|Volunteer Legal Handbook, 9th Edition
Handbook > Law > Nonprofit Law
Alaska's nonprofit corporate law is a mess. Some would describe it as confusing but that's not strong enough. First, the statute that appears to make for-profit corporation law apply where not inconsistent with nonprofit corporate law appears to contain an error.
AS 10.20.710(a) provides, "The provisions of this chapter relating to domestic corporations apply to all corporations organized under this chapter." Since there are no provisions relating to domestic corporations in Chapter 20 of Title 10, most attorneys assume that the first "chapter" in §710(a) should be read as "title." The difficulty is that the error has been in the statutes for about 20 years now.
There's a second problem. In 1989, a new business corporation law was adopted, imposing significant new duties and obligations on officers and directors of business corporations. It is not at all clear whether those duties and obligations extend to officers and directors of nonprofit corporations as well.
These materials assume that, where not inconsistent, the law of for Alaska profit corporations applies to Alaska nonprofit corporations despite the glitch in AS 10.20.710(a) and the adoption of the Alaska Corporations Code.
NOTE: Again, in these materials director is a member of the board of directors of a nonprofit corporation and is almost always a volunteer. An executive director or chief professional officer is the nonprofit equivalent of a chief executive officer, and is generally a paid staff person, and therefore not a volunteer. In these materials, a director means a member of the board of directors; an executive director means a paid staff person who manages the day-to-day affairs of a nonprofit corporation.
Liability of Directors.
As a broad general rule, directors are not liable for actions or inactions of officers, agents, or employees of the nonprofit corporation. This broad rule has numerous exceptions. And some of the exceptions can themselves be limited by the partial immunity described below.
Directors of a nonprofit corporation are fiduciaries and owe special duties of care and loyalty to the nonprofit corporation. A violation of a fiduciary duty exposes the wrongdoer to liability for compensatory damages, punitive damages, and a special kind of restitution called "disgorgement," where the wrongdoer has profited at the expense of the nonprofit corporation.
Every director owes a duty of care to the nonprofit corporation. The duty of care is quite broad. It ranges from a duty to monitor the affairs of the nonprofit corporation to guard against loss or injury to the nonprofit corporation, to a duty to vote and not to abstain. For example, a director violates the duty of care if he or she fails to review the treasurer's report, or the minutes of the previous meeting.
The duty of loyalty is an obligation to avoid self-dealing. Self-dealing occurs when a director places his or her own interests ahead of those of the nonprofit corporation. Under many circumstances, it is not necessary that the nonprofit corporation be shown to have suffered an injury as a consequence of the self-dealing; the courts treat a violation of the duty of loyalty so seriously that they will not permit even the appearance of misconduct. For example, if a member of the board of directors owns or even works at a furniture store, then the director cannot vote on a question of whether or not to purchase furniture from that store.
Some of the ways that a member of the board of directors of a nonprofit corporation can manage risks are discussed later at Risk Management. But here are some specific risk management techniques for board of directors members.
Work Description. Every nonprofit corporation should have a work description for the members of the board of directors, describing what is expected in terms of time and other commitments, and the duties that are specific to the nonprofit corporation, as opposed to the general duties described in these materials. If a nonprofit corporation doesn't have such a work description, how is a director to know whether or not he or she is performing?
Keeping Involved. By far the best technique to manage the risks facing a member of a board of directors is to keep involved. Most directors that get into trouble do so because they fail to keep involved, and the duties and decisions that they are supposed to perform either don't get made or get made by someone else. In either case, the director remains liable.
Registering Your Dissent. There will be times when you disagree with the decisions of your fellow board of director members. That's normal, and can even be a good sign; if all of the directors agree on controversial questions perhaps the decision is not being adequately thought through. If you dissent, ask the secretary to record your dissent. If you are especially concerned, ask in writing. Remember that if you are present and don't register your dissent, you are presumed to have agreed. AS 10.06.450(e).
Reliance on Committee Reports. Directors are entitled to rely upon committee reports if the director reasonably believes the committee reports merit confidence. AS 10.06.450(e).
