Flexibility for Oklahoma nonprofit corporations
In 2019 the Oklahoma Legislature passed, and the Governor signed into law on April 16, Senate Bill 642, which made numerous and substantial changes to the Oklahoma General Corporation Act (the “Act”) primarily relating to nonprofit and nonstock corporations. The amendments provide favorable corporate governance improvements for Oklahoma nonprofit corporations. They became effective November 1, 2019. Although some nonprofit corporations have taken advantage of the amendments, many have not. Oklahoma nonprofit corporations should consider amending their certificates of incorporation or bylaws to incorporate the changes.
The nonprofit sector, led by the Oklahoma Center for Nonprofits and the Oklahoma Bar Association Corporate Law Section, took the lead to coordinate with legislators, nonprofit organizations, and others to propose amendments that create flexibility and offer practical solutions for somewhat impractical corporate governance processes.
Nonprofit corporations frequently manage governance processes in a manner than differs from the management of governance processes by other types of corporations. For example, nonprofit corporations typically are not structured with shareholders or equity owners. Instead, their corporate organizational documents may provide for members who in many cases elect directors, although many nonprofit corporations provide for self-perpetuating boards of directors in which existing directors elect, designate, or appoint their successors. Additionally, directors of nonprofit corporations are responsible for assuring that the corporation fulfills its purposes. The earnings, assets, and other resources of nonprofit corporations are dedicated to the furtherance of the corporate mission and purposes, and generally they may not be paid or distributed to members or utilized for private gain. Considering that nonprofit corporations do not have shareholders or equity owners, they are accountable to the public.
The amendments create several practical and favorable improvements to the Act. Most of the constructive governance improvements are applicable to nonprofit corporations, but not to other types of corporations. Although some of the improvements may appear to be relatively insignificant in terms of corporate governance, they offer useful alternatives and options for nonprofit corporations.
Some of the more useful amendments are described in this article.
Definitions and Use of Terms. Among other changes in terminology, the amendments include several additional or revised definitions. A “nonstock corporation” is any corporation organized under Act that is not authorized to issue capital stock. A “nonprofit nonstock corporation” is a nonstock corporation that does not have membership interests. A “charitable nonstock corporation” is any nonprofit nonstock corporation that is exempt from taxation under Section 50l(c)(3) of the Internal Revenue Code. The terms “not-for-profit” and “nonprofit” are now legally synonymous.
The amendments provide that: (a) all references to shareholders of a corporation are deemed to refer to members, (b) all references to the board of directors are deemed to refer to the governing body of the corporation, (c) all references to directors or members of the board of directors are deemed to refer to members of the governing body, and (d) all references to stock, capital stock or shares of a corporation that is authorize to issue capital stock are deemed to refer to the membership of a nonprofit nonstock corporation and to the membership interests of any other nonstock corporation.
Certificate of Incorporation. The certificate of incorporation of a nonprofit corporation must include, among other provisions, the conditions of membership or other criteria for identifying members. Either the certificate of incorporation or the bylaws may also provide for classes of members and provisions related to voting rights. For charitable nonstock corporations, the certificate of incorporation must provide that the corporation is organized for specific charitable purposes and that upon dissolution, the assets will be distributed to charitable corporations. Additionally, the certificate of incorporation may include any provision for the management of the business and for the conduct of the affairs of the corporation that is not contrary to Oklahoma law.
Bylaws. The bylaws may contain any provision, not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its members, directors, officers or employees. A nonstock corporation may in its certificate of incorporation confer the power to adopt, amend, or repeal bylaws upon the directors or upon the members. The fact that the power has been conferred upon the directors or members, as the case may be, does not divest the members or governing body of the power, nor limit their power to adopt, amend or repeal bylaws.
Board of Directors and Governing Body. The Act provides that the business and affairs of every corporation formed under the Act must be managed by or under the direction of a board of directors or governing body, except as may be otherwise provided in the Act or in the corporation’s certificate of incorporation. The Act also includes provisions relating to the number, classes, qualifications, designations, terms, requirements for meetings (including quorum and voting requirements), manner of taking action, and committees of the board of directors or governing body. Additionally, the amendments to the Act provide that the certificate of incorporation or bylaws of a nonstock corporation may provide that the business and affairs of the corporation may be managed in a manner different from that provided for business corporations. The differences may include additional classes of directors, longer terms of service, the use of less than unanimous consents for board action, and permitting the Chair of the governing body to designate committees and appoint members.
