1. Baylor Law School Nonprofit Organizations Spring 2004 Course Class Two: Governance Prepared By: Darren B. Moore Bourland, Wall & Wenzel, A Professional Corporation Attorneys and Counselors City Center Tower II 301 Commerce Street, Suite 1500 Fort Worth, Texas 76102 (817) 877-1088 (817) 877-1636 (facsimilie) E-mail: dmoore@bwwlaw.comdmoore@bwwlaw.com ©Bourland, Wall & Wenzel, P.C.

2. Bylaws Govern the everyday operation of the organization Part of the “governing documents” Subject to the Articles of Incorporation & Texas Nonprofit Corporation Act Adopted at the first organizational meeting after approval of Articles of Incorporation Not filed with Secretary of State Will be included (usually) with Form 1023/1024 filed with IRS for federal exemption

3. Components of Bylaws Name, purposes, powers and offices Members (if applicable) Board of Directors (if applicable) Committees Notices Officers, Employees and Agents Contracts, checks, deposits and funds Miscellaneous Amendments Operation and Dissolution

4. Areas Typically Addressed Provisions concerning the Board of Directors Provisions concerning members Provisions governing committees of the Board Voting and procedural requirements

5. Bylaws: Purposes Must be organized and operated exclusively for purposes within appropriate code section (e.g. 501(c)(3) – religious, charitable or educational)

6. Bylaws: Membership Member or no member (classes of membership) Election of members Qualifications and rights of members (or classes of members) Eligibility Meetings, notice, voting, etc. Removal/exclusion from membership Quorum May restrict voting to certain members

7. Bylaws: Board of Directors General powers Number (at least 3) Qualification (e.g. educational or certifications) How elected/removed Term of office Filling of vacancies Meetings (annual, regular, special), quorum, manner of acting Absolute prohibition against loans to directors Take care to watch for inurement

8. Bylaws: Type of Governance 1.Member led 2.Board of director led 3.Hybrid (some decisions presented to and made by the members and the rest by the directors)

9. Board of Director Led Member Corporation: Board of directors makes all decisions except for “big ticket” items and anything else carved out for members in governing documents Nonmember Corporation: governed by board of directors; can have various classes of directors, executive committee, etc.

10. Member Led Member controlled: members control daily operation Board of director controlled: simple day to day operations decided by board but most decisions presented to and decided by members Keep in mind there may be a single member or there may be classes of members with only one class having voting rights or voting rights as to certain decisions (take care here when forming public charities)

11. Bylaws: Officers As many as deemed necessary Owe fiduciary duties Elected or appointed Directors may be officers President and secretary cannot be same Compensation to be reasonable Provisions for term, removal, vacancies Can name officers names other than President, VP, etc.

12. Bylaws: Gift Acceptance Policy Which types of gifts to accept (wills, trusts, CRUTs, charitable gift annuity, etc.) What types of property (cash, stock, life insurance, etc.) Restricted gifts Real estate conditioned on inspection and environmentals Develop and periodically review Understand motivations of donors Directors and staff not to benefit personally from gifts or fees related to gifts No private inurement for bringing in gifts Don’t accept if contrary to policy

13. Duties of Board Members (Fiduciary Duties) Duty of Care 1.Act in good faith 2.Use care that a person of ordinary prudence would use in same or similar circumstances 3.Make decisions believed to be in the best interest of the corporation (must be reasonably informed) Duty of Loyalty 1.Loyal to the corporation 2.Look to best interest of corporation rather than private gain 3.Corporate opportunity doctrine 4.Disclose personal interest 5.Transactions with organization must be fair to the nonprofit

14. Conflicts of Interest Adopt a policy Disclose material facts Interested directors should abstain from voting Approval from majority of disinterested directors Q: What if all directors are family members?

15. Avoiding Director Liability Advisory boards of professionals in their fields to provide guidance Indemnification provision in bylaws (good faith) D&O insurance Audits TX Charitable Liability & Immunity Act Volunteer Protection Act of 1997 (fed)

16. Bylaws: Professional Management/Advisory Boards May be an executive committee Day to day management can be delegated CPA’s Attorneys Money Managers No personal liability if director relies on information from others so long as director does not have knowledge that the information is incorrect

17. Investing Trusts: Prudent investor rule (no investment per se imprudent and may delegate investment decisions – look to how overall investment strategy developed for test of fiduciary duty) Corporations: to avoid personal liability, directors must simply act in good faith and with ordinary care in selecting advisors

18. Indemnification Permissive –Director in good faith –Director reasonably believed she acted in the best interests of the corporation (or, if not conduct in official capacity, not in opposition to corporation’s interests) –Criminal: no reason to believe conduct was unlawful Precluded –Found liable for receiving personal benefit improperly –Found liable to the corporation  But: Can still be indemnified for reasonable expenses incurred in connection with proceeding so long as not found liable for willful or intentional misconduct in performing corporate duties Must have a provision in the governing documents

19. Mandatory Indemnification Nonprofit must reimburse reasonable expenses incurred by a director after a court order and the exhaustion of all appeals where the director is successful in defending the lawsuit

20. D&O Insurance  Protects against unintentional wrongful acts (so long as not illegal or beyond authority)  Pays legal defenses and reimburses organization for indemnification costs  Coverage is made on a claims made basis

21. D&O Common Exclusions oFines and penalties oPunitive damages oPollution oERISA claims oDefamation oIntentional conduct oEmployment practices oSexual misconduct

22. D&O Considerations Who chooses defense counsel What are the coverage amounts What are the exclusions (e.g. employment practices) Is there a duty to defend/provide defense costs What is the retention amount (i.e. deductible)

23. Records: Need IRS audits Lawsuit over equipment, misconduct, etc. Selling/purchasing real estate Expulsion of member Employee termination Etc, etc, etc Many nonprofits (especially churches) fail to keep adequate records

24. Record-keeping: Methodology System should keep records organized, safe, easy to locate and access Records should be kept in a centralized location More than one person should understand and be able to locate records within the system Some type of redundancy should be built in to the system

25. Types of Records to be Kept Governing documents (all restatements and amendments) Certificate of Incorporation 9.01 reports Resolutions Real Estate documents (deeds, deeds of trust, lien notes, tax appraisals and ad valorem exemption records, plats and surveys, leases) Documents regarding personal property (bills of sale, receipts, warranty information, repair and maintenance records) Policies and procedures Employee handbooks Tax information/records received from governmental agencies Insurance policies (especially occurrence-based) Financial records Personnel records (need to keep separate)

26. Policies: Need Consistency in practices Reasonableness of procedures (i.e. avoiding negligence) Without appropriate policies, organizations are run in a crisis or conflict on history or emotion... Neither of which is an effective or efficient solution

27. Policies are only effective if followed Garcia v. City of New York Identify need Implement policy FOLLOW policy

28. Identifying Appropriate Policies Requires an examination of types of activities conducted and by whom they are conducted E.g. Churches: drivers’ policy, counseling policy, communicable disease policy, child abuse policy, volunteer childrens’ worker policy, sanctuary use policy, youth trip policy, etc.

29. Next Week Liability Issues