On July 9, 2013, Governor Corbett signed Act 67 of 2013, titled “GAA Amendments Act of 2013.” Act 67 provides for the expanded use of electronic media by business and nonprofit corporations to interact with shareholders, members, and directors – including the use of electronic meeting technology. It also updates Pennsylvania’s Nonprofit Corporation Law (NPCL) to make it more consistent with the Business Corporation Law (BCL).
The biggest change is that Act 67 adopts the “Pennsylvania Uniform Unincorporated Nonprofit Association Law,” providing a comprehensive legal regulatory scheme for unincorporated nonprofit associations – such as sports teams, churches, civic clubs, school PTOs, youth sports groups, and neighborhood associations. Among other things, this new law adopts the limited liability doctrine, which provides nonprofit association members protection against liability for debts and obligations of the association, as well as potential tort liability – in effect giving members liability protection similar to that afforded to shareholders of a business corporation and members of a limited liability company or nonprofit corporation.
Codification of Nonprofit Corporation Law Now Complete.
The process of codifying the NPCL has spanned over two decades. It was amended in 1988, 1990, 1992, and 1994, but more than half of the NPCL remained inconsistent with the BCL. In an effort to ensure that the law governing for-profit and nonprofit organizations is consistent, Act 67 completes the revision of the NPCL by conforming the NPCL to the BCL. For example, § 5546 is amended to remove the requirement that two-thirds of directors must approve a nonprofit corporation sale of real estate.
Electronic Communications – Shareholder, Member, and Director Meetings.
One important substantive change made to both the BCL and NPCL concerns use of electronic media to communicate with and hold meetings of shareholders, members, and directors.
Since 2001, the BCL has expressly authorized business corporations to issue notices to shareholders and directors through electronic communications, including email and facsimile. The NPCL has not previously included such permission. The NPCL has now been amended to provide that any notice required to be given by a nonprofit corporation may be made by facsimile, email, or other electronic communications.
Under Act 67, business and nonprofit corporations now have express permission to use electronic media, such as email, conference calling, and facsimile, to hold meetings, satisfy quorum requirements, grant proxies, and act by written consent – without conducting a physical meeting or submitting tangible copies of executed paperwork.
Expansion of the use of electronic media to facilitate various corporate activities is accomplished through the addition of new definitions of “record form” and “sign.” “Record form” is defined as information “inscribed on a tangible medium or stored in an electronic or other medium and retrievable in perceivable form.” Information stored in “record form” may be “signed” either manually or electronically. The law also provides that information retained by a corporation in the regular course of its activities, including shareholder or membership records, books of account, and minute books may be retained in electronic form. References to “written” documents or notice also now include documents that are in record form.
Shareholders and directors of business corporations have been permitted to hold electronic meetings since 2001. Nonprofit corporations have not previously had the same ability. Act 67 now provides that both business and nonprofit corporations may to do so, subject to any restrictions in the corporate bylaws preventing use of electronic media to conduct meetings.
Corporations opting to conduct electronic meetings must ensure that directors, shareholders, and members have the opportunity to read or hear the proceedings contemporaneously with the actual meeting, have the opportunity to vote on matters submitted for action, pose questions, make motions, and comment on the business of the meeting.
Unless bylaws prohibit doing so, a corporation’s shareholders or members may through unanimous consent approve actions without a meeting if consents to the action are signed in record form. Those consents must be filed with the minutes of the proceedings of the shareholders or members. The bylaws may also authorize action without a meeting of the shareholders or members by partial written consent – namely written consent by shareholders or members who could approve an action at a meeting. Corporations must file the partial written consent with the minutes of the proceedings of the shareholders or members. The corporation must also provide all non-consenting shareholders or members with at least 10 days notice of the action that has been taken before the action can be made effective.
Similarly, unless prohibited by the bylaws, a corporation’s directors may act by unanimous consent, without holding a meeting, if consents to the action are signed, in record form, by all directors in office on the date the first consent is signed. Directors may not act by partial written consent.
If a corporation opts to use electronic media in carrying out activities – and especially if such communications will include confidential information – we recommend a comprehensive review of the security of its electronic communication systems. We also strongly recommend that you ensure proper notices are contained on all transmitted messages regarding “confidential” information.
Pennsylvania Uniform Unincorporated Nonprofit Association Law (“PUUNAL”).
Historically, many nonprofit groups – including sports teams, churches, civic clubs, school PTOs, youth sports groups, and neighborhood associations – have not taken steps to incorporate. Usually, the primary reason was to conserve limited funds for use towards the organization’s purposes. In some cases, there was also a desire to avoid legal requirements for annual and other meetings, to avoid keeping formal minutes, to avoid other corporate procedure requirements, and a general desire for lesser formality.
