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  • Non-profits are generally organized as corporations. Charitable Trusts are much more restrictive and Trustees are held to a much higher fiduciary standard
  • NON-PROFIT CORPORATIONS: Director Liability

    1. 1. NON-PROFIT CORPORATIONS: DIRECTOR LIABILITY J. Keith Phifer, Esq., LL.M. Schlossberg, LLC 35 Braintree Hill Office Park, Suite 204 Braintree, Massachusetts 02184 (781) 848-5028 E-mail: [email_address]
    2. 2. SCHLOSSBERG, LLC <ul><li>Firm History </li></ul><ul><ul><li>Schlossberg, LLC has provided specialized legal service to New England business owners for the past 30 years.  Schlossberg, LLC has represented a broad range of influential businesses and entrepreneurs that have had a significant effect on the local and regional economy. It is the mission of Schlossberg, LLC to continue to grow its heritage of excellence over the next 30 years and beyond. </li></ul></ul><ul><li>Firm Description </li></ul><ul><ul><li>Schlossberg, LLC is a full service business law firm located in Braintree, Massachusetts. </li></ul></ul><ul><ul><li>Our team of professionals provide comprehensive legal counsel for the closely-held business, charitable endeavor, and individual with a broad range of legal needs. </li></ul></ul><ul><ul><li>The Firm’s team of experienced lawyers and support staff is large enough to provide the specialized expertise our clients need, yet small enough to establish a personal rapport with each client.  </li></ul></ul>
    3. 3. Welcome to the Board! <ul><li>Agenda: </li></ul><ul><ul><li>Non-Profit Basics </li></ul></ul><ul><ul><li>The Function of the Board </li></ul></ul><ul><ul><li>Duties of the Board </li></ul></ul><ul><ul><li>Taxes and Disclosure Obligations </li></ul></ul><ul><ul><li>Director Liability: the Protections </li></ul></ul>
    4. 4. I. Non-Profit Basics
    5. 5. Why the Corporation? <ul><li>What are the other options? </li></ul><ul><ul><li>Charitable Trusts </li></ul></ul><ul><ul><ul><li>More Restrictive. Trustees held to a higher standard </li></ul></ul></ul><ul><ul><li>Unincorporated Associations </li></ul></ul><ul><ul><ul><li>No liability protection. </li></ul></ul></ul><ul><li>Separate Legal Entity </li></ul><ul><ul><li>Can enter into contracts, employ people, hold title to property, sue and be sued. </li></ul></ul><ul><li>Limited Liability </li></ul><ul><ul><li>Directors, officers, and employees are not personally liable for obligations of corporation. </li></ul></ul>
    6. 6. Corporations in General (Profit and Non-Profit) <ul><li>Formed by filing Articles of Organization with Secretary of Commonwealth </li></ul><ul><ul><li> </li></ul></ul><ul><li>Bylaws: Rules for governing the corporation </li></ul><ul><li>Officers: President, Treasurer, Secretary, Executive Director, CEO, etc. . . </li></ul><ul><li>Board of Directors </li></ul>
    7. 7. Profit vs. Non- Profit Profit Officers Directors Shareholders Non-Profit Officers Directors
    8. 8. The Non-Profit Corporation General Form <ul><li>Governed by Massachusetts General Laws c. 180 </li></ul>
    9. 9. The Non-Profit Corporation General Form <ul><li>Articles of Organization </li></ul><ul><ul><li>Names and addresses of the incorporator </li></ul></ul><ul><ul><li>Corporation’s name </li></ul></ul><ul><ul><li>Purpose for which the corporation is formed </li></ul></ul><ul><ul><li>Address of the initial principal office </li></ul></ul><ul><ul><li>Names, residences, and post offices addresses of initial directors, president, treasurer, and clerk </li></ul></ul><ul><ul><li>Name and address of the registered agent </li></ul></ul><ul><ul><li>Fiscal year of the corporation </li></ul></ul><ul><ul><li>Articles MAY include provisions eliminating or limiting personal liability of a director to the corporation or its members for monetary damages arising from acts or omissions taken in good faith. Limitations MAY NOT extend to breach of duty of loyalty, acts or omissions involving intentional misconduct or knowing violations of law, or transaction from which director derived improper personal benefit. </li></ul></ul>
