Nonprofits should be at the forefront of encompassing diversity, equity, and inclusion (“DEI”) into their governance and operations. While discussions regarding DEI are increasingly prevalent in the nonprofit sector, the next, more difficult, step forward is to turn the discussions into action. How do we, as part of the nonprofit community dedicated to the benefit of the public, effectuate our commitment to DEI? What steps can we take to make our organizations more diverse, equitable, and inclusive?

Commitment to DEI may be demonstrated through leadership, governance policies, recruitment, power-sharing, and importantly, accountability. From a corporate law perspective, one way to lock DEI in as a core value of an organization is to include DEI principles and language into an organization’s Bylaws. As a manual for the Directors and officers in governing the organization, Bylaws that include DEI provisions function as a sign that the organization will devote meaningful resources to those values.

In considering where and how DEI principles might be incorporated into the Bylaws, a Board might review the document section by section, focusing on how each may impact, or be modified to impact, DEI favorably or adversely. For an organization whose mission is racial justice-oriented, it may be especially important to set forth specific DEI-related goals (rather than just aspirational language), that if not met, will cause the organization to be out of compliance with its Bylaws.

The following list is intended to help a Board generate its own discussion on how it might incorporate DEI in the Bylaws:

• • Purpose Statement – Practitioners differ in their opinion about whether an organization should include a specific purpose statement in their Bylaws. Generally speaking, including a specific purpose statement can create more legal risk if the organization diverts from that specific purpose. However, if DEI is part of an organization’s mission, locking a purpose statement in the Bylaws will evidence that the organization is committed to operating within that mission. A Board might begin by considering whether its mission and purpose statement (if any) accurately reflect the values of the organization and discuss how it might be improved.
  • Selection of Directors – If the Board is serious about DEI, it must set the tone at the top. When a nonprofit’s Board reflects the diversity of the community it serves, the organization will be better suited to serve that community and attract a diverse staff to implement its programs. Changing the composition of a Board can be very difficult; however, setting a goal through a provision in the Bylaws, whether aspirational or a specific, can tie the organization to said goal. Each organization should determine for itself what its Board diversity target is, how it plans to achieve it, when it plans to achieve it (e.g., 3 years? 5 years?), and by what method (e.g., set numbers, percentages). Admittedly, the following is an over-simplistic example, but if an organization’s goal is to increase representation of a certain group of individuals, they might include a provision in the Bylaws that states that Board must be made up of at least X% of that group within a stated time frame. Among the many challenges to discuss, carefully consider, and thoughtfully address are avoiding tokenism and ensuring any new directors have ample opportunities for meaningful contribution.
  • Qualifications of Directors – The organization should be sensitive to who it may be excluding through its qualifications for the position of a Director. Does the organization have Get or Give requirement or a qualification regarding the individual’s educational background? Such requirements may be important for many reasons, but the Board should also consider how those requirements exclude individuals from an array of backgrounds, which could ultimately harm the organization.
  • Principal Office – An organization might consider how the location of its office may have some DEI consequences and whether it is important to include specific considerations in determining where the office location is. For example, the Bylaws might include language such as, “We aspire to locate this corporation’s principal office in an area that is consistent with the mission of this corporation” or “We will consider the following factors in determining the principal office of this corporation: [e.g., beneficiaries, staff, mission].”
  • Compensation – The Board might consider including in the Bylaws certain provisions regarding compensation, such as a statement that the corporation must pay all employees a fair and reasonable wage, as to both the corporation and the employees. Additional external and internal compensation equity principles might also be added.
  • Meetings – In most states, including California, Board meetings are permitted to be held by “conference telephone, electronic video screen communication or electronic transmission” so long as each Director can hear one another or can communicate concurrently, depending on the medium. In consideration of the organization’s DEI values, a Director’s ability to participate in meetings remotely (in accordance with state law) should not necessarily be discouraged. Such form of participation may improve the Board’s geographical diversity and also might help in the recruitment and retention of a Director who might otherwise have an access barrier in serving as a Director.
  • Conduct of Meetings – Traditionally, a Chair of the Board presides over Board meetings and is responsible for setting the tone and guiding discussions and Board actions. One way to encourage diversity in thought and possibly deliberate through a different lens is to consider a provision in the Bylaws permitting other Directors to chair meetings. In addition, from time to time, allowing different Directors to prepare agendas and/or preside over certain Board meetings can also advance the organization’s DEI values.
  • Committees – While Bylaws may not include detailed committee descriptions to provide for greater flexibility, they may provide general descriptions of certain standing committees the Board is committed to maintaining. A DEI Committee may be one such committee. By making it an advisory committee instead of a Board committee (which must be composed of only Directors), the DEI Committee itself can maintain a diverse composition and be better positioned to have big picture discussions about the organization’s DEI priorities. A DEI Committee might also be charged with performing a DEI audit of the organization, as further discussed below.
  • Officers – Commonly, the corporate officers listed in the Bylaws include the Chair of the Board or President (or both), the Secretary, and the Treasurer. An organization might also consider requiring a Diversity Officer, which may be filled by a Director or possibly an employee. Alternatively, the organization might require a Vice President to assume DEI oversight responsibilities. Additionally, co-leadership models are becoming more common and may offer an opportunity for an organization to benefit from diverse perspectives in the management of the organization.
  • DEI Audit — The organization may commit to tracking how it is doing on DEI-related goals by requiring a DEI audit. The Bylaws may require that an annual DEI audit report be provided to the Board to hold itself accountable to its values. The report might examine the organization’s employees, beneficiaries, goods, Directors, officers, and vendors to see if there has been improvement and determine the areas needing more work. The Board might also consider whether to require that the DEI audit report be made public on the organization’s website.
  • Amendments — To protect the DEI provisions in the Bylaws, consider increasing the required number or percentage of Directors necessary to approve an amendment to those provisions.

