Nonprofit Entities Subsection Report

The work of the Subsection is illustrated by the Nonprofit Entities Subsection Report in the Colorado Bar Association, Business Law Newsletter, January, 1997.  The bill described has since been enacted by the Colorado Legislature (with some amendments):

Nonprofit Entities Subsection Report

Garth C. Grissom, Chairman

The first item of this report is a description of the proposed new Colorado Revised Nonprofit Corporation Act. The second item is a discussion of three current legal developments that may affect nonprofit and tax exempt organizations. The third item is a discussion of a proposed Bill to be introduced in the 1997 General Assembly which would impose significant limitations on acquisition of nonprofit health care entities by for profit entities.

1. The Proposed Colorado Revised Nonprofit Corporation Act. A subcommittee of the Business Law Section has been working on a proposed new nonprofit corporation law for a number of years. These efforts became more intense in 1995 and have culminated in a proposed new act to be introduced in the 1997 General Assembly. If approved the new Act, to be known as the Colorado Revised Nonprofit Corporation Act ("CRNCA"), would repeal and replace the existing Colorado Nonprofit Corporation Act ("CNCA") now appearing in C.R.S. as articles 20 to 29 of Title 7.

The purpose of this presentation is to describe changes that the CRNCA will make in provisions contained in the CNCA. If you agree these changes are desirable we ask that you contact your Representatives or Senators to encourage adoption of the CRNCA.

The CNCA was adopted in 1967 and was based on the then ABA Model Nonprofit Corporation Act. While the CNCA has been amended from time to time it has not had the same attention as was provided to business corporation law. As a consequence, the CNCA has become seriously outdated in many respects. The need for comprehensive revision of the CNCA and a general level of satisfaction with the Colorado Business Corporation Act ("CBCA") led to a determination to draft an entire new act for nonprofit corporations which would be based on the CBCA and would replace in its entirety the CNCA.

Because the nonprofit corporation law must meet the needs of so many different kinds of corporations with so many different structures, the proposed CRNCA makes extensive use of default provisions; that is, the CRNCA provides that the articles of incorporation and bylaws may provide variations to many of the governing provisions, but it provides minimum provisions that are to be followed in the event no variations are included in the articles or bylaws.

General Provisions. Filing requirements with the Secretary of State are based heavily on the CBCA. A delayed effective time and date is permitted. Following the CBCA, the use of defined terms has been greatly expanded.

Provisions for notice to members are more comprehensive. The traditional forms of notice such as written communication, telephone, telegraph, etc., are retained, but we have added a provision that when those traditional forms are impracticable, notice may also be given by newspaper of general circulation and by public broadcast communication. We thought this important for nonprofit corporations whose records are not always well maintained and may not have available a level of administrative services usually found in business corporations. We have also added a provision that where it is impractical or impossible for a nonprofit corporation to call meetings in accordance with its articles or bylaws, judicial relief may be obtained which may include revised notice provisions and quorum and voting requirements.

The Internal Revenue Code contains special provisions with respect to private foundations which impose penalties on certain distributions, acts of self dealing, retaining excess business holdings and taxable expenditures. As a "fail safe" provision we have included in the CRNCA a section prohibiting nonprofit corporations which are private foundations from taking those actions.

Incorporation. The requirements for articles of incorporation are much like those required for business corporations. While the CNCA required that the articles of incorporation include a statement as to whether or not the nonprofit corporation would have members, this requirement for the CRNCA has been changed to require a statement as to whether the nonprofit corporation will have "voting members." The CRNCA adapts a concept from the ABA's Revised Model Nonprofit Corporation Act by defining "voting members" as those persons who have the right to vote for the election of a director or directors. In many nonprofit corporations the concept of "membership" is utilized in fund raising and does not include governance authority. Under the CRNCA a nonprofit corporation might have a self perpetuating board of directors and still have members who pay dues or otherwise contribute to the nonprofit corporation.

Personal liability for unauthorized assumption of corporate powers is continued, but a good faith defense has been added.

Purposes and Powers. The CRNCA retains a broad statement of general powers which need not be included in the articles of incorporation. The CRNCA also retains the concept that nonprofit corporations may be formed with very broad purposes. Present Colorado law also permits a variety of special purpose corporations and religious and benevolent organizations which may be formed under articles 40 to 52 of Title 7. The CRNCA continues the philosophy of the CNCA which permits those corporations to also come under the nonprofit corporation law.

The CNCA allowed members to challenge the power of the nonprofit corporation to act. The CRNCA will limit this authority to directors and voting members.

Names. There have been no significant changes in the names that nonprofit corporations may use, although the provisions with respect to conflicting names and name protection have been updated to include the additional business entities which are recognized in Colorado law, such as limited liability limited partnerships, unincorporated associations, etc.

Registered Office and Registered Agent. The requirement that nonprofit corporations have and maintain a registered office and registered agent has been continued and now conforms with the CBCA requirements.

Members and Memberships. As indicated above, a nonprofit corporation is not required to have members, and if it does have members they do not necessarily have voting rights. The CRNCA adds provisions for admission of members, transfer of memberships and resignation of members. The CNCA was silent on these matters. The CRNCA provides that the articles of incorporation or bylaws may contain provisions for termination, expulsion or suspension of membership, but protects members in requiring that procedures be fair and reasonable and be carried out in good faith. A minimum requirement for procedures which are fair and reasonable is provided. The CNCA made no provision for derivative actions. The CRNCA permits derivative actions by directors and voting members having 5% or more of the voting power, and includes a provision that the court may require security.