    10. 10. The Non-Profit Corporation General Form <ul><li>Articles of Organization (Continued) </li></ul><ul><ul><li>Purpose clause important because it must be recognized under Massachusetts General Laws AND if non-profit is seeking 501(c)3 exemption, must state purpose is “religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition, or for the prevention of cruelty to animals.” </li></ul></ul><ul><ul><li>If Members, then also in Articles </li></ul></ul><ul><ul><li>Distribution of Assets on Dissolution: Massachusetts Law requires assets on dissolution are distributed for a similar charity. </li></ul></ul><ul><ul><li>Powers: A Non-Profit can do anything a profit corporation can do (except issue shares) </li></ul></ul>
    11. 11. The Non-Profit Corporation General Form <ul><li>Bylaws </li></ul><ul><ul><li>How meetings of members and directors are called and conducted </li></ul></ul><ul><ul><li>Number of Directors constituting a quorum </li></ul></ul><ul><ul><li>How directors and officers are removed and the tenure of their office; </li></ul></ul><ul><ul><li>Members: If there are members, what are their rights? What are procedures on voting and on what matters can they vote on? </li></ul></ul><ul><ul><li>Directors: number, qualifications, procedure for board meetings </li></ul></ul><ul><ul><li>Officers: titles, powers, and functions. This is important when entering into contracts. Who has the authority to bind? </li></ul></ul><ul><ul><li>Conflict of Interest Policy. Driven by IRS requirements. Intended to prevent self dealing. </li></ul></ul><ul><ul><li>How to revise the Bylaws? </li></ul></ul>
    12. 12. Non Profit vs. Public Charity <ul><li>Not all Non-Profits are Public Charities </li></ul><ul><li>Non-profits are accountable to the Secretary of State and governed by Massachusetts General Laws Chapter 180 </li></ul><ul><ul><li>Section 4. A corporation may be formed for any one or more of the following purposes: </li></ul></ul><ul><ul><ul><li>for any civic, educational, charitable, benevolent or religious purpose; </li></ul></ul></ul><ul><ul><ul><li>for the prosecution of any antiquarian, historical, literary, scientific, medical, chiropractic, artistic, monumental or musical purpose; </li></ul></ul></ul><ul><ul><ul><li>for establishing and maintaining libraries; </li></ul></ul></ul><ul><ul><ul><li>for supporting any missionary enterprise having for its object the dissemination of religious or educational instruction in foreign countries; </li></ul></ul></ul><ul><ul><ul><li>for promoting temperance or morality in the commonwealth; </li></ul></ul></ul><ul><ul><ul><li>for fostering, encouraging or engaging in athletic exercises or yachting; </li></ul></ul></ul><ul><ul><ul><li>for encouraging the raising of choice breeds of domestic animals and poultry; </li></ul></ul></ul><ul><ul><ul><li>for the association and accommodation of societies of Free Masons, Odd Fellows, Knights of Pythias or other charitable or social bodies of a like character and purpose; </li></ul></ul></ul><ul><ul><ul><li>for the establishment and maintenance of places for reading rooms, libraries or social meetings; </li></ul></ul></ul><ul><ul><ul><li>for establishing boards of trade, chambers of commerce and bodies of like nature; </li></ul></ul></ul><ul><ul><ul><li>for providing nonprofit credit counseling services, as defined in section four A; </li></ul></ul></ul><ul><ul><ul><li>for encouraging agriculture or horticulture; for improving and ornamenting the streets and public squares of any city or town by planting and cultivating ornamental trees