By reviewing the Bylaws and considering where DEI principles can be included, the Board will be forced to think through what level of commitment to DEI is desired for the organization. Of course, the Board shouldn’t include requirements that it cannot meet; however, the Board can show its commitment and readiness to be held accountable when the goals it sets out in the Bylaws are not met.

Additional Reading

• Governance Documents: Diversity, Equity, and Inclusion for Nonprofits
• Board Source- Vital Voices: Lessons Learned from Board Members of Color
• National Council of Nonprofits – Why diversity, inclusion, and equity matter for nonprofits

2018 has featured many major events that have affected, and will continue to affect, the nonprofit sector. On January 1, 2018, the Tax Cuts and Jobs Act, the most comprehensive overhaul of the U.S. tax code in over 30 years, went into effect, leaving nonprofits with many unanswered questions about how to comply. Youth advocates demonstrated their power and influence with the March for Our Lives movement and their large voter turnout in the midterm elections. On a judicial front, Brett Kavanaugh was confirmed to the Supreme Court, ushering in a more conservative court and an understanding that there is much more progress to be made in believing women. Here is a list of 10 significant news events of 2018 affecting the nonprofit sector in the United States and a few links regarding each:

1. Tax Cuts and Jobs Act

   • Tax Cuts and Jobs Act, H.R. 1 Nonprofit Analysis of the Final Tax Law and 2018 Tax Law Checklist: New Federal Tax Law – Now What for Nonprofit Board and Staff Members? [National Council of Nonprofits]
   • The New Tax Law and Its Impact on Nonprofits – Part 1 and Part 2 [Nonprofit Law Blog]

2. Mass shootings and March for Our Lives

   • Lockdown Generation Roars Back—Enough is Enough! [Nonprofit Quarterly]
   • Turning Point? Philanthropy vs. Gun Violence After the Parkland Shooting [Inside Philanthropy]

3. Brett Kavanaugh hearings and confirmation

   • Implications for Nonprofits of the Brett Kavanaugh Nomination to SCOTUS [Nonprofit Quarterly]
   • With Kavanaugh Hearings as Backdrop, Nonprofit Leaders Call for More Grants to Curb Sexual Assault [Chronicle of Philanthropy]
   • How Is Kavanaugh Likely To Rule On Critical Issues? Here’s A Look At His Record [NPR]

4. Murder of Jamal Khashoggi

   • Jamal Khashoggi Wanted to Launch a Pro-Democracy Group. Then the Saudis Disappeared Him. [The Daily Beast]
   • Why Jamal Khashoggi’s Killing Has Resonated [The New York Times]

5. Midterm elections

   • Nonprofits Have a Lot to Be Thankful for in the Wake of the Midterm Elections [Bolder Advocacy]
   • Is the Future Here Yet? Young Voters’ Critical Influence on the Midterms and Beyond [Nonprofit Quarterly]

6. California fires

   • See how a warmer world primed California for large fires [National Geographic]
   • California Fires Exacerbate State’s Housing Crisis [Nonprofit Quarterly]

7. Migrant family separation and detention of children

   • Trump Administration Diverts Nearly a Half-Billion Dollars to Migrant Children in Custody [Washington Post]
   • Nonprofits Shouldering Care Of Migration Detainees [The Nonprofit Times]
   • Families are Still Being Separated at the Border, Months After “Zero Tolerance” was Reversed [The Texas Tribune]

8. General Data Protection Regulation takes effect

   • G.D.P.R., a New Privacy Law, Makes Europe World’s Leading Tech Watchdog [The New York Times]
   • Europe’s New Data Law: What Nonprofits Need To Know [The Nonprofit Times]

9. Donor information disclosure rules

   • First, Treasury Weakens Donor Disclosure Requirements for Some Nonprofits [Nonprofit Quarterly]
   • Then, Senate votes to overturn Trump donor disclosure rule [Politico]

10. Supreme Court decisions

    • Supreme Court Ruling Delivers a Sharp Blow to Labor Unions [The New York Times]
    • Divided court rules for anti-abortion pregnancy centers in challenge to California law [SCOTUSblog]
    • The Limits and Meaning of the Masterpiece Cakeshop Decision [Nonprofit Quarterly]

The Rebuttable Presumption of Reasonableness procedures, described in Treasury Regulation Section 53.4958-6(a), were promulgated to help charities avoid overpaying certain individuals and entities (known as disqualified persons) that might be able to exercise influence on the charity’s decision-making. Among those included as disqualified persons (DQPs) are:

1. Directors (board members), trustees, presidents, CEOs, COOs, treasurers, CFOs, and other persons who were, at any time during the 5-year period ending on the date of such transaction, in a position to exercise substantial influence over the affairs of the organization (which typically include founders, substantial contributors over the past five years, and persons whose compensation is primarily based on revenues derived from a part of the organization that the person controls);
2. Family members of those individuals described in (1) above, including spouses, siblings, the spouses of siblings, ancestors, children, grandchildren, great grandchildren, and the spouses of children, grandchildren, and great grandchildren; and
3. 35-percent controlled entities, which are corporations in which individuals described above own more than 35% of the combined voting power, partnerships (including LLCs) in which individuals described above own more than 35% of the profits interest, and trusts and estates in which individuals described above own more than 35% of the beneficial interest; provided however, that entities exempt under 501(c)(3) and most entities exempt under 501(c)(4) are not disqualified persons.

