03/17/2010 07:34:00 PM EST
Classis of Central California v. Miraloma Community Church
Why Bylaw Provisions Specifying How the Bylaws Can Be Amended Should Be
Carefully Considered and Drafted
Because nonprofit
corporations cannot issue stock, control is affected through contractual and
voting relationships. In this article, Jack Siegel provides practical advice on
how to analyze and draft provisions regarding how to amend bylaws, particularly
with respect to affiliated nonprofit organizations.
Mr. Siegel
writes: In the case of a conflict
between corporate documents, lawyers who advise nonprofits can recite the legal
hierarchy in their sleep: A statute trumps the articles of incorporation, the
articles of incorporation trump the bylaws, and the bylaws trump board
resolutions or policies. This applies to process provisions, such as who can
amend a given document, as well as substantive provisions, such as a nonprofit's
purpose. Matters get more complicated, however, when a particular nonprofit
corporation is an affiliate of another nonprofit organization. Much recent
litigation – including the subject of this commentary – involves schisms in
hierarchical religious denominations, and religious organizations can enjoy
heightened rights of autonomy. But all affiliated organizations can learn
important lessons about control, ownership, and document drafting from these
cases.
Charities having nonprofit affiliates can operate under a variety
of models. Because nonprofit corporations cannot issue stock, control is
effected through contractual and voting relationships. For example, the
affiliated entities, rather than individuals, might be the charity's legal
members, or the "parent" body might control the members, or the arrangement
might have yet a different structure. The law does not dictate the relationship
between these multi-nonprofit membership entities; the choice of a federated
model, a branch model, or an association (or a looser affiliation, such as a
supporting, but otherwise independent organization)—and the details of the
chosen structure—are left up to the parties.
For hierarchical affiliated
nonprofits – such as a hierarchical church or a national organization with state
or local chapters – the "subsidiary" affiliate usually must conform its articles
and bylaws to a model specified by the "parent." Separately, the parent usually
has appointment or approval authority over the election of board members of the
subsidiary, and over its fundamental transactions. Indeed, the 2008 redesigned
Form 990 asks in Part VI, line 9: "Does the organization have local chapters,
branches, or affiliates?," and: "If "Yes," does the organization have written
policies and procedures governing the activities of such chapters, affiliates,
and branches to ensure their operations are consistent with those of the
organization?" The instructions add: "If "No," explain on Schedule O (Form 990)
how the organization ensures that the local unit's activities are consistent
with its own."