therein and also otherwise improving the physical aspects of such city or town and furthering the recreation and enjoyment of the inhabitants thereof; </li></ul></ul></ul><ul><ul><ul><li>for the purpose of purchasing, holding, preserving and maintaining burial grounds in accordance with the provisions of chapter one hundred and fourteen; </li></ul></ul></ul><ul><ul><ul><li>for establishing a not-for-profit association of employers as authorized by section twenty-five E of chapter one hundred and fifty-two, including such not-for-profit associations of employers organized as nonprofit corporations. </li></ul></ul></ul>
    13. 13. Non-Profit vs. Public Charity <ul><ul><li>Public Charities are subject to the oversight of the Attorney General’s office. </li></ul></ul><ul><ul><li>Public Charities generally share three characteristics: </li></ul></ul><ul><ul><ul><li>They are Non-Profit Organizations </li></ul></ul></ul><ul><ul><ul><li>They have a purpose that is primarily charitable </li></ul></ul></ul><ul><ul><ul><li>They benefit an indefinite class or number of people. </li></ul></ul></ul><ul><ul><li>Public charities must comply with rules and annual filing requirements of the Division of Public Charities of the Attorney General of Massachusetts office. </li></ul></ul><ul><ul><li>The Division of Public Charities has the obligations to the public to ensure the proper use and solicitation of charitable funds. </li></ul></ul><ul><ul><li>Requirements include: initial filing, Form PC, IRS Form 990, audited financial statement. Also must obtain Certificate for Solicitation. </li></ul></ul>
    14. 14. II. The Function of the Board
    15. 15. How are Directors Chosen? <ul><li>Membership Corporations </li></ul><ul><ul><li>Members elect directors just like shareholders in a corporation elect directors </li></ul></ul><ul><ul><li>Usually at annual meeting, as specified in the bylaws. Bylaws establish notice to members before the meeting </li></ul></ul><ul><li>Nonmembership Corporations </li></ul><ul><ul><li>Incumbent directors elect or re-elect directors </li></ul></ul><ul><ul><li>Again, usually at annual meeting, as specified in the bylaws </li></ul></ul>
    16. 16. <ul><li>Period of Service </li></ul><ul><ul><li>Generally serve until the next annual meeting </li></ul></ul><ul><ul><li>Sometimes staggered or for multiple year terms </li></ul></ul><ul><li>Number of Directors </li></ul><ul><ul><li>Stated in the Bylaws </li></ul></ul><ul><ul><li>Must be at least three (3) by statute. </li></ul></ul><ul><ul><li>Always make sure the correct number are serving. </li></ul></ul>How are Directors Chosen?
    17. 17. <ul><li>Special Categories of Directors </li></ul><ul><ul><li>Ex officio: Sometimes officer of the Corporation is stated in the Bylaws to automatically be a director. Are these directors entitled to the same voting rights as other directors? Depends. </li></ul></ul><ul><ul><li>Honorary or Emeritus: Generally not allowed to vote </li></ul></ul><ul><li>Removal of Directors </li></ul><ul><ul><li>Provided for in Bylaws </li></ul></ul><ul><ul><li>With or without cause provisions </li></ul></ul><ul><ul><li>Missing meetings </li></ul></ul>How are Directors Chosen?
    18. 18. <ul><li>Compensation </li></ul><ul><ul><li>Massachusetts law allows directors to get paid </li></ul></ul><ul><ul><li>Most serve without compensation </li></ul></ul><ul><ul><li>Expense reimbursement ok </li></ul></ul><ul><ul><li>Statutory immunity for “volunteers” not available for paid service on the board </li></ul></ul><ul><li>Who can serve on the Board? </li></ul><ul><ul><li>Articles or Bylaws can specify qualifications </li></ul></ul><ul><ul><li>Special background, qualifications or management experience not required </li></ul></ul><ul><ul><li>Choosing right people critical for success </li></ul></ul>How are Directors Chosen?