While the Rebuttable Presumption of Reasonableness procedures were designed to apply only in cases in which an economic benefit is provided by a charity, directly or indirectly, to or for the use of a DQP, these procedures serve as a best practice to implement wherever significant payment is being made by the charity that might be considered excessive in relation to the goods, services, or rights being received in return. Even if the person or entity benefiting from the excessive payment is not a DQP, such payment may represent a prohibited private benefit and diversion of charitable assets. Accordingly, procedures that help assure that the payments are reasonable as to the charity, if carefully observed in good faith, will be protective to the charity and to the board. But practically speaking, following the Rebuttable Presumption of Reasonableness procedures may in some cases, particularly for smaller charities, be unduly burdensome and unnecessary where the payment made to a DQP is very obviously below fair market value.

Excess Benefit Transactions

Codified in section 4958 of the Internal Revenue Code (“IRC”), the excess benefit transaction rules impose penalty taxes on DQPs that receive excessive payments from a charity. These rules are meant to prevent the unjust enrichment of a DQP at the expense of the charity. If an excess benefit transaction has occurred, the IRS can levy taxes, commonly referred to as intermediate sanctions, on both the DQP who received the excess benefit and the organizational manager(s) (e.g., directors, officers) who knowingly approved the excess benefit transaction. This issue often comes up in the context of executive compensation.

If a DQP is found to have benefited from an excess benefit transaction, the DQP will need to return to the charity the portion of any payment considered excessive and pay to the IRS a first tier penalty tax (intermediate sanction) of 25% of the excessive amount and, if not timely corrected, a second tier penalty tax of 200% of the excess benefit. In some cases, the entire payment may be considered an excess benefit (e.g., where compensation to the DQP was not properly reported to the IRS), and the penalty can be extremely steep. For an example of such cases, see Automatic Excess Benefit Transactions (David Levitt, Adler & Colvin).

If the charity engaged in an excess benefit transaction, the organizational manager(s) (e.g., directors, officers) who knowingly approved the excess benefit transaction may also be subject to a penalty tax of 10% of the excess benefit. An organizational manager participates in a transaction knowingly only if the person –

• Has actual knowledge of sufficient facts so that, based solely upon those facts, such transaction would be an excess benefit transaction;
• Is aware that such a transaction under these circumstances may violate the provisions of Federal tax law governing excess benefit transactions; and
• Negligently fails to make reasonable attempts to ascertain whether the transaction is an excess benefit transaction, or the manager is in fact aware that it is such a transaction.

Generally, if the IRS penalizes a DQP under the excess benefit transaction rules, such individual bears the burden to prove that the transaction was reasonable. However, if the organization follows the Rebuttable Presumption of Reasonableness procedures described below, the burden of proof shifts to the IRS to show that the transaction resulted in an excessive payment to the DQP.

Three Steps to the Rebuttable Presumption of Reasonableness

The Rebuttable Presumption of Reasonableness procedures consist of three steps:

1. The compensation arrangements are approved in advance by an authorized body of the organization composed entirely of individuals who do not have a conflict of interest with respect to the compensation arrangement;
2. The authorized body obtained and relied upon appropriate comparability data prior to making its determination; and
3. The authorized body adequately documented the basis for its determination concurrently with making that determination.

1. Authorized Independent Body Free of Conflicts

The authorized body charged with approving the transaction may be made up of the full board of directors or a smaller authorized board committee, so long as all members of the body do not have a conflict of interest with respect to the transaction. The regulations identify five conditions that must be satisfied in order to establish the requisite absence of a conflict of interest. Generally, the members of the authorized body should not consist of:

• A DQP or anyone related to the DQP who is, or will, participate in, or economically benefit from, the transaction or arrangement (hereafter, referred to as “Person X”);
• A person in an employment relationship subject to the direction or control of Person X;
• A person who receives compensation or other payments subject to approval by Person X;
• A person who has a material financial interest affected by the transaction or arrangement; or
• Any person who receives or will receive from a DQP approval of a transaction benefiting such person in turn for such person’s approval of the transaction providing economic benefits to the DQP (i.e., a “you-scratch-my-back, I’ll-scratch-yours-type reciprocal transaction).

The authorized body may invite the DQP to come to a meeting and answer questions with respect to the transaction or arrangement, so long as that person recuses themselves from the meeting and is not present during debate and voting of the transaction or arrangement.

2. Appropriate Comparability Data

The requirement for reviewing comparability data helps the authorized body determine what economic benefit (payment) is fair and reasonable as to the charity, particularly when what would constitute such amount under similar circumstances is not well-known. It may also be thought of as an extension of a director’s duty of care, which includes reasonable inquiry. One way to show that a transaction or arrangement is fair and reasonable to the charity, does not provide an excess benefit to any private individuals or companies, and overall is in the best interest of the charity, is to look at other similar transactions or arrangements for comparison. We’ve previously written a post on appropriate comparability data for compensation arrangements. Note that, for transactions involving property, the regulations provide that appropriate comparability data may include “current independent appraisals of the value of all property to be transferred; and offers received as part of an open and competitive bidding process.” See Treas. Reg. § 53.4958-6(c)(2)(i).