Quorum and Voting. In the case of a business corporation, a majority of the total number of directors (or a lesser number, but not less than one-third of the total number of directors) is required to constitute a quorum for the transaction of business, unless the certificate of incorporation or the bylaws require a greater number. For nonstock corporations, the quorum and voting requirements are more lenient. Unlike business corporations, the certificate of incorporation or bylaws of a nonstock corporation may provide that less than one-third of the members of the governing body or a committee may constitute a quorum for the transaction of business by the governing body or committee, as applicable.
Committees. The board of directors of a business corporation is authorized to designate committees and appoint one or more of the directors of the corporation as members of committees. The certificate of incorporation or bylaws of a nonstock corporation may provide that the Chair of the governing body may designate committees and appoint committee members.
Action of Board of Directors or Governing Body. For business corporations the vote of the majority of the directors present at a meeting at which a quorum is present constitutes the act of the board of directors, unless the certificate of incorporation or the bylaws require a vote of a greater number. For nonstock corporations the certificate of incorporation or bylaws may different voting and approval requirements.
Action Taken by Written Consent in Lieu of a Meeting. The Act provides that any action required or permitted to be taken at any meeting of the board of directors of a business corporation or of any committee of the board may be taken without a meeting if all members of the board or committee, as the case may be, consent to the action in writing or by electronic transmission, and the writing or electronic transmission is filed with the minutes of proceedings of the board or committee. Unanimous written consent is required. When taking action by consent in lieu of a meeting, the directors may not have the opportunity to discuss, deliberate, collectively consider, or exchange ideas about the proposed action. As a safeguard, a requirement of unanimous consent assures that the directors have not only reached a consensus about the proposed action, but also have confirmed that all directors are in agreement with the action taken.
Members of the governing board of a nonprofit or nonstock corporation are typically volunteers who are not compensated. Due to business commitments, previous obligations, or other reasons affecting their availability, members of the governing board are frequently not able to attend board or committee meetings. To facilitate their decision making, the amendments to the Act provide that action required or permitted to be taken at any meeting of the governing board of a nonstock corporation may be taken without a meeting by written consent of less than all members of the governing body. Unanimous written consent is not required.
Whether taken by the board of directors of a business corporation or the governing board of a nonstock corporation, the written consent may specify a future effective date for the action to become effective, including upon the happening of an event. If the Board or committee specifies a future date, the date cannot be more than 60 days after the date of the consent.
Meetings of Shareholders and Members. The certificate of incorporation or bylaws of a business corporation may specify the number of shares with voting power that must be present or represented by proxy at any meeting to constitute a quorum for the transaction of any business. A quorum may not consist of less than one-third of the shares entitled to vote at the meeting. In all matters other than the election of directors, the affirmative vote of a majority of shares present in person or represented by proxy at the meeting and entitled to vote on the subject matter constitutes the act of the shareholders. Directors are elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors.
For nonstock corporations with members, the certificate of incorporation or bylaws may specify any rights of members, the number of members with voting power, and provisions regarding meetings. The certificate of incorporation or bylaws of a nonstock corporation may specify the number of members having voting power who must be present or represented by proxy at any meeting of the members in order to constitute a quorum for the transaction of any business. The certificate of incorporation or bylaws may specify that a quorum may consist of less than one-third of the members who are entitled to vote at the meeting. In the absence of a specification in the certificate of incorporation or bylaws, one-third of the members of the corporation will constitute a quorum at a meeting of the members. In all matters other than the election of the governing body, the affirmative vote of a majority of the members present in person or represented by proxy at the meeting and entitled to vote on the subject matter constitutes the act of the members, unless the vote of a greater number is required by the provisions of the Act, the certificate of incorporation or the bylaws. Members of the governing body are elected by a plurality of the votes of the members of the corporation present in person or represented by proxy at the meeting and entitled to vote.
Record Date for Action. The board of directors of a business corporation may fix a record date for determining the shareholders entitled to vote at a meeting of the shareholders. For nonstock corporations, the amendments to the Act provide for a default record date, which is the date of the meeting or the date on which the corporate action is taken, as applicable.