Because of the lack of a general Pennsylvania statute governing unincorporated associations, the result was uncertainty concerning applicable law. The biggest concern of unincorporated association members was liability. The law was unclear whether members could incur personal liability for acts or omissions of the organization. In fact, there were court cases suggesting that any suit against the organization should name organization members. In addition, the law was unclear as to enforceability of contracts with unincorporated associations, and the permissibility of owning real estate for organizations other than churches and certain professional associations. PUUNAL addresses these issues.
Nonprofit Associations As Legal Entities.
Under PUUNAL, an unincorporated “nonprofit association” is recognized as a legal entity distinct from its members and officers. A nonprofit association must consist of two or more members joined together under an agreement to facilitate some nonprofit purpose.
A nonprofit association now has the same powers as an individual to do those things necessary to carry out its intended purpose. This includes: (1) owning and transferring real estate and personal property; (2) suing or being sued in the association’s name (independent of its members); and (3) engaging in profit making activities, subject to funds being used to further the organization’s nonprofit purposes. PUUNAL does not state an explicit right of nonprofit associations to contract. However, this right is clearly implied.
A nonprofit association may adopt “governing principles” – guidelines that govern the internal affairs of the nonprofit association. Such “governing principles” are the equivalent of a corporation’s articles of incorporation and bylaws – and most likely will be called bylaws. In the absence of adoption of “governing principles,” PUUNAL provides that nonprofit associations must use traditional “principles of parliamentary law and procedure” to conduct meetings and vote on proposals. These default rules may be varied through the governing principles, which are not required to be in writing. Of course, we strongly recommend that a nonprofit association have written governing principles – in the form of bylaws.
Member Duties and Liability Protection.
As with shareholders of a corporation or members of limited liability company, PUUNAL now grants nonprofit association members protection from tort and contract liability claims based on actions or omissions of the nonprofit association. A nonprofit association’s liabilities, debts, and obligations are now solely those of the association. However, like their counterparts in corporations or limited liability companies, members and managers of nonprofit associations may have personal liability as a result of their own tortious actions or where they have guaranteed an association’s contract obligations.
Members who are not managers of the association and do not undertake managerial duties do not have fiduciary duties to the association or other members by virtue of their status as members. However, members must perform tasks undertaken consistent with an obligation of good faith and fair dealing. For example, members have an obligation not to disclose confidential information to third parties.
Managers of a nonprofit association have two fiduciary duties to the organization: care and loyalty. Managers have an affirmative obligation to manage the association in good faith, in a manner reasonably believed to be in the best interests of the association, and in a reasonably prudent manner. Similarly, a manager has a fiduciary duty of loyalty to the nonprofit association and to avoid conflicts of interest. These fiduciary obligations parallel those applicable to directors of business and nonprofit corporations.
Just like a business corporation, nonprofit corporation, or limited liability company, the members may provide liability immunity for managers. If the governing principles of the nonprofit association include such a provision, in written form, a manager is not personally liable for his or her actions unless he or she: (1) willfully or recklessly breached or failed to perform his or her fiduciary duties; (2) committed self-dealing; (3) violated a criminal statute; or (4) breached his or her responsibility to pay taxes pursuant to Federal, state, or local law. Just as with business corporations, nonprofit corporations, and limited liability companies, we strongly recommend inclusion of such an immunity provision in nonprofit association bylaws.
PUUNAL also adopts the indemnification provisions set out in the NPCL. We recommend inclusion of a clause within the bylaws that expressly permits the nonprofit association to indemnify individuals acting on behalf of the nonprofit association from third party claims or corporate or derivative actions.
Real Estate Transactions.
If a nonprofit association acquires real estate, it is advisable to consider filing a “Statement of Authority” with the County Recorder of Deeds. While not required at the time of acquisition of real estate, the “Statement of Authority” provides information related to the association, its contact information, the fact that it is a nonprofit association, and the name of individuals authorized to participate in transactions on behalf of the association. A “Statement of Authority” must be filed when the association conveys an interest in real estate to a third party.
Business Corporation and Nonprofit Organization Insurance – You Should Check Before Agreeing to Serve on Board of Directors.
It is important that organizations – profit and nonprofit – have proper insurance for the protection of the organization – and also to protect you if you serve on the board of directors. This includes general liability insurance protection against personal injury and property damage claims, and possibly also director and officer liability insurance protection against shareholder or member claims. Before agreeing to serve on a board of directors of any type of organization, you should verify the organization has insurance coverages appropriate to the circumstances – for the protection of the organization and also for your own protection!
If you have any questions regarding any business law matter, including the issues discussed in this newsletter, please do not hesitate to contact us at 717-392-1100, or email us at the following addresses:
KEGEL KELIN ALMY & LORD LLP
Corporate and Business Law Group
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Kegel Kelin Almy & Lord LLP has a substantial business law practice, representing businesses of all sizes. Kegel Kelin Almy & Lord LLP advises businesses on mergers and acquisitions, business formation, general contracting and business counseling, financing, distribution and trade regulation, tax, technology law issues, as well as a full range of other legal areas faced by businesses.
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