The Massachusetts statute governing nonprofit corporations,
M.G.L. c. 180, was originally adopted in 1971. For the past 45
years, this statute has governed many large institutions and
smaller nonprofit organizations in Massachusetts. Efforts are
underway by a working group from the Boston Bar Association to
propose changes to the Massachusetts nonprofit corporation law. It
will be important to consider those changes, and their potential
improvements on the organization and operation of nonprofit
corporations in Massachusetts.
Law Needs to be Modernized
In 2004, Massachusetts adopted a new Business Corporation Act,
M.G.L. c. 156D. The new BCA updated the law previously applicable
to business corporations. The new BCA is based on the American Bar
Association's Revised Model Business Corporation Act, which is the
basis of the business corporation statutes in most states.
The new Massachusetts BCA has options that were not available
under the old corporation law, M.G.L. c. 156B, regarding corporate
governance. The new BCA explicitly recognizes various types of
notice, and modern forms of communication, including electronic
transmissions. The new BCA is more flexible in allowing remote
participation in corporate meetings. The new Massachusetts business
corporation statute recognizes entities like limited liability
companies, and reorganizational transactions like domestications
and conversions, that did not previously exist in
Massachusetts.
A business enterprise has several options to consider when
deciding on an entity through which to conduct its for-profit
operations. Options include a corporation under the new
Massachusetts BCA, a limited liability company under the relatively
new Massachusetts LLC statute, or a non-Massachusetts business
entity. However, a nonprofit enterprise in Massachusetts is largely
limited to organizing as a nonprofit corporation under Chapter 180,
many of whose provisions are vague, cumbersome, old-fashioned and
outdated.
One example of outdated language is in M.G.L. c. 180, § 4, which
lists the specific purposes for which a nonprofit corporation may
be formed in Massachusetts. This list includes such purposes, that
originated in earlier times, as "promoting temperance or morality
in the commonwealth," "fostering, encouraging or engaging in
athletic exercises or yachting" and "the association and
accommodation of societies of Free Masons, Odd Fellows, Knights of
Pythias or other charitable or social bodies of like character and
purpose." A more modern statute would generally allow incorporation
for any nonprofit purpose.
Another example of an outdated provision is the local
investigation provision. M.G.L. c. 180, § 5 says that before
issuing a certificate of incorporation, or approving a change of
location of the principal office of a Massachusetts nonprofit
corporation, the State Secretary may refer the matter to the
appropriate city or town for a local investigation. The purpose is
to determine if the incorporators, officers or others identified
with the corporation have been engaged in the illegal selling of
alcoholic beverages, keeping places used for illegal gaming, or
other business prohibited by law, or are persons of ill repute. The
current regulations under the Office of the Secretary of State
indicate that the Corporations Division now dispenses with the
local investigation if a statement is signed by the incorporators
regarding the lack of convictions by the incorporators and officers
for crimes relating to alcohol or gaming in the past ten years.
Chapter 180 also has various specialized provisions, that appear
to have originated in the late 1800s or early 1900s, relating to
conferring degrees by medical corporations (M.G.L. c. 180, § 13),
horse breeding corporations (M.G.L. c., § 14), and medical milk
corporations (M.G.L. c. 180, §§ 20-25).
The most outdated feature of the Massachusetts nonprofit
corporation statute is that it does not comprehensively cover,
within Chapter 180, all aspects of the organization and operation
of a nonprofit corporation. Instead Chapter 180 refers to and
incorporates the old Massachusetts Business Corporation Law,
Chapter 156B, as the law governing various areas not covered by
Chapter 180. One effect of this is that the improvements brought to
corporate practice by the new Massachusetts BCA are still
inapplicable to the large number of nonprofit corporations in
Massachusetts.
Corporate Operations Can be Cumbersome
The Massachusetts nonprofit corporation statute does not easily
accommodate fundamental corporate transactions if the corporation
has a large number of members, which is a characteristic of many
nonprofit corporations. Chapter 180 requires the approval of two
thirds of all voting members in order for a nonprofit corporation
to amend its articles of organization, to dispose of its assets, or
to merge with another corporation. With a large voting membership,
obtaining such a vote can be impossible or difficult. M.G.L. c., §
7A, prescribes a process to petition the state secretary for
approval of charter amendments and mergers, when the two-thirds
vote cannot be achieved. While the state secretary's office has
been very helpful to corporations that must file Section 7A
petitions, the process under Section 7A still involves significant
planning, risk and expense in order to be sure that the Section 7A
standards are satisfied.
The failure of the Massachusetts nonprofit corporation statute
to specifically recognize modern methods of communication and
voting also creates difficulties when there is a large membership.
There would be an advantage to large membership corporations if
provisions similar to those in the new Massachusetts BCA, that
allow for electronic communications, and alternative forms of
notice, were part of the nonprofit corporation statute.
The present nonprofit corporation statute limits the types of
mergers in which a Massachusetts nonprofit corporation may engage.
Under M.G.L. c. 180, a nonprofit corporation may merge with another
nonprofit corporation if such other corporation law so permits.
This statute does not allow for mergers with limited liability
companies or other non-corporate entities. Because the merger
provisions of M.G.L. c. 156B do not address mergers with nonprofit
corporations, a Massachusetts nonprofit corporation may not
directly merge with any Massachusetts corporation, for example, a
cooperative corporation under M.G.L. c. 157, that is still governed
by M.G.L. c. 156B.