    19. 19. What are Functions of the Board? <ul><li>Priority Number One: Knowing the Nonprofit’s Purpose. </li></ul><ul><ul><li>What does it do and for whom? </li></ul></ul><ul><ul><li>General Purpose Statement in Articles </li></ul></ul><ul><ul><li>Mission Statement </li></ul></ul><ul><li>Board’s power is cornerstone of corporate law </li></ul><ul><ul><li>Govern enterprise by delegation and oversight of management to officers </li></ul></ul><ul><ul><li>Board only acts as a group </li></ul></ul><ul><li>Board Functions: </li></ul><ul><ul><li>Setting and overseeing policy and overall direction of the Corporation </li></ul></ul><ul><ul><li>Remaining reasonably informed of corporate activities </li></ul></ul><ul><ul><li>Providing reasonable oversight of management and committees </li></ul></ul><ul><ul><li>Review of possible conflict of interest transactions </li></ul></ul><ul><ul><li>Delegating functions to committees and officers </li></ul></ul><ul><li>Management functions </li></ul><ul><ul><li>Developing long term and strategic plans for review and approval by the board </li></ul></ul><ul><ul><li>Implementing directives of the Board </li></ul></ul><ul><ul><li>Conducting and Managing day to day operations </li></ul></ul>
    20. 20. <ul><li>Board Meetings </li></ul><ul><ul><li>Directors generally must meet in order to act. </li></ul></ul><ul><ul><li>Meetings can be conducted through electronic means, so long as all “present” can simultaneously hear each other during the meeting (Massachusetts General Law c 156B, S 59) </li></ul></ul><ul><ul><li>Board Action can be approved, however, by unanimous written consent. All directors must sign vote. </li></ul></ul><ul><ul><li>Minutes </li></ul></ul><ul><li>Rights to information </li></ul><ul><ul><li>In order to carry out duties, directors have right to inspect books and records of Corporation </li></ul></ul>What are Functions of the Board?
    21. 21. <ul><li>Setting Executive Compensation </li></ul><ul><ul><li>Balancing fair compensation with non-profit resources and charitable purpose </li></ul></ul><ul><ul><li>Pay should be related to performance and based on comparisons of similar executives performing similar duties in comparable organizations </li></ul></ul><ul><ul><li>IRS can impose fines on both executives and board of directors for excessive salaries and benefits. </li></ul></ul>What are Functions of the Board?
    22. 22. <ul><li>Duties of the Board </li></ul>
    23. 23. Fiduciary Duties <ul><li>Massachusetts law imposes “fiduciary duties” on both directors and officers of non-profit corporations </li></ul><ul><li>2 primary duties are Duty of Care and Duty of Loyalty </li></ul><ul><ul><li>“ A Director. . .shall perform his duties as such, including. . .his duties as a member of a committee of the board upon which he may serve, in good faith and in a manner he reasonably believes to be in the best interest of the corporation, and with such care as an ordinarily prudent person in a like position with respect to a similar corporation . . .would use under similar circumstances.” (M.G.L. c. 180, S6C) </li></ul></ul><ul><li>Third duty is Duty of Obedience </li></ul><ul><ul><li>Not specifically imposed in Massachusetts but is imposed in other jurisdictions </li></ul></ul><ul><ul><li>It is likely that Massachusetts Attorney General would take the position that duty of obedience is required </li></ul></ul>
    24. 24. <ul><li>Duty of Care </li></ul><ul><ul><li>That degree of diligence, care, and skill which ordinarily prudent person would exercise under similar circumstances </li></ul></ul><ul><ul><li>Plainly, thoughtfulness and care </li></ul></ul><ul><ul><li>Standard which would be expected by someone with common sense and wisdom, exercising informed judgment and acting under similar circumstances </li></ul></ul><ul><ul><li>“ Similar circumstances” takes into account the non-profit nature of the corporation and the expertise and qualifications of the individual director </li></ul></ul><ul><ul><li>Applicable to all aspects of a director’s service </li></ul></ul><ul><ul><ul><li>Not just specific transactions but also regular governance </li></ul></ul></ul>Fiduciary Duties