Generally, the regulations do not specify the types of information or number of comparables that must be reviewed in order to benefit from the presumption; instead they state that the authorized body must use its judgement, given the knowledge and expertise of the body’s members, to determine whether the information gathered is sufficient to satisfy the standard set in the regulations (i.e., that “the compensation arrangement in its entirety is reasonable or the property transfer is at fair market value”). Thus, it will be a matter of facts and circumstances in determining whether sufficient and/or appropriate and current data was obtained and reviewed by the authorized body when making its decision. One exception to this general rule is for charities with annual gross receipts of less than $1 million (based on an average of its gross receipts during the three prior taxable years). For those small charities, there is a special rule that provides that consideration of three comparables of similarly situated organizations and positions will be appropriate.

Comparability data must be gathered and presented to the authorized body in advance of, or at, the meeting at which the arrangement or transaction is being considered. As a best practice, the data should be in writing and sent to the members of the body prior to the meeting so that each member has time for review and analysis.

3. Concurrent Documentation of Basis for Determination

To satisfy the third requirement of the rebuttable presumption, that the authorized body adequately documented the basis for its determination concurrently when making it, the regulations require that the documentation includes the following:

• the terms of the transaction and the date it was approved;
• the members of the authorized body who were present when the transaction was debated and those who voted on it;
• the comparability data obtained and relied on by the authorized body and how the data was obtained; and
• any actions taken by a member of the authorized body who had a conflict of interest with respect to the transaction (e.g., abstention).

Such documentation belongs in the minutes of the authorized body’s meeting or a written consent. The records must be prepared before the authorized body’s next meeting or 60 days after the body’s final actions are taken, whichever is later. Records must be reviewed and approved by the authorized body as reasonable, accurate, and complete within a reasonable time period.

If an organization satisfies the rebuttable presumption of reasonableness requirements, the IRS may rebut the presumption, “only if it develops sufficient contrary evidence to rebut the probative value of the comparability data relied upon by the authorized body.” Treas. Reg. § 53.4958-6(c)(3)(ii).

Ensuring that your organization’s conflict of interest policy conforms to these standards, as well as any other potential standards governing self-dealing transactions under state law, is one way to mitigate providing excess benefits to insiders in the future.

2019 began in the middle of the longest government shutdown in history, the ramifications of which were felt within the nonprofit sector for months thereafter. Youth advocates continued to demonstrate their power and influence, with Greta Thunberg and many other young people gaining national attention and recognition for their climate activism. We witnessed nonprofits struggle in their attempts to handle tainted or controversial donors such as Jeffrey Epstein and the Sackler family. And President Donald Trump hit a few roadblocks, including his admission that he misused charitable assets (and the subsequent Trump Foundation settlement and dissolution), and his recent impeachment by the House.

Here is a list of our 10 significant news events of 2019 affecting the nonprofit sector in the United States and a few links regarding each:

1. Government shutdown

• Nonprofits Step In to Fill Gaps During Government Shutdown [Chronicle of Philanthropy]
• Nonprofits Aim to Recover After Shutdown Disaster [Independent Sector]

2. Continued migrant family separation and detention of children

• Hungry, Scared and Sick: Inside the Migrant Detention Center in Clint, Tex. [The New York Times]
• Letters from immigration detention centers, ‘break my heart every time I open an envelope,’ volunteers say [The San Diego Union-Tribune]

3. Youth activism in climate change

• In the Largest Climate Mobilization Ever, Young People Call for Urgency [Nonprofit Quarterly]
• Time Person of the Year 2019: Greta Thunberg [Time]

4. The most diverse class of lawmakers sworn into Congress

• A historic new Congress will be sworn in today [Vox]
• Meet the New Women of Congress [Politico]

5. Gun violence continues

• There have been more mass shootings than days this year [CBS News]
• Nonprofits at the Eye of the Gun Storm See a More Level Field [Nonprofit Quarterly]

6. Repeal of the parking tax/ Simplification of private foundation net investment income excise tax

• Two Year-End Tax Law Changes [Nonprofit Law Blog]
• Transportation Benefits Tax Axed From House Bill [The Nonprofit Times]

7. College admissions scandal

• Actresses, Business Leaders and Other Wealthy Parents Charged in U.S. College Entry Fraud [The New York Times]
• College Admissions Scandal Highlights an Overwhelmed IRS, Nonprofit Experts Say [Chronicle of Philanthropy]

8. Trump Foundation settlement

• AG James Secures Court Order Against Donald J. Trump, Trump Children, And Trump Foundation
• Trump Pays $2 Million Fine; Foundation Assets Liquidated, Distributed [The Nonprofit Times]

9. Tainted donations

• Epstein’s donations to universities reveal a painful truth about philanthropy [The Washington Post]
• Jeffrey Epstein’s Charity: An Image Boost Built on Deception [The New York Times]
• The Met museum to reject donations from Sackler family over opioid crisis [The Guardian]

10. The U.S. House impeaches President Donald Trump

• Can a 501c3 Advocate for Impeachment of a Federal Office Holder? [Nonprofit Quarterly]
• Charity Advocacy and Impeachment: Opportunities and Risks [Adler & Colvin]

Nonprofit corporations may decide to merge for many reasons, including to better advance a common purpose or to expand the range of services offered to common beneficiaries. Generally, in a simple 2-party merger between A (the surviving corporation) and B (the merging corporation also referred to in the law as the disappearing corporation), A automatically assumes all of the assets and liabilities of B upon the merger by operation of law. Thus, the debts of B become the debts of A, and A is automatically substituted for B in any lawsuit or legal proceeding. This may be problematic if B’s liabilities cannot be identified or if B’s liabilities are greater than expected, particularly if they exceed the value of the assets A acquired in the merger.