There are also issues regarding whether remedies to enforce
director and officer duties, such as derivative actions by members
of a Massachusetts nonprofit corporation, are available in
Massachusetts. This is unfortunate because the need for an
effective remedy to address breaches of officer and director duties
applies as much to nonprofit corporations as to for-profit
corporations.
New Areas, Newer Statutes
The new Massachusetts BCA, the ABA Model Nonprofit Corporation
Act and newer state nonprofit corporation statutes have provisions
that, if adopted in Massachusetts, could improve the operation and
governance of nonprofit corporations in Massachusetts.
The new BCA and Model Nonprofit Act recognize electronic means
of communication in various areas. Those acts also allow not only
for notices by the traditional methods of mail and hand delivery,
but also, under appropriate circumstances, by electronic
communication, orally or by newspaper of general circulation,
radio, television or other form of public broadcast communication.
These acts allow for annual meetings to be held by means of the
internet or other electronic communications technology where
members can participate in the meeting concurrently with their
proceedings.
The Model Nonprofit Act includes several provisions that would
remove impediments to corporate action when there is a large
membership. This act has provisions allowing a membership
corporation to operate with delegates instead of members. The Model
Nonprofit Act also allows for approval of proposed corporate
actions by ballot. This act allows for a relaxation of quorum
requirements if a members' meeting must be adjourned due to a lack
of quorum.
Moreover, the Model Nonprofit Act provisions regarding
authorization of extraordinary corporate actions allow much more
flexibility in obtaining the required approval of members. Thus,
under the Model Nonprofit Act, unless a greater member vote is
required by the organizational documents or by the directors, a
proposed charter amendment, a plan of merger, a disposition of
assets outside of the ordinary course of a nonprofit corporation's
activities, or a dissolution of the corporation, may be approved by
a majority of a quorum at a properly called meeting.
Nonprofit corporations, particularly charities, now recognize
the importance of having and enforcing conflict of interest and
related policies. While M.G.L. c. 180 includes standards by which
directors and officers of a nonprofit corporation must perform
their duties, the Model Nonprofit Act has more robust provisions
that address manager duties, conflict of interest situations and
remedies for enforcement. Thus the Model Nonprofit Act includes a
duty by an officer to report to his or her superiors information
known to be material to the superior officer, board or committee,
as well as to report of any actual or probable material violation
of law or material breach of duty by an officer, employee or agent
of the corporation. The Model Nonprofit Act includes provisions to
validate transactions involving conflicts of interest, which
generally call for disclosure and approval by disinterested
directors or members. The Model Nonprofit Act includes provisions
specifically permitting members or directors to bring derivative
proceedings in the name of the nonprofit corporation. The more
recently amended New York nonprofit corporation statute contains
stricter requirements for approval of related party transactions,
and maintenance of conflict of interest and whistleblower policies
by the corporation.
The Model Nonprofit Act and new Massachusetts BCA allow for
domestication, by which a corporation may change its state of
incorporation, and conversions, by which a corporation may convert
to a different entity. These options do not exist under M.G.L. c.
180.
Need to Preserve Massachusetts Traditions
Provisions like those described above would give nonprofit
corporations options that would make it easier to take corporate
action, allow better participation by members and directors, define
duties of managers and create remedies for breaches. However, we
must be mindful of principles and traditions peculiar to nonprofit
corporations that have been established in Massachusetts. Many
nonprofit corporations operate under organizational documents that
were created long ago, and governance procedures that were
developed under Chapter 180. It is important to consider the impact
of any proposed amendment to the nonprofit corporation statute on
existing Massachusetts practices and case law.
The authority of the Office of the Massachusetts Attorney
General to protect public charities and address issues in the
management of their assets has long been recognized under
Massachusetts common law and statutory law. M.G.L. c. 12, §§ 8 -
8M, relates to the jurisdiction of the attorney general over public
charities. M.G.L. c. 180 has several provisions that require
attorney general involvement in fundamental actions by
Massachusetts charities. These include M.G.L. c. 180, § 8A,
regarding the disposition of assets by public charities and
hospitals, and Sections 11A and 11B, regarding dissolution of
public charities. Any amendment that, for example, might allow the
conversion of a Massachusetts nonprofit corporation or a derivative
lawsuit by a member of a nonprofit corporation, would have to take
account of, and not interfere with, the attorney general's
oversight authority over public charities.
Massachusetts also has developed case law regarding various
governance issues of public charities. There are important
Massachusetts decisions that, for example, address the higher
standards of care by directors, the power of officers, the ability
of the board to change charitable purposes or delegate its powers
with regard to the charity's assets, or the right to transfer
control over the charity's assets.
Care should also be taken not to upset systems and processes at
the Massachusetts Secretary of State's Office that work well. A
large number of Massachusetts nonprofit corporations have
organizational documents that have been developed under the current
law, and tax exempt recognition has been granted based on those
documents. Statutory changes that would require unnecessary changes
to bylaws or other organizational documents should be carefully
considered.
In summary, there are a number of areas where improvements could
be made to the nonprofit corporation law in Massachusetts. The work
being done to consider and propose amendments to this law is to be
commended.