Delegate decisions Slide 12 UPMIFA Uniform law governing management, investment, and expenditure of funds held by charitable organizations within its scope. (Replaces UMIFA) Intended to modernize the rules for expenditures from endowment funds and update provisions governing the release and modification of restrictions on charitable funds. Standard of Care: Ordinary business care and prudence under the facts and circumstances prevailing at the time of the action/decision Prudence standard consistent with the UPIA Permits expenditure of net appreciation in FMV of endowment assets over historic dollar value Sets certain rebuttable presumptions of imprudent spending Allows for delegation of investment authority so long as prudent under the circumstances Allows for release of donor restrictions when donor consents in tangible or electronic writing or court grants permission Slide 13 Duty of Loyalty Exercise an extreme measure of candor, unselfishness and good faith Dont usurp corporate opportunities Transactions with organization must be fair to the organization Maintain appropriate confidentiality Slide 14 Corporate Opportunity Prohibits a director from usurping corporate opportunities (i.e. opportunities in which the corporation has a legitimate interest or expectancy and the financial resources to exploit) Where closely related to corporate operations, must disclose (timely) Defenses where no disclosure: Not same line of business Corporation abandoned opportunity Corporation lacked financial resources to pursue the opportunity Slide 15 Before a director engages in a transaction which he or she reasonably should know may be of interest to the corporation, the director should disclose the transaction to the board in sufficient detail (all material facts) and adequate time to enable the board to act or decline to act with regard to such transaction. Corporate Opportunity Slide 16 Interested Transactions Not inherently unethical or a violation of law Note: Loans to directors are a statutory violation Key is disclosure and how the director and board then deal with a disclosed conflict (i.e. upon disclosure the board should provide a disinterested review of the matter) Decision makers should consider adopting a conflict of interest policy Slide 17 Interested Transactions An officer of director is interested if he: makes a personal profit from the transaction with the corporation; buys or sells assets of the corporation; transacts business in the officers or directors capacity with a second corporation of which the officer or director has a significant financial interest; or transacts corporate business in the officers or directors capacity with a member of his family. Slide 18 Dealing with Disclosed Conflict Interested transactions are presumed unfair on the part of the decision maker, fraudulent on the corporation and generally voidable. Safe Harbor Interested decision maker discloses material facts Majority of the disinterested directors, in good faith and the exercise of ordinary care, authorize the transaction Slide 19 Conflict of Interest Policy If an organization chooses to adopt a policy, the policy should consider the following: 1. Identification of the class of individuals covered by the policy; 2. Definition of "actual" and "potential" conflicts of interest; 3. Articulation of the duty of disclosure of officers and directors; 4. Appropriate "trigger" mechanisms to help identify potential conflicts; 5. Annual, episodic disclosure obligations of individuals covered by the policy; 6. Written conflicts disclosure questionnaires; 7. A process for review of disclosed potential conflicts by a committee of disinterested directors with outside counsels input; 8. The applicability of the corporate opportunity doctrine to the board; 9.Disclosure obligations regarding outside board service of officers and directors; and 10. Disclosure obligations regarding outside business activities of senior executive leadership. Slide 20 Duty of Obedience Remain faithful to and pursue the goals of the organization Follow the governing documents of the organization, laws applicable to the organization (including reporting and regulatory requirements), and restrictions imposed by donors Ensure charitable assets are not diverted to non-charitable uses Liability requires personal participation or actual knowledge of the wrongful act Slide 21 Permissive Director in good faith Director reasonably believed she acted in the best interests of the corporation (or, if not conduct in official capacity, not in opposition to corporations interests) Criminal: no reason to believe conduct was unlawful Indemnification Precluded Found liable for receiving personal benefit improperly Found liable to the corporation But: Can still be indemnified for reasonable expenses incurred in connection with proceeding so long as not found liable for willful or intentional misconduct in performing corporate duties Must have a provision in the governing documents to provide for indemnification during litigation Slide 22 Nonprofit must reimburse reasonable expenses incurred by a director after a court order and the exhaustion of all appeals where the director is successful in defending the lawsuit Mandatory Indemnification Slide 23 Standing to Bring a Complaint Nonprofit Corporations: Organization (and/or its members where applicable) OAG Donors in very narrow circumstances (must retain a special interest in the donated gift) Note: Venue for breach of fiduciary duty claims brought by the OAG lies in Travis County Slide 24 Common Law Authority Constitutional Authority Statutory Authority Authority of AG as to Charitable Organizations Slide 25 Representative of the public interest in charity (standing) Duty to ensure charity assets used for appropriate charitable purposes Broad authority to carry out duty Power and Duty derived from Statute of Charitable Uses (cf. Tex. Civ. Prac. & Rem. Code s 5.001) Common Law Authority of the AG Slide 26 AG shall perform such other duties as may be required by law. [The AG] shall represent the state in all suits and pleas in the Supreme Court of the State in which the State may be a party, and shall especially inquire into the charter rights of all private corporations and from time to time, in the name of the State, take such action as may be proper and necessary to prevent any private corp