Initially, the parties must determine which will be the surviving corporation and which will be the merging corporation, which may not be obvious. From a legal perspective, the parties might consider the history of each entity and its recognition of tax-exempt status (e.g., a church may not have an IRS determination letter), existing government licenses, contracts, or registrations, and each entities’ employees and their employment benefits. For example, a smaller, less established nonprofit might be the more suitable surviving corporation if it possesses a critical license that the larger, more established nonprofit values. In such case, the merging corporation’s board might take over the surviving corporation’s board and rename the surviving corporation with the merging corporation’s name. As a result, the public would likely believe the merging corporation was actually the surviving corporation.

Once it is determined which entity will be the surviving corporation, the surviving corporation must plan how it will absorb both the assets and liabilities of the merging organization and take over any transferable rights and obligations. Accordingly, proper due diligence is key. While there is no prescribed set of materials that should be considered by the board of each entity (though see our previous post on Nonprofit Mergers – Due Diligence Items for a sample), the goal of due diligence for each entity is to assure that its board has engaged in sufficient inquiry and acquired enough information to make an informed decision that merging is in the best interest of the corporation and that the integration will ultimately be successful.

From a corporate governance perspective, if either corporation has a voting membership structure, consideration should be placed on obtaining membership approval for the merger and the possible barriers. The mechanics of a membership vote can be onerous and may require additional time to obtain such approval. If an entity cannot get obtain a quorum of the members necessary for a vote, or if a faction of members disagrees with the merger, this may add significant cost and delay.

If the merging corporation has real property, the surviving corporation should consider issues such as the cost and requirements of transferring ownership, whether the terms of any loans require bank consent, whether there are any liens on the property, whether the merger will trigger transfer tax liability, and whether an environmental review should be conducted. The surviving entity will also want to review whether the merging corporation is a party to actual, pending, or threatened litigation, settlement agreements or court orders, and whether the merging corporation has any nontransferable permits or licenses. Further, the surviving corporation should consider the potentially complex employment issues that may result, particularly if not all employees of the merging corporation will be employed by the surviving corporation, there are union or organizing activities involved, compensation and benefit structures are markedly different and not easily harmonized, there are misclassified independent contractors who should have been treated as employees, or there are employees strongly opposed to the merger.

For the merging corporation, issues may arise if it has assets (e.g., restricted funds, endowment funds) that are bound by charitable trust to a purpose that does not completely line up with the surviving corporation’s mission. In such case, the surviving corporation may have to amend its governing documents to broaden its purposes in order to receive such assets (however, then it must be careful not to use any funds it previously raised under its more limited purpose for the new broader purpose) or the merging corporation may have to grant such fund out to another organization prior to the merger. Of course, the merging corporation must also consider the sustainability of the surviving corporation, which may involve careful review of the surviving corporation’s financial statements, information returns, compliance history, and other characteristics that would indicate the surviving corporation’s ability to integrate the operations and activities.

The merging corporation should also review its contracts and determine which may be freely assigned and which require consent from, or notice to, the other party to the contract. The board of the merging corporation should also think through the requests it will bring to the merger negotiations regarding its legacy, such as whether certain named programs will carry on, or ensuring that a specific geographical area continues to be served by the surviving corporation post-merger.

 Legal considerations of an asset transfer in lieu of a merger (dissolution and transfer)

In some cases, an organization may want to consider dissolving and transferring its assets to another entity. In this scenario, when B (the dissolving corporation) distributes its remaining assets to A (the recipient corporation) and then dissolves, A generally does not automatically assume B’s liabilities. A may be able to limit the risk it takes on when acquiring B’s assets, as, unlike a merger, B’s liabilities do not necessarily transfer to A by operation of law.

The terms of such a transaction are governed by an asset transfer agreement. The recipient corporation may be able to reduce its liability exposure though a contractual provision stating that it is assuming only certain explicitly identified assets and liabilities and structuring the transaction so it does not appear to be a merger either in substance or form. Special consideration should be given to whether indemnification provisions and representations and warranties will provide much protection, as the recipient corporation may be left without remedy if the dissolving corporation breaches the agreement and has dissolved.

If the recipient corporation has a complicated membership structure, and assuming the bylaws do not state otherwise, one advantage to a dissolution and transfer of assets is that the recipient corporation would not have to seek membership approval of this transaction. Typically, the due diligence necessary on the part of the board of the recipient corporation may be significantly less arduous if it is merely approving a receipt of assets.

For the board of the dissolving corporation, an asset transfer in lieu of a merger may be far less desirable if certain liabilities are carved out of the transaction, which could expose the individual board members of the dissolving corporation into litigation in the future. 