The CRNCA includes provisions for delegates.

Member Meetings and Voting. Provisions are made for annual, regular and special meetings of members. Minimum requirements for notice are provided. Provisions for establishing a record date for meetings of members are included. The CNCA was silent on this matter.

Unless the articles or bylaws provide otherwise, a quorum will equal 10% of the votes entitled to be cast on a matter. This is designed to facilitate action by the nonprofit corporation when its membership is inactive. Nonprofit corporations with an active membership may want to establish greater quorum requirements.

The Committee's draft of the CRNCA allows members to act without a meeting by a majority of all the members entitled to vote on the matter. When the CBCA was considered by the Legislature it contained a similar provision, but the Legislature reinstated the unanimous vote requirement when acting without a meeting.

The CRNCA continues provisions for a written ballot and includes any action which may be taken at a meeting of members. The section providing for written ballot includes a requirement of written information sufficient to permit each person casting a ballot to reach an informed decision on the matter. Provided that enough votes are submitted by written ballot to constitute a quorum if the matter were considered at a meeting, approval by written ballot is by the same vote as would be required at a meeting.

Voting entitlement may be varied by the articles or bylaws, but in the absence of other provisions, only voting members are entitled to vote with respect to any matter submitted to a vote of members. (Voting members are defined as those members entitled to vote on election of directors.) Unless otherwise provided voting members are entitled to vote with respect to all matters submitted to a vote of the members.

The CRNCA contemplates separate voting groups and provides rules similar to those contained in the CBCA. Provision is made for voting agreements.

Directors and Officers. Unless otherwise provided, each nonprofit corporation shall have a board of directors, but it may be known by any other name. The governing body shall consist of one or more persons. Flexibility is provided in the way directors may be selected. Boards may be self perpetuating, directors may be elected by members or appointed by another body, or they may serve ex officio while serving in another capacity. Staggered terms are permitted.

The CRNCA also provides for action by directors without a meeting but the vote required for approval varies from the vote required of members when acting without a meeting. Because of concern with the fiduciary duty of directors, the CRNCA provides that every member of the board must vote on the matter or abstain from voting. A director who votes against the matter or abstains must also waive the right to demand that a meeting be held. If those requirements are met, then the matter may be approved by directors acting without a meeting by the same vote that would be required at a meeting at which all of the directors were present and voted.

Action by committees of the board are authorized. Action that may be taken by committees varies from the CBCA since action that may be approved by the board of directors itself will not always be subject to approval by members (where the nonprofit corporation does not have voting members). The CRNCA limits the authority of a committee of the board to act for the full board in certain situations where member approval is not also required. Based on the CBCA, general standards of conduct for directors and officers are provided. The CNCA was silent on this matter. Provision is also made for dealing with directors conflicting interest transactions. This provision also follows the CBCA.

Amendment of Articles of Incorporation and Bylaws. The vote required of members to amend the articles of incorporation may be provided in the articles of incorporation or bylaws. The default provision requires a majority of a quorum.

Provisions for amendment of bylaws have been changed. The board of directors may amend the bylaws unless the CRNCA or the articles reserve such power exclusively to the members. A bylaw amendment adopted by the members that fixes a greater quorum or voting requirement for members may only be changed by vote of the members.

Merger. Merger with other nonprofit corporations is authorized, including merger with foreign nonprofit corporations. Unless a greater vote is required mergers may be approved by a majority of a quorum.

Sale of Property. Provision is made for the sale of property other than in the usual and regular course of business. Unless otherwise provided, the transaction may be approved by a majority of a quorum.

Dissolution. Provisions for dissolution follow the CBCA. Unless otherwise provided, authorization for dissolution may be approved by a majority of a quorum.

Provisions for administrative dissolution are changed significantly. The secretary of state may commence proceedings for administrative dissolution based on failure to pay fees, failure to file corporate reports, failure to maintain a registered agent or office, failure to give notice to the secretary of state that a registered agent or office has been changed and expiration of the period of duration stated in the articles of incorporation. After administrative dissolution the nonprofit corporation continues its corporate existence but may not carry on any activities except as is appropriate to wind up and liquidate its affairs. If the nonprofit corporation is not reinstated within 120 days then the corporate name must include the words "a dissolved Colorado nonprofit corporation" and the year of dissolution. A nonprofit corporation which has been administratively dissolved may apply to the secretary of state for reinstatement within five years after the effective date of dissolution. This extensivetime period for applying for reinstatement is based on the assumption that nonprofit corporations may not be subject to supervision and care that is normal for profit corporations. A nonprofit corporation that is administratively dissolved and that continues to operate for nonprofit purposes and does not wind up its business and affairs is deemed an unincorporated organization under the Uniform Unincorporated Nonprofit Association Act.

Foreign Nonprofit Corporation. Provisions for qualification of foreign nonprofit corporations follow the CBCA.

Records, Information, and Reports. Provisions for corporate reports and corporate records follow the CBCA. Provision is made for inspection of corporate records by members and protection is provided on the use of membership lists.

Transition Provisions. The CRNCA will apply to any existing corporate entity that was incorporated under the CNCA or elected to accept such articles. The CRNCA will not confer rights of transferability of members that did not have those rights under the CNCA. Neither does the CRNCA confer voting rights on persons who did not have those rights by reason of a provision of its articles of incorporation or bylaws, or by a custom, practice or tradition to vote for the election of a director or directors.

The right of pre 1968 corporate entities to elect to come under the CRNCA is preserved.