Connecting Great Ideas and Great People

Playing by the Rules: Maintaining Member and Officer Discipline

Discipline of Officers and Directors

2009 Annual Association Law Symposium in

Washington, DCSeptember 25, 2009

Topics

Contentious Times, Contentious Process

Background for Officer & Director Discipline

Course Background Materials Issue Spotting in Statutes and Bylaws Common Law Background Historic Development

Topics, cont.

Common Statutory Provisions for Officer Discipline

Common Statutory Provisions for Director Discipline

Common Law, Due Process Required by Default

Common Law, Notice Common Law, Specific Charges

Topics, cont.

Common Law, Opportunity for Defense

Common Law, Following Rules Common Law, Exhaustion of

Remedies Contact Information

Contentious Times, Contentious Process

More stress, more disagreement When jobs are tight, volunteer credentials

mean more More focus on fiscal issues and tough choices

causes disagreement Hard looks uncover unsound practices and

actual fraud Looking for scapegoats Increasing regulatory focus by IRS and state

regulators

Background for Officer& Director Discipline

Review Applicable Statutes Review Articles of

Incorporation/Corporate Charter/Corporate Certificate

If Organization is a Subordinate Unit, Apply Any Rules of Superior Organization

Review Constitution (if any) and Bylaws Review Parliamentary Authority &

Adopted Disciplinary Procedures (if any)

Course Background Materials

Director and Officer Discipline in Nonprofit Corporations, covering case law development

Nonprofit Corporation Code Disciplinary Procedures, covering common statutory provisions for member, director & officer discipline, citations to law reviews, case annotations, and parliamentary resources

Issue Spotting in Statutes and Bylaws

Do terms last for a specific period, “or until a successor is qualified,” or “and until a successor is qualified”?

Can terms be shortened by decreasing the number of directors?

Is there a method for declaring a position vacant?

Who can elect/appoint/remove?

Issue Spotting in Statutes and Bylaws, cont.

Can the officer/director be removed more easily by expelling him/her from membership, if expulsion is also warranted?

Is cause required for discipline? Are intermediate sanctions, such as

suspension, censure, and reprimand, provided for?

Issue Spotting in Statutes and Bylaws, cont.

Are statutory provisions mandates or defaults?

Is a higher quantum of vote required (more common in bylaws)?

Does statute permit judicial removal?

Common Law Background

At common law, directors and officers treated similarly

Directors and officers could be removed by amotion

Corporations developed the inherent right to discipline officers and directors

Due process and cause required unless otherwise stated in charter or bylaws

Historic Development

Separation of function of managing officers and overseeing directors, more highly differentiated in business corporations

Historic remnant, title “Executive Director” Nonprofits often have volunteer officers

and/or boards active in management Many nonprofit corporation statutes are

based on business corporation statutes that presume all officers are paid staff

Common Statutory Provisions for Officer Discipline I

Any officer elected or appointed may be removed by the persons authorized to elect or appoint such officer whenever in their judgment the best interests of the corporation will be served thereby. The removal of an officer shall be without prejudice to the contract rights, if any, of the officer so removed.

Model Nonprofit Corporation Act (1952) (MNCA) § 24

Common Statutory Provisions for Officer Discipline II

(b) Except as otherwise provided by the articles or bylaws, officers shall be chosen by the board and serve at the pleasure of the board, subject to the rights, if any, of an officer under any contract of employment.

Cal. Corp. Code § 5213

Common Statutory Provisions for Officer Discipline III

(b) Except as provided in the articles of incorporation or bylaws, an officer may be removed at any time with or without cause by:

(i) the board of directors; (ii) the officer who appointed the officer being

removed, unless the board provides otherwise; or (iii) any other officer authorized by the articles, the

bylaws or the board. [Note, electing body not included.] (c) In this section, “appointing officer” means the

officer (including any successor to that officer) who appointed the officer resigning or being removed.

2008 Model Nonprofit Corporation Act (3d ed.) (MNCA3d) § 8.43

Common Statutory Provisions for Officer Discipline IV

(a) Any officer elected or appointed by the board may be removed by the board with or without cause. An officer elected by the members or a class of members may be removed, with or without cause, only by the vote of the members or such class of members, but his authority to act as an officer may be suspended by the board for cause.

(b) The removal of an officer without cause shall be without prejudice to his contract rights, if any. The election or appointment of an officer shall not of itself create contract rights.

Common Statutory Provisions for Officer Discipline IV, cont.

(c) An action to procure a judgment removing an officer for cause may be brought by the attorney-general, by any director, by ten percent of the members, whether or not entitled to vote, or by the holders of ten percent of the face value of the outstanding capital certificates, subvention certificates or bonds having voting rights. The court may bar from re-election or reappointment any officer so removed for a period fixed by the court.

N.Y. Not-for-Profit Corp. Law § 714

Common Statutory Provisions for Director Discipline I

(d) A director may be removed from office pursuant to any procedure therefor provided in the articles of incorporation [preceding taken from 1953 MNCA § 18] or the bylaws, and if none be provided may be removed at a meeting called expressly for that purpose, with or without cause, by such vote as would suffice for his election.

D.C. Code § 29-301.19

Common Statutory Provisions for Director Discipline II

(a) The members may remove one or more directors elected by them without cause.

