Advantages of amending the Massachusetts nonprofit corporation law

Issue May/June 2016 May 2016 By David A. Parke

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as a nonprofit corporation under Chapter 180, many of whose provisions are vague, cumbersome, old-fashioned and outdated.

One example of outdated language is in M.G.L. c. 180, § 4, which lists the specific purposes for which a nonprofit corporation may be formed in Massachusetts.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.