Will Changes to the D.C. Corporations Code Affect Your Nonprofit Practices?
The District of Columbia has overhauled its Business Organizations Code, Title 29 of the D.C. Code ("Code"), effective July 2, 2011. The new provisions will apply as of January 1, 2012, unless entities elect to be governed by old Title 29 ("Old Code"), as described below. These modifications present potential challenges to, and opportunities to revisit, the operational structure of nonprofits and for-profits organized in D.C., as the Old Code is being replaced.
For certain D.C. entities, part of the challenge will be to decide whether or not to be governed by the new Code. Nonprofits established before August 6, 1962, and other entities formed before June 8, 1954, may elect to continue complying with the Old Code. Notice of such election must be given on or before January 1, 2014. If notice is not provided prior to that date, the entity will automatically be subject to the new Code. Entities formed after those dates do not have a choice and must comply with the new Code.
Whether or not such an election is available, entities should review their Articles of Incorporation ("Articles"), Bylaws, and other operational documents to determine whether the Code's new default provisions:
(a) will affect actions taken under existing organizational or operational documents in such a way as to invalidate such action(s); or
(b) should be, or are already, superseded by the governing documents.
In addition, for entities doing business in D.C. as a foreign corporation, the Code provides for a domestication process, thus streamlining and simplifying the process for an entity to transfer its jurisdiction of incorporation to D.C.
The new Nonprofit Corporation Act ("Act"), a subpart of the Code, substantially revises the D.C. nonprofit laws. The remainder of this document focuses on the important differences between the Act and the Old Code that may affect how your nonprofit operates.
The following changes apply solely to nonprofits having members, and each may be superseded by the Articles or Bylaws unless otherwise specified:
- Voting: Action may be taken by the members without a meeting if the action is authorized in a statement that is signed by all members entitled to vote.
- Voting Entitlement: Each member is entitled to one vote on each matter voted on by the members. The Old Code did not automatically provide members with voting rights unless specifically authorized by the Articles.
- Electronic Meetings: Members may hold annual, regular, or special meetings electronically or via the Internet, if provided for in the Articles or Bylaws.
- Special Meetings: Special meetings may be called by at least ten percent (10%) of the voting members. The Articles or Bylaws may set a higher threshold to call a special meeting, but such amount may be no greater than twenty-five percent (25%). The Old Code allowed special meetings to be called by at least five percent (5%) of the voting members and did not place a cap on the minimum number of members that the Articles or Bylaws could require to call the special meeting.
- Notice: Notice shall be given no fewer than ten (10) and no more than sixty (60) days before each meeting of the members.
- Member Quorum: A quorum constitutes a majority of the votes entitled to be cast on a matter. The Articles or Bylaws may establish higher or lower quorum requirements for members. The Old Code set a minimum quorum of the members at 1/10 of the votes entitled to be cast.
- Voting for Directors: Members must elect Directors by a plurality of the votes entitled to be cast and cannot cumulate their votes. The Old Code permitted Directors to be elected by a majority of the members.
BOARD AND OFFICER PROVISIONS:
The following changes apply to the nonprofit's Directors and Officers:
- Director Qualifications: Directors must be individuals, but the Articles or Bylaws may prescribe other qualifications.
- Director Number and Terms: The Act still requires the Board of Directors to consist of three or more Directors. Unless fixed in the Articles or Bylaws, Director terms shall be one (1) year, and cannot exceed five (5) years, although there is no limit on successive terms or reelections.
- Director Quorum: A quorum still constitutes a majority of the Directors before a meeting begins. The Articles or Bylaws may establish a different quorum, provided that the quorum cannot be fewer than one-third of the number of Directors or two Directors, whichever is greater. The Old Code only set a minimum quorum of one-third of the number of Director's fixed by the Articles or Bylaws.
- Actions of the Board: If a quorum is present, the affirmative vote of a majority of Directors present shall be the act of the Board, unless a greater vote is required by the Articles or Bylaws.
- Board Committees: Committees may consist of as few as one (1) Director. The Old Code required at least two (2) Directors per committee. The Act also provides that committees may not: (1) authorize distributions; (2) in the case of a membership nonprofit, approve or propose members actions that the Act requires to be approved by members; (3) fill vacancies of the Board or any of its committees; or (4) adopt, amend, or repeal the Bylaws.
- Officers: At a minimum, two Officers are required- one responsible for management of the nonprofit (e.g., a "president"), and one responsible for the financial affairs of the corporation (e.g., a "treasurer"). The Old Code required a president, secretary and treasurer, and the positions of president and secretary could not be held by the same person. While a separate office for secretary is not required under the Act, one of the two Officers must be assigned the duties of a secretary.
- Standards of Conduct and Liability: The Act codifies the traditional common law concepts of the standards of conduct and liability for Directors and Officers.
Amendments to Articles and Bylaws
- Article Amendments: Amendments to the Articles that are proposed by the Board must be adopted by the Board and approved by those members entitled to vote on the changes, if any. The Board need not obtain member approval to adopt certain non-substantive administrative changes. Members may propose amendments to the Articles with at least ten percent (10%) approval of the members entitled to vote (and without approval of the Board), unless otherwise specified in the Articles or Bylaws. The Old Code did not provide members with an independent right to amend the Articles without Board approval, and the power to amend the Bylaws was vested solely in the Board, unless the Articles or Bylaws provided otherwise.
- Board Approval of Article Amendments: Where the nonprofit does not have members, an amendment to the Articles must be adopted by the Board. Except as otherwise provided in the Articles, any such amendment adopted by the Board shall also be approved: (1) by a designated body whose approval is required by the Articles or Bylaws, if applicable; (2) by persons other than the Board who may appoint Board members if the amendment changes or removes a provision regarding the appointment of a Director by such persons; or (3) by the Director affected by the change if the amendment changes or removes a provision regarding the designation of such Director.
- Amendment of Bylaws: Either the Board or members entitled to vote may amend or repeal the nonprofit's Bylaws, unless the Articles or Bylaws reserve that power exclusively to the members or a designated body in whole or in part.
- Two-Year Reports: Biennial reports will be due every two years, on or before April 1st, instead of January 15th. Nonprofits should continue using their current reporting year, and file their next report by April 1st in the year their next report is due.
- Domestication: Domestication is a process that permits a nonprofit to transfer its jurisdiction of incorporation either into or out of D.C. without having to create or merge into a different legal entity. Domestication must be authorized by both the nonprofit's old and new jurisdiction of incorporation.
- Inspection Rights: The nonprofit must maintain certain records at its principal office, and allow members to inspect and copy the records, including financial information, upon request. The right to inspect the nonprofit's records can be limited by its Articles or Bylaws.
For more information on these changes and whether your entity should revise its organizational or operational documents, please contact:
Tracy P. Marshall (202.434.4234; firstname.lastname@example.org)