It is important to note that although the recipient corporation does not automatically assume the dissolving corporation’s liabilities, there is always some risk associated with a full transfer of assets that a court could conclude the transfer constituted a de facto merger. Accordingly, the recipient corporation would want to carefully review such risk. Factors that may contribute to the risk include whether the boards of the dissolving corporation and the recipient corporation (post-transfer) are substantially similar or integrated. It may difficult to argue that the recipient corporation is different than the dissolving corporation if it is now governed by the same people. Along the same lines, does the recipient corporation carry on all of the same programs as the dissolving corporation with the same employees and pursuant to the same names, policies, practices, and procedures?

Overall, if the transfer of assets and dissolution results in exactly what would occur in a merger, for example (1) assumption of certain obligations of the dissolving corporation that allow for the recipient corporation to continue operating the dissolving corporation’s programs/businesses and (2) continuity of the management, personnel, locations and operations of the dissolving corporation, a court could conclude that the corporate restructuring was in substance a merger and that the recipient corporation should be treated as a surviving corporation in a merger.

Last week, Venable LLP hosted a webinar called COVID-19: What Your Nonprofit Needs To Know, which examined current questions surrounding workers, insurance, events, travel, and workplace situations. Below are some tips for nonprofits in handling the COVID-19 pandemic. Note that, as the situation is fluid and changing rapidly, good practices recommended today may be different by tomorrow.

Insurance and Event Cancellation

Insurance may be very useful right now, particularly as nonprofit organizations cancel events and experience business interruption. Nonprofits should speak with their insurance providers and inquire about their coverage details and limits, and read their insurance policies carefully. If an organization obtained event cancellation insurance, for example, which is typically written to cover specific events, it should check to see if there is an exclusion for communicable diseases.  Nonprofits should provide timely notice to their insurance providers and keep accurate records, track expenses, and document losses carefully. Keep in mind that, communications, both internal and external, may be discoverable in litigation later on, and that communications with insurance brokers and agents are not privileged.

When considering the financial exposure of canceling an event, there are a few contractual provisions to look out for, such as termination, damages, and force majeure clauses. Each vendor contract should be reviewed, as they all may be different. For example, termination fees may increase over time depending on calendar targets, which could affect when a decision should be made about canceling a certain vendor or the event as a whole.

A force majeure clause is a contract provision that excuses performance when supervening circumstances, outside of the parties’ control, prevent or impede performance. Such a provision may contain a specific list of events that count as an “act of god,” or sometimes there may be a catch-all phrase such as “and any other occurrence beyond the parties’ control.” Some, more flexible force majeure provisions excuse performance when it would be “inadvisable, commercially impracticable, illegal, or impossible” to perform, while others may be more limited as to when performance may be excused.

Nonprofits should consider speaking with counsel, most likely a litigator, about the specific facts and circumstances, and whether excused performance may be sought. A litigator may also be able to help an organization formulate a plan for approaching each vendor about the possibility of terminating to see what might be negotiated. Additionally, it will be important to comply with any notice provisions in each contract and any other clauses that may require the mitigation of damages. 

Employment Issues, Generally

Under the Occupational Safety and Health Act (“OSHA”), generally speaking, there is an obligation for employers (to which OSHA applies) to assure safe and healthy working conditions, including a workplace free from recognized hazards. Nonprofits should keep in mind that the “workplace” may not be solely the physical office, but may be anywhere the organization’s business is being conducted. For recommendations intended to assist employers in providing a safe and healthful workplace, see OSHA’s Guidance on Preparing Workplaces for COVID-19. 

Nonprofits should also be thoughtful and deliberate in crafting employee policies about remote work and work travel, and ensure that all policies are being consistently administered. Inconsistent application of policies could create a risk of a discrimination claim.

Furthermore, as employee health issues are typically private, an organization may not be aware of the underlying health conditions of its employees and any necessary accommodations that should be sought during this time. Accordingly, communication is key, and any communications from the nonprofit employer to its workers should be accurate and consistent. Employees should feel safe to report that they are experiencing symptoms and should be told to stay home until they are symptom free. Employers must also inform all employees of any reported exposures.

Lastly, nonprofits should seek counsel from employment attorneys regarding the federal and state labor and employment laws that may apply to them and their workers during this crisis.

Additional Resource: Nonprofit Governance: Coronavirus and COVID-19

There are many ways in which two or more nonprofits can collaborate (see La Piana Consulting’s Collaborative Map), including (1) mergers and (2) dissolutions and asset transfers discussed in Part 1 of this series. This post specifically examines a merger between two California nonprofit corporations.

Prior to moving forward with a merger, the parties should each assess its own positions (financial, programmatic, public relations/marketing, leadership, governance, available resources); its existing relationship with the other party; the consistency of their missions and cultures; its motivations for the contemplated merger; and its knowledge and understanding of the other party and its positions. Assuming, after careful consideration of these factors, the parties are still interested in moving forward, the following steps offer a general framework for the merger process.

1. Due Diligence

The primary goal of due diligence is to help assure a merger is in the best interests of a corporation, considering its mission, values, and key stakeholders. Reasonable due diligence under the circumstances is also necessary to satisfy the directors’ fiduciary duties of care and loyalty. Each corporation has the responsibility of conducting a thorough investigation into the other corporation’s organization and operations, including its governance structure, tax history, financials, real property, employment matters/human resources, intellectual property, contracts, and risk management. While there is no fixed list of materials which must be reviewed in all cases, each board should be aware of the relative benefits, detriments, opportunities, and threats with the merger, including any liabilities the other party may bring to the transaction. See Nonprofit Mergers – Due Diligence Items.