Directors' and Officers' Insurance. Directors can purchase a special kind of insurance to cover some of the risks they face. Please see the discussion at Risk Management, and particularly Insurance, below.
Liability of Officers.
Like directors, officers of a nonprofit corporation are fiduciaries. In addition, officers are true agents for the nonprofit corporation (see the discussion of agency). Officers are liable for breaches of their agency duties. Some of those duties are described here.
Status as an officer imposes on the officer the obligations placed on the office by statute and the Bylaws of the nonprofit corporation. For example, usually the treasurer of a nonprofit corporation is obligated to keep and review the books and records of the nonprofit corporation. If the treasurer delegates those obligations to the executive director of the nonprofit corporation, and the executive director fails to perform them, or, worse yet, embezzles monies, the treasurer may well be personally liable for the amount of the loss.
In the case of professionals, persons who have special skill and expertise associated with the performance of the duties of the office, those persons may well be held to a higher standard of care than would a non-professional. For example, an accountant who is a treasurer may be held to a higher level of care than a lay person in the same office.
In addition to the risks described above, a number of statutes also impose liability on officers and directors of corporations. The list of statutory liabilities and statutory exceptions to the general rule of liability set out here is not exhaustive.
Federal Withholding Taxes. Any business with paid employees is required to withhold monies for income taxes, unemployment compensation and other purposes. Those monies are held in trust by the employer and are supposed to be paid over to the IRS. If the employer fails to withhold when it should, or withholds but fails to pay the monies over, then directors and, particularly, officers, may face personal liability for a penalty equal to the amount of the unpaid withholding monies. This risk is particularly serious for persons authorized to sign checks. A number of nonprofit corporations in Alaska have faced this specific kind of claim.
State Employment Security Compensation. State law requires that employers pay employment security compensation to the State of Alaska. If the employer fails to do so, then directors and, particularly, officers, may face personal liability for a penalty equal to the unpaid employment security monies.
Worker's Compensation. Alaska law requires essentially all employers to maintain worker's compensation insurance against the risk of an employee being injured or killed on the job. If an employer fails to maintain that insurance, and an employee is injured or killed on the job, then officers and directors may be personally liable to the employee for the benefits the employee would have received as worker's compensation.
Officer and Director Immunity.
Officers and directors can partially immunize themselves from liability for some kinds of risks by amending their nonprofit corporation's Articles of Incorporation to include special language provided by statute. There are two broad drawbacks to making those amendments. Despite those drawbacks, most nonprofit corporations will want to amend their articles of incorporation to take advantage of these limitations of liability. Most nonprofits will find that such a step makes it easier to attract new directors and officers and makes directors and officers insurance premiums lower.
First, amendments to Articles of Incorporation require the consent of the members of the nonprofit corporation (if your nonprofit corporation has members). It's a little awkward for officers and directors to ask the persons who select them to immunize them from the consequences of their own conduct. Second, the immunity is limited in scope. Officers and directors remain liable for their actions and inactions in each of the following areas.
Breach of the Duty of Loyalty. A breach of the director's duty of loyalty to the nonprofit corporation cannot be excused, and to the extent a director violates the duty of loyalty he will remain liable even if the statutory immunity has been put in place. An example: a director who is on the board of two different nonprofit corporations applying for the same grant has hopelessly compromised his duty of loyalty. No matter which nonprofit gets the grant, the other can accuse him of a breach of his duty of loyalty.
Acts Not in Good Faith. A director is liable for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law. To the extent a director is not acting in good faith, or knowingly violates the law, he or she will remain liable even if the statutory immunity has been put in place. An example: a director who agrees to accept a donated painting, in return for agreeing the painting has a value higher than an appraisal shows, has engaged in a knowing violation of the law, and will be liable.
Improper Personal Benefit. A director will be liable for a transaction from which the director derives an improper personal benefit, even if the statutory immunity has been put in place. An example: a director who is also an insurance agent, and writes insurance policies for the nonprofit corporation, and receives a commission, has derived an improper personal benefit.
Conflicts of Interest.
