noteworthy developments in nonprofit corporation law michael w. peregrine gardner, carton &...
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Noteworthy Developments inNonprofit Corporation Law
Michael W. Peregrine
Gardner, Carton & Douglas
April 25, 2003
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WELCOME
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Goals of Presentation
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• To review the significant series of developments in nonprofit and charitable trust law that have occurred in the last several years.
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• To focus on specific developments with implications for the not-for-profit corporate director.
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• To provide specific recommendations for addressing these issues with nonprofit charitable clients.
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The Outline/Bibliography/Other Resources
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Part IRecent Noteworthy Case
Law Developments
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Health Midwest:– Kansas Litigation– Missouri Litigation
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• CareFirst: the opinion of the Insurance Commission.
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HealthPartners– Business Compliance Review– “Appointment of Directors” Litigation
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• Note: The Implications of the HealthSouth Controversy.
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• Note: Recently Released OIG/AHLA Guidance.
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In Re Milton Hershey School Trust– The “Public Interest” as a Trust Beneficiary– Liberalized Preliminary Injunction Criteria– Impact on Governance
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The Banner Health System Litigation– Increase in value from contributions and
benefits should be retained by the community
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Littauer v. Spitzer– “Good News” for Nonprofit “M&A”?
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The AHERF Settlement– Continued Focus on Application of
Restricted Gifts– “Zone of Insolvency” Issues
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The Virginia Experience
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Allina Health System– Affiliate Divestiture– Waste of Charitable Assets– Impact on Management, Governance
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Emerging Issues:– Parent/Subsidiary Conflicts– Charitable Solicitation Concerns– Imprudent Investment
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Notable Private Actions– Chairman of the Board v. Trinity– Smithers v. St. Luke’s-Roosevelt Hospital– Eychaner v. Roosevelt University– In re: Terra Foundation
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– The Cleveland Clinic– Art Institute of Chicago– United Way of National Capital Area– Barnes Foundation Museum
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• Note: Emerging Issue Conflicts of Interest in Integrated Parent/Subsidiary Health Systems.
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Part IIThe Impact of the “CorporateResponsibility Environment”
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And Just What Is ThatEnvironment?
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NASCOThe National Association of State Charity Officials
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Key Developments– Powers Report– NYSE Report– Sarbanes– NASCO Focus– IRS Announcement
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“The Powers Report”
Report by the Special Investigative Committee of the Board of Directors of Enron Corp.
February 1, 2002
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• Board and Management oversight failed for many reasons.
• The concept of the related party transactions was flawed.
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• Board-adopted controls were inadequate and not adequately implemented.
• Senior management did not exercise sufficient oversight.
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• 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.
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• 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.
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NYSE Corporate Accountability Report
(June 6, 2002)– Increasing Role and Authority of
Independent Directors– New Audit Committee Requirements
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– Encouraging Focus on Good Corporate Governance
– New Control and Enforcement Mechanisms– Improving Board Education and Training
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Sarbanes-Oxley Act (July 30)– Designed to protect the interests of investors
and provide market stability.– Does not apply to nonprofits
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– Oversight for public accounting industry– Rules for auditor/client relationship– Penalties for corporate financial crimes
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– Procedures for Executive and Board Conduct
– Ethical obligations for corporate counsel– Financial disclosure protections for investors
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NASCO– Focus at state level of oversight of charitable
corporations and protection of charitable assets, and the duties and obligations of officers and directors.
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IRS– Modification of Form 990 Return to Include
Questions Related to the Integrity of the Organization’s Financial Statements.
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Part IIIThe Relevance to Nonprofits
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– Need to preserve charitable assets– Preserve reliability of financial statements
• Donors’ reliance
• “Early warning systems”
– Bondholders
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– State charity officials perceive an enhanced oversight obligation over nonprofit charities following AHERF
– The “Few Bad Apples” Analogy
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Part IVLessons Learned;
Governance Guidelines
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Conclusion