Effective January 15, 2015, Governor Snyder signed into law Senate Bills 623, 624 and 929. These three Bills amend the Michigan Nonprofit Corporation Act (the “Act”) which is the law under which most Michigan nonprofit corporations operate. Some of the amendments described below will require action by management to amend bylaws or articles of incorporation, but most will not. A summary of some of the important amendments to the Act appear below:
1) Amendments to the Act that affect management of the corporation:
- Allow a nonprofit corporation to provide in its articles of incorporation that one or more members, shareholders, or other persons have the right to manage the business and affairs of the corporation which is otherwise reserved to the board of directors and officers.
- Provide that a nonprofit corporation may not make distribution to members or shareholders if after the distribution it would not be able to pay its debts as they become due or its assets would be less than its liabilities, unless the articles of incorporation provide otherwise. Directors who approve distributions in violation of this rule expose themselves to personal liability for the corporation’s liabilities.
- Allow the shareholders, members or directors of a nonprofit corporation to enter into an agreement that restricts the discretion of the board of directors, governs the making of distributions to shareholders or members, establishes who shall be officers and directors, governs the exercise or division of voting rights by the shareholders, members and directors, transfers to one or shareholders, members or other persons all or part of the authority to manage the business and affairs of the corporation including resolution of deadlock, or it otherwise governs the exercise of the corporate powers or the management of the business.
- Provide that unless the articles of incorporation or bylaws provide otherwise, the majority of the board shall constitute a quorum unless the board provides for a larger or smaller number to constitute a quorum. However, a quorum may not be less than one-third of the members of the board.
- Provide that a corporation must distribute to its shareholders and members, or to directors if organized on a directorship basis, its income statement, year-end balance sheet and statement of source and application of funds.
2) Amendments to the Act that affect notice, procedure and voting at shareholder, member and director meetings:
- Provide that for a nonprofit corporation organized on a directorship basis, a director may give a proxy to another person to vote for directors, unless the articles of incorporation or bylaws provide otherwise.
- Provide that a nonprofit corporation must have an annual meeting to elect directors and conduct other business, unless the members act by written consent or vote for directors by ballot, as explained below.
- Introduce a new concept known as ballot voting under which shareholders and members can vote by ballot for directors or other matters without a meeting, if allowed by the articles of incorporation or bylaws.
- Clarify that for a nonprofit corporation that is organized on a directorship basis that has members, the members are not entitled to vote on any matter, including any action to limit their rights as members.
- Provide that a notice of shareholder or member meeting must include notice of any proposal a shareholder or member intends to propose if it is known to the corporation.
- Provide that a shareholder or member’s attendance at a meeting waives the notice requirement for a proposal that is not described in the notice.
- Allows a nonprofit corporation to hold a shareholder or member meeting without notice or with the notice in the bylaws, if the meeting does not involve election of directors or other action involving control or governance of the corporation.
- Provide that at each meeting of shareholders and members a chair shall be appointed as provided in the bylaws or appointed by the directors. The chair shall preside at the meeting and shall determine the order of business and establish rules for the meeting.
- Provides that a shareholder or member may give their proxy to authorize another person to vote for them for election of director. Proxy may be given by a signed writing or electronically.
- Provide that unless provided otherwise in the articles of incorporation, abstaining from a vote is not considered a vote cast or counted as a vote.
- Allow articles of incorporation to allow cumulative voting in which a person voting for directors may cumulate their votes by giving one candidate as many votes as the number of director to be elected multiplied by the number of votes held by the person, or by distributing the votes on the same principle among any number of the candidates.
3) Amendments to the Act that affect director, shareholder and member rights:
- Allow a corporation to provide for shareholder preemptive rights in its articles of incorporation. Preemptive right allows shareholders to purchase additional shares of the corporation when new shares are issued.
- Provide that a member or shareholder of a corporation organized on a membership basis may inspect, for any proper purpose, certain books and records of the corporation, like shareholders in a profit corporation. Notwithstanding this provision, the articles of incorporation, bylaw or a board resolution may provide that the shareholders and members do not have the right to inspect certain records if the shareholders, members or directors that approved the limitation make a good faith determination that:
- Allowing inspection of certain records would impair the rights or privacy of the shareholders or members.