The most issue-laden areas tend to be real property, contracts, and employment. For example, transferring ownership of a property subject to a bank loan typically requires bank consent, which can be quite onerous. Similarly, government contracts generally cannot be transferred without obtaining the consent of the government agency and failure to get such consent could halt the merger altogether. Determining how to transition employees, specifically their compensation and benefits packages (which may not match between the two entities), HR databases, and software systems, and whether and who may be laid off, can be very costly and time consuming. Employment-related disputes are typically the number one reason why a nonprofit may find itself in court. Ascertaining whether the merging entity has any actual, pending, or threatened employment related matters is imperative. Additionally, post-merger, the surviving corporation must consider compliance with employment laws across the organization.

2. Plan of Merger/Merger Agreement Drafting Process

Th next step is for the two parties to begin laying out the plan of merger and document it in a merger agreement. Sometimes, any binding contracts are preceded by letters of intent or term sheets, which may identify common areas of agreement, as well as a confidentiality agreement.

In California, some nonprofits choose to execute two merger agreements: (1) a long form merger agreement which details all of the terms and conditions of the merger; and (2) a short form merger agreement containing only the required provisions under state law, to be filed with the Secretary of State. This two agreement strategy can help make the filing simpler and faster by not providing the secretary of state with a long agreement to vet and then publish on its website.

The short form merger agreement (see a sample from the Secretary of State here) may include just the following four summarizing provisions:

• Merging Corporation shall be merged into Surviving Corporation.
• Each membership of Merging Corporation shall be converted into one membership of Surviving Corporation.
• Merging Corporation shall from time to time, as and when requested by Surviving Corporation, execute and deliver all such documents and instruments and take all such action necessary or desirable to evidence or carry out this merger.
• The effect of the merger and the effective date of the merger are as prescribed by law.

The long form merger agreement contains key terms negotiated by the parties regarding pre-merger conditions, representations and warranties (in support of the due diligence), and post-merger organization and operations. This agreement includes the often more emotionally-charged aspects of the merger such as the name of the merged (surviving) corporation, leadership and board representation, continuation of any of the merging corporation’s named programs, and how the merging corporation’s legacy will carry on.

Once the merger agreement and plan of merger are finalized, each board must approve it and document such approval in minutes. Additionally, if either entity has a voting membership structure, the members must also vote to approve it.

3. 20 day Notice to the California Attorney General

The California Attorney General must receive 20-days’ prior notice before a California nonprofit corporation consummates a merger with another corporation. However, practitioners recommend proving the Attorney General with longer notice, and waiting for the Attorney General to respond before proceeding, in case there are any issues.

The California Attorney General requires the following to be included in the notice:

• A letter signed by an attorney or director for the corporation setting forth a description of the proposed action and the material facts concerning the proposed action;
• Copies of both merger agreements (the short and long form agreements);
• A copy of the resolution of the board of directors authorizing the proposed action, and board meeting minutes reflecting discussion of the proposed action;
• A copy of the corporation’s current financial statement; and
• Copies of the current version of the corporation’s articles of incorporation, and the articles of incorporation of any other corporation that is a party to the proposed action.

Typically, during this notice period, the corporations will begin providing notices that the merger will take place and begin obtaining the necessary consents or approvals for the transaction itself or to transfer an agreement at the closing of the merger. The officers will also sign the merger agreements.

4. Filing of the Merger Agreement and Officers’ Certificates with the Secretary of State

After the notice to the Attorney General has been satisfied and the parties are ready to move forward, the final step is to file the short form merger agreement and the officers’ certificate with the California Secretary of State. Due to the sensitive timing of merger transactions, practitioners recommend pre-filing these documents with the Secretary of State for a desired date of merger, in case such documents are initially rejected by the Secretary of State.

5. Integration and Final Filings of the Merging Corporation

Integration may be the most difficult part of the merger process and the subject for a separate post. Elements to be integrated include governance, fundraising, programs, systems (including finance, communications, and information technology), and staffing. Cultural integration is critical to the perceived success of a merger, yet it is often insufficiently analyzed during the due diligence phase.

The final filings of the merging corporation must not be forgotten. Even after the merger, information returns to the Internal Revenue Service (e.g., Form 990) and California Franchise Tax Board (e.g., Form 199) will be due for the final tax year of the merging corporation, ending on the effective date of the merger. The surviving corporation will want to have assurances in the merger agreement that the such requirements will be fulfilled post-merger, particularly if those in charge of the merging corporation’s financials and filings are not part of the surviving corporation moving forward.

SAN FRANCISCO, CA — January 25, 2021: The Committee on Nonprofit Organizations of the American Bar Association’s Business Law Section is calling for nominations for the “2021 Outstanding Nonprofit Lawyer Awards.” The Committee presents the Awards annually to outstanding lawyers in the categories of Academic, Attorney, Nonprofit In-House Counsel, and Young Attorney (under 35 years old or in practice for less than 10 years). The Committee will also bestow its Vanguard Award for lifetime commitment or achievement on a leading legal practitioner in the nonprofit field. Nominations are due by March 22, 2021.

For a nomination form, please go to the Nonprofit Organizations Committee webpage and scroll down to find the form under “2021 Outstanding Nonprofit Lawyer Awards.” The Awards will be announced at the Business Law Section’s Spring Meeting in April.