(b) [class-elected director removal by electing class] (c) Except as provided in subsection (i), a director may be

removed under subsection (a) . . . only if the number of votes cast to remove the director would be sufficient to elect the director at a meeting to elect directors.

(d) [removal of director elected by cumulative voting] (e) A director elected by members may be removed by the

members only at a meeting called for the purpose of removing the director and the meeting notice must state that the purpose, or one of the purposes, of the meeting is removal of the director. . . .

Common Statutory Provisions for Director Discipline II, cont.

(h) A director elected by the board may be removed without cause by the vote of two-thirds of the directors then in office or such greater number as is set forth in the articles or bylaws; provided, however, that a director elected by the board to fill the vacancy of a director elected by the members may be removed without cause by the members, but not the board.

(i) If, at the beginning of a director’s term on the board, the articles or bylaws provide that the director may be removed for missing a specified number of board meetings, the board may remove the director for failing to attend the specified number of meetings. The director may be removed only if a majority of the directors then in office vote for the removal.

1988 Revised Model Nonprofit Corporation Act (RMNCA) § 8.08

Common Statutory Provisions for Director Discipline III

(a) (1) The members may remove, with or without cause, one or more directors who have been elected by the members, unless the articles of incorporation or bylaws provide that directors may be removed only for cause. The articles or bylaws may specify what constitutes cause for removal. . . .

(c) The board of directors of a membership corporation or nonmembership corporation may remove a director who:

(1) has been declared of unsound mind by a final order of court: (2) has been convicted of a felony; (3) has been found by a final order of court to have breached a

duty as a director under [Subchapter] 8C; (4) has missed the number of board meetings specified in the

articles of incorporation or bylaws, if the articles or bylaws at the beginning of the director’s current term provided that a director may be removed for missing the specified number of board meetings; or

Common Statutory Provisions for Director Discipline III, cont.

(5) does not satisfy at the time any of the qualifications for directors set forth in the articles of incorporation or bylaws at the beginning of the director’s current term, if the decision that the director fails to satisfy a qualification is made by the vote of a majority of the directors who meet all of the required qualifications.

(d) A director who is designated in the articles of incorporation or bylaws may be removed by an amendment to the articles or bylaws deleting or changing the designation. See Section 10.30 (approval of amendments by third persons).

(e) Except as provided in the articles of incorporation or bylaws, a director who is appointed by persons other than the members may be removed with or without cause by those persons.

MNCA3d § 8.08

Common Statutory Provisions for Director Discipline IV

(a) Except as limited in paragraph (c) [for directors elected by class and cumulative voting], any or all of the directors may be removed for cause by vote of the members, or by vote of the directors provided there is a quorum of not less than a majority present at the meeting of directors at which such action is taken.

(b) Except as limited in paragraph (c), if the certificate of incorporation or the by-laws so provide, any or all of the directors may be removed without cause by vote of the members. . . .

(d) An action to procure a judgment removing a director for cause may be brought by the attorney-general or by ten percent of the members whether or not entitled to vote. The court may bar from re-election any director so removed for a period fixed by the court.

N.Y. Not-for-Profit Corp. Law § 706

Common Law, Due Process Required by Default

“The supreme council was a body whose will was a law unto itself. It was to have original jurisdiction in all cases of its own officers and members, but no mode of procedure was specified for their trial. It would seem, therefore, that it might adopt such mode of trial as it pleased, subject only to the implied limitation that it must be fair.”

Spillman v. Supreme Council of Home Circle, 157 Mass. 128, 130, 31 N.E. 776, 777 (1892)

Common Law, Notice “[I]n the call for the meeting at which the

association proceeded to elect new trustees in place of the respondents there was no notice that the removal of officers or the choice of new officers would be brought up. Whether the respondents were still members or not, their places could not be filled at the meeting, because there was no notice upon that in the warrant.”

Canadian Religious Ass’n v. Parmenter, 180 Mass. 415, 422, 62 N.E. 740, 743 (1902)

Common Law, Specific Charges

“Taking the charges and specifications together, they appear to have been sufficiently minute and specific to give him notice of the ground of complaint against him.”

Spillman v. Supreme Council of Home Circle, 157 Mass. 128, 131, 31 N.E. 776, 777 (1892)

Common Law, Opportunity for Defense

Accused directors and officers must always be given a reasonable opportunity to defend themselves.

Kahn v. Colonial Fuel Corp., 198 N.Y.S. 596 (1923)

Common Law, Following Rules “The courts do not investigate the question

whether the decision of removal was right or wrong. They ascertain whether there has been compliance with the essential formalities prescribed by the rules of the society or organization, whether the proceedings have been regular, and whether the decision is within the scope of the jurisdiction.”

Dittemore v Dickey, 249 Mass. 95, 108–09, 144 N.E. 57, 62 (1924)

Common Law, Exhaustion of Remedies

“[T]he rights of members in organizations such as are now before us must be settled in accordance with the provisions of their constitutions and . . . every remedy available within such organizations must be exhausted before the aid of a court can be invoked.”

Malloy v. Carroll, 272 Mass. 524, 536, 172 N.E.2d 790, 794–95 (1930)

Connecting Great Ideas and Great People

Contact Information:

Michael E. MalamutAttorney-at-Law and Professional

ParliamentarianPhone: 781-329-9096Mobile: 617-838-8657Fax: 617-326-0286E-mail: michael@michaelmalamut.com Websites: www.michaelmalamut.com