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Sweeping Changes to Michigan’s Nonprofit Corporation Act

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SWEEPING CHANGES MADE TO MICHIGAN’S NONPROFIT CORPORATION ACT

IS YOUR ORGANIZATION NOW OUT OF DATE WITH ITS GOVERNANCE DOCUMENTS? 

By: Michael F. Matheson

On January 15, 2015, Governor Rick Snyder signed into law a series of bills that implemented a number of changes to the Michigan Nonprofit Corporation Act.  Many of the changes could have a significant impact on the way a nonprofit organization is governed.  An explanation of some of the more meaningful changes is discussed in this article.  In order to obtain a complete understanding of the breadth of the amendments and how your organization may be impacted, legal counsel should be consulted.

Director and Officer Indemnification

Previously, a corporation was allowed to provide for the indemnification of its volunteer directors and officers for damages caused to the corporation, or its shareholders or members, but only to the extent the damages related to a breach of a fiduciary duty by the director or officer.  The amendments now expressly expand the limits of indemnification to “money damages for any action taken or any failure to take any action as a director or volunteer officer”.  It is important for an organization to review its existing bylaws and articles of incorporation to determine whether indemnification was afforded to directors and officers prior to the amendments because, in most cases, the new limits of indemnification will be automatically available to an organization that currently indemnifies its board of directors and officers.  Nevertheless, to ensure that the intent of the organization is fully implemented, a review and update of the corporation’s governance documents may be in order.

Access to Information

The Act currently requires that a corporation, upon the written request of a shareholder or member, furnish the requestor with certain financial information for each fiscal year.  Upon proper notice, the shareholder or member may also examine the corporation’s meeting minutes and record of its shareholders or members.  This provision has been eliminated by the amendments to the Act.  The Act now requires that the request to inspect an organization’s books and records must describe the purpose of the inspection and the specific records the shareholder or member desires to inspect.  The request must also state a proper purpose for the inspection, which is defined as “a purpose that is reasonably related to a person’s interest as a shareholder or member”.  A corporation may also now restrict access to its stock ledger, donor lists, and other books and records when a good faith determination is made by the corporation that opening its books and records would “impair the rights of privacy or the free association of the shareholders or members . . . or a lawful purpose of the corporation”.  A corporation that elects to limit access to its books and records must, however, provide a reasonable way for shareholders or members to communicate with other shareholders or members on the affairs of the corporation.  The extent of disclosure, or conversely confidentiality, for an organization’s books and records should be evaluated on a case-by-case basis.

Learned Professions

The Amendments allow a nonprofit corporation to employ and enter into other arrangements for the providing of “services in a learned profession”.  This opens up the possibility for corporations to be formed around or employ dentists, osteopathic physicians, physicians, surgeons, doctors of divinity and other clergy, or attorneys.  The Amendments were intended to expand upon a Michigan Attorney General opinion which provided that a nonprofit hospital could employ physicians for the furnishing of medical services.

Nonexecutive Committees

A corporation may currently designate one or more directors to a committee approved by the board.  Committees with directors will now be called “executive committees”.  Unless otherwise provided by a corporation’s governance documents, a board can now also create “nonexecutive committees” to assist in the governance of the corporation.  A nonexecutive committee may be constituted with members, “some or all of [who] may be individuals who are not directors, officers, members, or shareholders of the corporation.”  A nonexecutive committee must have a designated purpose and describe the manner in which committee members would be elected, appointed and removed.  The Amendments make it clear that a nonexecutive committee could not execute the authority of the board of directors in the management of committee’s affairs.

Voting by Mail, Electronically, or at Polling Places

The Amendments provide that a corporation may include in its corporate documents that any action the shareholders or members were required or permitted to take at an annual or special meeting could be taken without a formal meeting by voting electronically or at a polling place so long as the corporation provides a ballot to each shareholder or member entitled to vote.  Prior to the amendments, shareholders or members had to vote either in person or by written consent.  In addition to voting by mail and electronically, shareholders or members are now permitted to vote at a polling place established by the corporation.  Depending upon the size of the organization, this gives the corporation significantly greater flexibility and potential cost savings by allowing for online ballots/surveys, email and printed ballots when voting at polling locations.  A corporation organized on a directorship basis may also provide for a director election in person, by proxy, or electronic transmission.  Quorums for board of director meetings may also be reduced to 1/3 of the members then in office.

Merger and Dissolutions

The provisions for obtaining approval from the shareholders or members for a merger or dissolution have been simplified.  Prior to the adoption of the amendments, a merger or dissolution required the majority approval of those shareholders or members entitled to vote.  The Amendments now allow for a merger plan or dissolution to be approved if the plan is approved by a majority of those shareholders or members who are present at the meeting, so long as there are at least 20 shareholders or members present for the meeting.

Merger, Conversion of Dissolution of Charitable Purpose Corporation

Prior to merging, converting or dissolving a corporation, organized for charitable purposes, the corporation must provide written notice to the Attorney General of the proposed action.  Also, a corporation that is automatically dissolved because its articles of incorporation have expired, or if it has failed to file annual statements or fees for two years, it would have to give written notice to the Attorney General within 60 days of the event.  The Michigan Department of Licensing and Regulatory Affairs will not accept paperwork to merge, dissolve or convert the corporation unless it is accompanied by a written consent from the Attorney General.  The requirement for consent from the Attorney General cannot be avoided by simply stating in the articles of incorporation that the corporation shall dissolve on a specific date.

Conclusion

The amendments to the Michigan Nonprofit Corporation Act equally impact organizations formed on a stock, membership or directorship basis.  To gain a full understanding of how the amendments to the Nonprofit Corporation Act may impact your organization you should consult with your organization’s regular legal counsel or you may contact Michael F. Matheson at the Loomis Law Firm, 124 W. Allegan St., Ste. 700, Lansing, MI  48933; (517) 482-2400; mfmatheson@loomislaw.com.

This update was prepared for informational purposes only.  It is not legal advice.  This update is not intended to create, and receipt of it does not constitute, an attorney-client relationship.  Readers should not act upon this information without first seeking professional counsel.

Posted in: Business/Taxes

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