    25. 25. Fiduciary Duties <ul><li>Duty of Care (continued) </li></ul><ul><ul><li>Requires active involvement meaning: </li></ul></ul><ul><ul><ul><li>Preparation for meetings by reading materials in advance </li></ul></ul></ul><ul><ul><ul><li>Assess the adequacy or insufficiency of information provided, and if insufficient, ask for additional information </li></ul></ul></ul><ul><ul><ul><li>Attend meetings and actively participate in discussions and decision making </li></ul></ul></ul><ul><ul><ul><li>Inquiry. Ask questions of management and outside advisors that are necessary to fully appreciate issues and decisions </li></ul></ul></ul><ul><ul><ul><li>Carefully review financial reports </li></ul></ul></ul><ul><ul><ul><li>Maintain confidentiality </li></ul></ul></ul><ul><ul><ul><li>Exercise independent judgment </li></ul></ul></ul>
    26. 26. <ul><li>Duty of Loyalty </li></ul><ul><ul><li>Conduct performed in good faith and in a manner the director believes are in the best interest of the corporation (as opposed to self interest or in the interest of another) </li></ul></ul><ul><ul><li>Director can not unfairly profit form the corporation </li></ul></ul><ul><ul><li>Conflicts of interest </li></ul></ul><ul><ul><li>Corporate opportunity doctrine </li></ul></ul><ul><ul><ul><li>Director must reject corporate opportunities unless that corporate opportunity has first been offered to the Board </li></ul></ul></ul><ul><ul><ul><li>Any opportunity to engage in business activity that Director became aware of in connection to his or her role with the corporation, or through the use of corporate information or property, and which the director would reasonably believe to be of interest to the corporation </li></ul></ul></ul>Fiduciary Duties
    27. 27. <ul><li>Duty of Loyalty (Continued) </li></ul><ul><ul><li>Example: Phil is Director at local Private School. Bob owns land next to School. Bob asks Phil if School is interested in buying adjacent land . Phil purchase land directly from Bob without disclosing opportunity to School. </li></ul></ul><ul><ul><li>Example: Jane is Director at local Hospital. Hospital is considering entering into contract with financial services company to oversee employee retirement plan. Jane purchases stock of financial services company. </li></ul></ul><ul><li>First step is to recognize potential conflict of interest or corporate opportunity exists (not always easy) </li></ul><ul><li>Once recognized, Director must disclose </li></ul><ul><ul><li>True regardless of whether deal is ‘fair’ or opportunity would not be valuable to corporation </li></ul></ul><ul><li>Director should not be present on board deliberations regarding the matter </li></ul>Fiduciary Duties
    28. 28. <ul><li>Duty of Obedience </li></ul><ul><ul><li>Attorney General’s office has stated that Duty of Obedience will apply </li></ul></ul><ul><ul><li>Requires directors to ensure that the corporation’s resources are used in a manner that is consistent with mission and that corporations does not engage in unauthorized activities </li></ul></ul><ul><ul><li>Specifically, Director must: </li></ul></ul><ul><ul><ul><li>Read incorporating documents </li></ul></ul></ul><ul><ul><ul><li>Be familiar with the corporate purpose </li></ul></ul></ul><ul><ul><ul><li>Perform duties in a manner that ensures the corporations does not engage in activities for which it is not authorized </li></ul></ul></ul><ul><ul><li>“ Be true to your school” </li></ul></ul><ul><li>Watch out for restricted gifts! </li></ul>Fiduciary Duties