Send nomination forms by March 22, 2021 to:
Emily N. Chan
Adler & Colvin
135 Main Street, 20th Floor
San Francisco, California 94105
(415) 421-7555
(415) 421-0712 (fax)
echan@adlercolvin.com

2021 has been another challenging year for many. With the pandemic still raging, a divided country met a new administration, and issues such as abortion access and climate change continued to be dire. Here is our list of 10 significant news events of 2021 affecting the nonprofit sector in the United States and a few links regarding each:

1) Covid-19 – COVID’s Economic Toll: “The Greatest Rise in Inequality Since Records Began” (Nonprofit Quarterly); Data on How the Pandemic and Economic Crises Are Affecting Nonprofits (National Council of Nonprofits)

2) Joe Biden Becomes President, Kamala Harris Becomes Vice President – Biden Victory Gives Nonprofits Cautious Optimism on Advancing Their Causes (Chronicle of Philanthropy); Kamala Harris Makes History as First Woman and Woman of Color as Vice President (NY Times); Nonprofits to President Biden and Congressional Leaders: Invest in Charities to Help Meet Community Recovery Needs (National Council of Nonprofits)

3) Capital Riot –  Nonprofit Leaders React To Rioting At The Capitol (The Nonprofit Times)

4) Taliban Retakes Afghanistan – Aid Groups Wonder Whether To Stay Or Go As The Taliban Take Over Afghanistan (NPR); A Dangerous Scramble to Evacuate Afghan Nonprofit Workers (NY Times); The Women Forgotten in the Wars We Started (Nonprofit Quarterly)

5) Texas Abortion Ban – Texas Abortion Ban Sends Women Out of State, Draining Aid Funds (Bloomberg Law);  Fundraising for Women’s Access Increases as Abortion Clinics Targeted and Closed (Nonprofit Quarterly) 

6) UN Climate Report – IPCC report: ‘Code red’ for human driven global heating, warns UN chief

7) Proposed DAF Legislation (ACE Act) – Summary of Accelerating Charitable Efforts Act (Council on Foundations); Will Congress Act to Reform Philanthropy?  (Nonprofit Quarterly)

8) Americans for Prosperity Foundation v. Bonta – The Impact of Americans for Prosperity Foundation v. Bonta on Donor Disclosure Laws (JD Supra)

9) The Great Resignation – Who Is Driving the Great Resignation? (Harvard Business Review); The “Great Resignation” Problem In The Nonprofit Sector (For Purpose Law Group)

10) Build Back Better Legislation (Dead or not?) – Nonprofit Advocates Praise House Passage of Build Back Better Legislation (Chronicle of Philanthropy); Biden’s Build Back Better plan is on ice. Here’s what that means for you (CNN)

In 2022, a war began in Europe, the Supreme Court ended nearly 50-years of precedent by overturning Roe v. Wade, inflation rose, and climate change continued to be one of the defining issues of our time. Here is our list of 10 significant news events of 2022 affecting the nonprofit sector in the United States, and a few links discussing each:

1. Russia Invades Ukraine – Conflict in Ukraine (Global Conflict Tracker); All Eyes on Ukraine – How Americans Are Responding to the Crisis (Fidelity Charitable); The Racial Politics of Solidarity with Ukraine (Nonprofit Quarterly)

2. U.S. Supreme Court Overturns Abortion Rights – U.S. Supreme Court overturns Roe v. Wade, ends constitutional right to abortion (Reuters); Abortion Should No Longer Be a Dirty Word for the Nonprofit Sector (Stanford Social Innovation Review)

3. Large Gifts to 501(c)(4) Organizations –  Billionaire No More: Patagonia Founder Gives Away Fortune (NY Times); How a Secretive Billionaire Handed His Fortune to the Architect of the Right-Wing Takeover of the Courts (ProPublica)

4. Continuing Controversy Over DAFs and Consideration of Legislation – Accelerating Charitable Efforts (ACE) Act (Congress.gov); Summary and Key Context (Independent Sector)

5. The Fall of FTX and Sam Bankman-Fried – FTX and Sam Bankman-Fried: Your Guide to the Crypto Crash (Wall Street Journal);  Sam Bankman-Fried’s Donations To Effective Altruism Nonprofits Tied To An Oxford Professor Are At Risk Of Being Clawed Back (Forbes)

6. Iranians Protest – Iran’s moment of truth: what will it take for the people to topple the regime? (The Guardian); Iranian protesters look to outside world for help (BBC)

7. A Redwood Forest Returned to Native Tribes – Save the Redwoods League Donates 523 Acres of Forestland to the InterTribal Sinkyone Wilderness Council for Lasting Protection (Save the Redwoods League)

8. Student Debt Relief – Student Loan Rollercoaster and How It Impacts Nonprofit Workers (Council of Nonprofits); 360,000 student loan borrowers received $24 billion in forgiveness from fix to Public Service Loan Forgiveness (CNBC)

9. Inflation – Turbulence in the Economy Poses Continued Challenges for Nonprofits That Serve the Needy (Chronicle of Philanthropy); Giving USA Data Shows $18.6B Lift Flattened By Inflation (Nonprofit Times)

10. Continuing Effects of Climate Change – 2022 review: Climate philanthropy increased amid growing urgency (Philanthropy News Digest); A Planet to Win—Where Do We Start? (Nonprofit Quarterly); 2022 Was Almost a Disaster for Climate Change Action. Instead, There Was Hope (TIME)