Additional Provisions to Consider. The certificate of incorporation or bylaws of a nonstock corporation may contain other provisions that are not contrary to Oklahoma law. The following are examples and suggestions:
- Mission Statement. Board accountability begins with the corporate mission. For nonprofit nonstock corporations, development of a mission statement allows the incorporators and founders to focus on the mission of the corporation. Articulating and including the mission statement in an introductory preamble of the certificate of incorporation provides an opportunity for the organizers to reflect on and communicate their important goals and the legacy that they are creating. The mission statement should be a concise statement of the values and purposes of the corporation.
- Statement of Support of Mission. Another consideration is inclusion of a statement of support of the mission. The statement of support would accompany the bylaws and should be circulated to the directors for signature following incorporation and approval of the bylaws. The statement of support confirms that the members of the governing board know and understand the mission. It evidences their commitment to implement with management strategies for carrying out the mission and to monitor and assess the efforts of management to carry out those strategies. The statement of support also serves as a reminder to the directors of their expected obedience to the corporate mission.
- Interpretations. Another provision to consider for the bylaws is a statement of final authority. This provision would state that for purposes of carrying out and furthering the mission, vision, values, and purposes of the corporation, and for governing and supervising its business and affairs, the governing board has final interpretive authority with respect to matters pertaining to the interpretation of the certificate of incorporation and bylaws.
- Rules of Procedure. Bylaws of nonprofit nonstock corporations frequently include a provision requiring the use of Robert’s Rules of Order for the conduct of meetings. Robert’s Rules of Order are rules of procedure for parliamentary and deliberative assemblies. Corporate law does not require the use Robert’s Rules of Order. In some instances, Robert’s Rules of Order conflict with corporate laws, and they do not provide the flexibility that business corporations need in their operations. Instead, the Board Chair is expected to conduct meetings in an orderly manner. Many believe that they know, understand, and are familiar with Robert’s Rules of Order. When questioned, their knowledge is typically limited to making general motions, seconding motions, amending a motion, participating in discussion, and calling for a vote. Corporate directors, officers, and members are usually unfamiliar with the rules of procedure prescribed by Robert’s Rules of Order, including a point of privilege, parliamentary inquiry, motions to extend or limit debate, objections to consideration, requirements to “lay it on the table,” an appeal of a decision of the Chair, suspension of the rules, point of information, or dividing the question. Some motions and requests require a second, while others don’t. Some motions are debatable or amendable, and some are not. Use of Robert’s Rules of Order may create confusion or uncertainty, generate unintended consequences, or disrupt business functioning.
- Committee Charters. Bylaws often include a listing of committees, which may include standing, permanent, select, operating, advisory, and ad hoc committees. Some committees may be authorized to exercise the power of the governing board, while some are not. The titles, composition, functions, and responsibilities of committees can cover a wide range of administrative, financial, governance, fundraising, operational, marketing, investment, or other functions. An alternative to including comprehensive information and descriptions of committees in the bylaws, it may prove to be more practical to develop a separate committee compilation that includers committee charters of each committee. The committee charters should include the designation and title, composition, terms of committee members, authority, functions, and responsibilities of each committee. The provisions of the bylaws relating to committees would primarily cover committee meetings and procedures.
- Conflicts of Interest. For a number of reasons, nonprofit nonstock corporations should include in the certificate of incorporation or bylaws, provisions addressing conflicts of interest. Although conflict of interest provisions are often included to protect directors and officers from liability, they also benefit the nonprofit corporation by promoting good relationships and trust with members of the governing board and others. They assist the governing board in identifying, assessing, and resolving conflicts of interest that may involve a financial or other interest or relationship of a member of the governing board, management official, or employee that conflict or may conflict with the obligation to act in the best interests of the corporation.
- Code of Business Conduct and Ethics. In addition to provisions addressing conflicts of interest, the certificate of incorporation or bylaws should include a provision authorizing the governing board to establish and enforce a Code of Conduct and Ethics. The Code would require members of the governing board, management officials, and employees to carry out their functions and responsibilities in a manner that furthers the mission of the corporation and complies with law, as well as ethical standards and policies established or approved by the governing board.