    29. 29. Liabilities <ul><li>Who can sue? </li></ul><ul><ul><li>If Director breaches any of these duties who has standing to make claim? </li></ul></ul><ul><li>Suit by the Corporation </li></ul><ul><li>Suit by members, if any </li></ul><ul><li>Massachusetts Attorney General </li></ul><ul><ul><li>Whenever the attorney general believes that breaches of trust are being committed in the administration of a public charity, and investigation may be conducted with the approval of the trial court. </li></ul></ul><ul><ul><ul><li>This authority may also be used to enforce directors’ fiduciary duties. </li></ul></ul></ul>
    30. 30. Liabilities <ul><li>Liability can arise from many sources: </li></ul><ul><ul><li>Corporation </li></ul></ul><ul><ul><li>IRS </li></ul></ul><ul><ul><li>DOR </li></ul></ul><ul><ul><li>Attorney General </li></ul></ul><ul><ul><li>Outside Parties </li></ul></ul>
    31. 31. IV. Taxes and Disclosure Obligations
    32. 32. Tax Exemptions <ul><li>Not all Non-Profits are exempt </li></ul><ul><li>Internal Revenue Code has various categories for tax exemptions. </li></ul><ul><li>501(c)3 is only section that entitles contributors to a tax deduction for their gifts to non-profits </li></ul>
    33. 33. Tax Exemptions <ul><li>9 common types of non profits exempt from taxes </li></ul><ul><ul><li>Charitable organizations – 501(c)(3) </li></ul></ul><ul><ul><li>Social welfare organizations -501(c)(4) </li></ul></ul><ul><ul><li>Labor and Agricultural Organizations -501(c)(5) </li></ul></ul><ul><ul><li>Business Leagues -501(c)(6) </li></ul></ul><ul><ul><li>Social Clubs -501(c)(7) </li></ul></ul><ul><ul><li>Fraternal Societies -501(c)(8) </li></ul></ul><ul><ul><li>Veterans Organizations -501(c)(19) </li></ul></ul><ul><ul><li>Employees Associations -501(c)(9) </li></ul></ul><ul><ul><li>Political Organizations -527 </li></ul></ul>
    34. 34. Tax Exemptions <ul><li>501(c)(3) Organizations </li></ul><ul><ul><li>Must be organized exclusively for charitable, religious, educational, literary, or scientific purposes </li></ul></ul><ul><ul><li>Earnings can not inure to private individuals </li></ul></ul><ul><ul><li>No substantial activities to influence legislation </li></ul></ul><ul><ul><li>No participation in political campaigns </li></ul></ul>
    35. 35. Tax Exemptions <ul><li>Application </li></ul><ul><ul><li>Must apply (Form 1023) </li></ul></ul><ul><ul><li>Churches and corporations with less than gross receipts of $5,000 need not apply. </li></ul></ul><ul><ul><li>Public Charity vs. Private Foundation </li></ul></ul><ul><li>Private Foundation subject to additional restrictions </li></ul><ul><ul><li>No self dealing </li></ul></ul><ul><ul><li>Minimum requirements for distribution </li></ul></ul><ul><ul><li>Limits on ownership interests in other entities </li></ul></ul><ul><ul><li>Prohibition on certain investments </li></ul></ul><ul><ul><li>Excise taxes </li></ul></ul>
    36. 36. Tax Exemptions <ul><li>Unrelated Business Income </li></ul><ul><ul><li>If trade or business is “unrelated” to its exempt purpose, then taxable </li></ul></ul><ul><ul><li>If substantial, the nonprofit may lose its exemption </li></ul></ul><ul><ul><li>Does not include passive income –rents, dividends, interest, etc. </li></ul></ul><ul><ul><li>Potential Strategy is to set up for profit subsidiary </li></ul></ul><ul><ul><ul><li>Subsidiary is fully taxed </li></ul></ul></ul><ul><ul><ul><li>Dividend to Non-Profit is a dividend not considered unrelated business income </li></ul></ul></ul>
    37. 37. Tax Exemptions <ul><li>Maintaining Exempt Status: </li></ul><ul><ul><li>Limit unrelated business activities </li></ul></ul><ul><li>Private Benefit </li></ul><ul><ul><li>No net earnings can inure to private individual </li></ul></ul><ul><ul><li>No excess compensation </li></ul></ul><ul><ul><li>Purchase of goods at higher than fair market </li></ul></ul><ul><ul><li>Use of corporate assets without paying </li></ul></ul><ul><ul><li>Can result in penalty taxes for “Disqualified Persons” </li></ul></ul><ul><li>Special Rules for Hospitals </li></ul>