Suppose a corporation or partnership in which you are a director or partner or an employee, for example, wants to do business with your nonprofit corporation. You owe a fiduciary duty of loyalty to that corporation or partnership, which includes the duty to get it the best return reasonable under all of the circumstances. At the same time, if you are a director of your nonprofit corporation, you owe the nonprofit corporation the duty to get the lowest reasonable price. Pretty clearly, you have a conflict of interest.
The general rule should not be surprising: the fiduciary duty of loyalty requires a director to have an undivided allegiance to an organization's mission when using either the power of her position, information she possesses concerning the organization, or its property; and it bars a director from using her position or information concerning the organization and its property in a manner which allows her, or a third party through her, to gain a pecuniary benefit. The director's conduct, at all times, must further the nonprofit corporation's goals and not her own interests or the interests of a third party with whom the director may be affiliated.
In Alaska, directors and officers of for-profit corporations can obtain a kind of limited exception to this general rule. It's not entirely clear that this exception will be available for directors and officers of nonprofit corporations who, as explained above, may owe a higher duty of loyalty to their nonprofit corporation than does the director of a for profit entity. But except where the conflict of interest clearly violates another provision of law, for example, a loan to a director, probably the conflict of interest can be waived by strict adherence to AS 10.06.478. The statute deals with situations where a director is directly or indirectly contracting with the corporation of which he is a director.
AS 10.06.478 addresses two sorts of situations: (1) where the director is herself contracting, or a nonprofit corporation or other business in which she has a material financial interest is contracting, with the corporation; or (2) where another corporation in which a director is also an officer or director is contracting with the nonprofit corporation (the dual directorship case).\A contract or other transaction between a nonprofit corporation and one or more directors, or between a nonprofit corporation and another business in which one or more directors have a material financial interest, is not void or voidable because of the presence of the director at the meeting where the contract is approved, if:
If the contract is approved by the members in good faith, then the contract is presumed to be just and reasonable. If approved by the directors but not the members, the person attempting to assert the contract has the burden of establishing the contract was just and reasonable at the time it was made. In neither case does the director involved get to vote.
The second situation, the dual directorship, arises where the same person is a director in two corporations, but does not have a personal, material financial interest in the transaction at issue. A contract or other transaction between two corporations where the director does not have a material financial interest in either corporation is not void or voidable because of the presence of the director at the meeting where the contract is approved, if:
- All materials facts are disclosed, and
- The transaction is approved by the members or directors.
- The vote of the director involved is not counted. (The director should not vote in any event.) Note that director approval in the case of a dual directorship does not result in the burden of proof requirements imposed by a simple conflict described above.
In dealing with conflicts of interest, the bottom line is it is best to avoid them wherever possible. Use competitive bidding or proposals if you can. REMEMBER: Where you cannot avoid conflicts of interest, the minutes of the meeting of the board of directors should reflect in detail full disclosure of all material facts, the vote by the directors on the transaction, and a specific entry that the conflicted director did not participate in the voting. A previously approved, a written conflicts of interest policy is a best practice.
Also remember: the IRS wants you in your Form 990 to describe your conflicts of interest policy. You should develop one and not rely upon the dubious protections of Alaska’s for-profit corporate law.
Open Meetings Laws.
Alaska law requires meeting of public bodies to be open to the general public in most cases. AS 44.62.330. Other states have similar statutes. To be open to the public typically requires that notice of the public meeting be given in advance of the meeting, and that interested persons be permitted to attend and observe.
Alaska law does not specifically apply the Open Meetings Act to a nonprofit corporation, and there are no Alaska cases addressing the issue. The question has arisen many times in other jurisdictions, however. While the specific language of an individual state's open meetings law is critical, several general principles can be identified. Although none of those principles, standing alone, is usually sufficient to trigger open meeting obligations in a nonprofit corporation, the following factors have been considered by the courts in determining whether or not a state's open meeting laws applied to a nonprofit corporation:
The law just isn't very clear in this area, and some states have applied open meetings act requirements to nonprofit corporations for some purposes and refused to apply them for others. Please see the Supplemental Materials for additional information.