- Allowing inspection of certain records would impair the lawful purposes of the corporation.
- Opening list of donors or donations for inspection is not in the best interest of the corporation or the donors.
A corporation that limits inspection of lists of its shareholders and members, as provided above, shall provide a reasonable way for shareholders or members to communicate with all other shareholders or members concerning the election of directors and other affairs of the corporation.
- Provide that a director may examine certain books and records for a purpose reasonably related to his or her position as a director.
- Allow a director of a corporation organized on a directorship basis, a shareholder of a corporation organized on a stock basis and a member of a corporation organized on a membership basis to bring an action in court to establish that the acts of the directors, shareholders or members are illegal, fraudulent, or willfully unfair and oppressive to the corporation, the director, shareholder or member.
4) Amendments to the Act that affect liability of the corporation and its directors, shareholders and members:
- Allow a nonprofit corporation to eliminate a director’s or volunteer’s liability to the corporation, its members or its shareholders for any action taken or failure to take action as a director or volunteer officer subject to certain exceptions. Prior law had allowed the limit of liability only for a breach of the director or officer’s duty of loyalty. This protection will require an amendment to the articles of incorporation.
- Provide that in legal action commenced by a ten percent or more shareholder or by ten percent of the members, a director may be removed from office if the director was involved in fraudulent, illegal, or dishonest conduct or gross abuse of authority or discretion and removal is in the best interest of the corporation.
- Provide that a transaction in which a director or officer is determined to have an interest shall not be set aside or give rise to damages if the director or officer establishes that the transaction was fair to the corporation, the material facts and the interest of the director or member were disclosed or known to the board, and the material facts and the interest of the director or officer were disclosed or known to the shareholders or members entitled to vote.
- Provide that a shareholder or member who receives a dividend or distribution with knowledge of facts that it is contrary to the Nonprofit Corporation Act, the articles of incorporation or bylaws, is liable to the corporation for the amount received in excess of the amount the corporation could lawfully distribute.
- Clarify and expand the indemnification law and procedure for approving and making indemnification payments. The new law provides that a nonprofit corporation may make indemnification in advance of final disposition of a proceeding if the person furnishes the corporation a written agreement to repay the advance if it is determined that the person did not meet the standard of conduct required by the law. The new law also contains language on how indemnification payments are authorized and provides that if the corporation has amended its articles of incorporation to eliminate the liability of a director a corporation may indemnify a director without a determination that the director has met the standard of conduct, subject to certain exceptions.
5) Other Amendments to the Act:
- Require that the board of directors of a nonprofit Michigan corporation consist of three or more directors, unless the corporation is a private foundation or a corporation formed to provide care to dentally underserved population which may have one or more directors.
- Allow two nonprofit corporations that participate in a partnership or joint venture to use the same name if they both consent to the use.
- Allow a nonprofit corporation to issue shares that are convertible into bonds or redeemable by the corporation.
- Allow for the electronic mailing by the State of Michigan to the resident agent of a corporation of notice of pending dissolution for failure to file annual report for two years.
- Provide that the State of Michigan shall waive the filing fee for the initial articles of incorporation for individuals who served in the armed forces and were honorably discharged.
- Provide that any charitable purpose organization must notify and obtain the written consent of the Attorney General’s Office prior to any merger or dissolution, or certain amendments or restatement of its articles of incorporation.
This article is a brief summary of an extensive amendment to the Act. Nonprofit corporations should contact legal counsel regarding any provisions of the new law and how it may affect their organization.
Edward J. Castellani J.D., C.P.A. is an attorney and certified public accountant specializing in Nonprofit and Tax-Exempt Organization Law, and is a member of the Business and Tax Department of Fraser Trebilcock. His clients include trade associations, educational and charitable organizations, foundations and other nonprofit organizations. For more information, please contact Mr. Castellani at 517.377.0845 or ecast@fraserlawfirm.com.