    38. 38. Disclosure Requirements <ul><li>Informational Filings </li></ul><ul><ul><li>File Form 990 with IRS </li></ul></ul><ul><ul><li>Annual Report with Secretary of State </li></ul></ul><ul><ul><li>Annual Filing with Division of Public Charities </li></ul></ul><ul><li>Public Disclosure </li></ul><ul><ul><li>Application for Exemption </li></ul></ul><ul><ul><li>Copies of Informational Returns </li></ul></ul>
    39. 39. V. Protections
    40. 40. Liability Protection By Statute <ul><li>Provided the Director acts in accordance with their Fiduciary obligations (Duty of Care, Duty of Loyalty, and Duty of Obedience), Massachusetts law provides protections </li></ul><ul><li>Directors may rely on outside experts, if such reliance is reasonable </li></ul><ul><ul><li>Must be critical </li></ul></ul><ul><li>Volunteer Protection </li></ul><ul><ul><li>If Director serves without compensation, “no civil damages for actions relating solely to the performance of his duty as an officer, director or trustee. . .” </li></ul></ul><ul><ul><li>Grossly negligent acts or omissions are not protected nor are activities that are primarily commercial in nature </li></ul></ul><ul><ul><li>No protections for actions relating to operation of an automobile. </li></ul></ul><ul><ul><li>Massachusetts General Law C. 231, S. 85W </li></ul></ul><ul><ul><li>Federal law is similar (42 U.S.C. S 14501) </li></ul></ul>
    41. 41. Business Judgment Rule <ul><li>Applies to all corporations (profit and non-profit) </li></ul><ul><li>Director will not be found liable for an honest mistake or error in judgment </li></ul><ul><li>Requires actions in good faith after due consideration </li></ul>
    42. 42. Statutory Exculpation <ul><li>Massachusetts allows nonprofits to limit the liability of directors in lawsuits brought by the corporation or on its behalf (M.G.L. C. 156B S 13(b)) </li></ul><ul><li>Limitation MUST BE STATED IN THE ARTICLES OF ORGANIZATION </li></ul><ul><li>Helpful, but significant gaps remain </li></ul><ul><ul><li>Director can still have to pay own legal fees to defend himself or herself </li></ul></ul><ul><ul><li>Does not apply to suits by outside parties or government regulators </li></ul></ul>
    43. 43. Indemnification <ul><li>Corporation can indemnify the director </li></ul><ul><li>Corporation would pay for the cost of defense and costs of legal judgments or fines </li></ul><ul><li>Indemnification language should be in Bylaws </li></ul><ul><li>Only as good as corporation’s ability to pay </li></ul>
    44. 44. Directors’ and Officers’ Insurance <ul><li>Best protection </li></ul><ul><li>Business judgment rule and exculpatory language only protect against suits by the corporation </li></ul><ul><li>Indemnity only as good as corporation’s ability to pay </li></ul><ul><li>D & O insurance has 2 aspects: </li></ul><ul><ul><li>Reimbursement of individual directors’ liability to the corporation or outside parties (if the director is not indemnified) </li></ul></ul><ul><ul><li>Funding of the corporation’s indemnification obligations if the director is indemnified </li></ul></ul>
    45. 45. Directors’ and Officers’ Insurance <ul><li>D & O policies are indemnity vs. liability </li></ul><ul><ul><li>Paid reimbursements after insured is required to make payments </li></ul></ul><ul><li>Exclusions: </li></ul><ul><ul><li>Pollution and environmental claims </li></ul></ul><ul><ul><li>Claims involving intentional conduct (employment discrimination, defamations, securities fraud) </li></ul></ul><ul><ul><li>Payment of fines </li></ul></ul><ul><ul><li>Penalties and punitive claims </li></ul></ul><ul><ul><li>Matters in which director realized profit </li></ul></ul><ul><li>Umbrella Policies </li></ul><ul><ul><li>May have coverage, but need to disclose </li></ul></ul>
    46. 46. QUESTIONS? J. Keith Phifer, Esq. Schlossberg, LLC 35 Braintree Hill Office Park, Suite 204 Braintree, Massachusetts 02184 (781) 848-5028 E-mail: [email_address]