- Indemnification. Indemnification essentially provides for reimbursement to members of the governing board, officers, volunteers, employees, and agents of the corporation for expenses, settlements, and judgments they incur as a result of legal proceedings against them for actions they take or approve on behalf of the corporation and in furtherance of its business and activities. The Act also authorizes the corporation to purchase and maintain of liability insurance on behalf of such persons when they are not protected by the corporation ’s indemnification. The bylaws should include comprehensive indemnification provisions that conform to the indemnification provisions specified in the Act.
- Exculpation. The Act allows nonprofit corporations to limit the personal liability of members of the governing board for a claim for monetary damages based on a breach of the duty of care by the director. Such a provision, if included in the certificate of incorporation or bylaws, would not eliminate liability for a breach by a director of other duties or for actions in which a party seeks injunctive or other equitable relief.
- Tax-exempt Charitable Corporations. If the corporation will be organized as a “charitable nonstock corporation” that plans to file a Form 1023 application with the Internal Revenue Service for exemption from federal income tax exemption under Section 501(c)(3) of the Code, provisions relating to tax exemption should be included. The Act includes a definition of “charitable nonstock corporation” for corporations that will be organized and operated as charitable organizations described in Section 501(c)(3), but does not address the 28 other types of nonprofit nonstock corporations that may seek an exemption from federal income taxation under another provision of Section 501(c) of the Code, such as a civic league, social welfare organization, labor organization, business league, chamber of commerce, fraternal benefit organization, social club, or other type of nonprofit corporation that is not a charitable corporation describe in Section 501(c)(3). For charitable nonstock corporations, the certificate of incorporation or bylaws should include (a) provisions for complying with Section 501(c)(3), including provisions for operating exclusively for tax-exempt purposes and for restricting private inurement, carrying on propaganda, attempting to influence legislation, and participating or intervening in a political campaign on behalf of a candidate for public office, (c) provisions that are applicable to a private foundation, if the corporation is operated as or determined to be private foundation, and (e) provisions for the distribution on dissolution of net assets remaining following payment of debts.
- Non-discrimination. The corporation should consider including a provision that, in any program or activity it sponsors or conducts, it will not exclude from participation, deny benefits or services to, or discriminate against any individual on the basis of race, color, creed, national origin, religion, age, gender, marital status, physical disability or impairment. Depending on the nature of the organization, it may be appropriate to include marital status, sexual orientation, gender identity, gender expression, political affiliation, veteran status, military obligations, or other factors.
- Control During Crisis. Also, in light of the new statutory provision permitting the business and affairs of the corporation to be managed in a manner different from that provided for business corporations, to include a provision dealing with control of the governing board or the executive committee during a crisis. Circumstances may arise that may result in harm to the corporation, its constituents, or its business, affairs, programs, reputation, or image. In those situations, the governing board should be authorized to develop a crisis and disaster plan and procedures that will address internal or external procedures, protocols, and plans (including communications and announcements) regarding a crisis situation, including the manner in which the crisis situation is handled.
- Declaring an Emergency and Suspending the Bylaws. As noted above, the amendments to the Act provide that the certificate of incorporation or bylaws of a nonstock corporation may provide that the business and affairs of the corporation may be managed in a manner different from that provided for business corporations. The differences may include additional classes of directors, longer terms of service, the use of less than unanimous consents for board action, and permitting the Chair of the governing body to designate committees and appoint members. How this provision may be interpreted is uncertain. It is unclear whether the listing of differences is an exclusive or exhaustive list, but instead provides examples of differences that may be considered. Nonstock corporations regularly take actions to deal with unanticipated events and emergency situations in order to further their purposes. The governing board may be interested in providing additional flexibility in the conduct of the business and affairs of the corporation, especially when dealing with unanticipated circumstances and events, emergencies, and situations beyond the control of the corporation. In light of the new statutory provision permitting the business and affairs of the corporation to be managed in a manner different from that provided for business corporations, it may be appropriate to include provisions in the certificate of incorporation and bylaws authorizing the governing board to declare an emergency and suspend the bylaws.
The amendments to the Act provide and allow for interesting and important new provisions to consider for certificates of incorporation, bylaws, and governance processes for nonstock corporations. Nonprofit and nonstock corporations should consider updating, amending, and restating their corporate organizational documents to take advantage of the changes authorized in the amendments.