Historically, New York’s NPCL did not allow nonprofit organizations to hold virtual membership meetings. That changed with the COVID-19 pandemic, when New York offered temporary flexibility to the boards of charitable and religious nonprofits.  Under the COVID-19 rules, boards of charitable nonprofit or religious organizations could unilaterally decide to hold member meetings virtually. Under the revised law, boards of nonprofit charitable organizations may unilaterally determine whether or not to hold member meetings electronically, as long as their certificate of incorporation or bylaws do not prohibit such a decision.

Similarly, the newly-created default rule under New York’s Religious Corporations Act (RCL § 28) is that a board of a religious corporation may organize a virtual membership meeting if the board is already authorized to determine the place of a membership meeting, under either the organization’s governing documents or another provision of the RCL. However, leaders of religious organizations should bear in mind that the RCL contains different provisions depending on the denomination of the organization – leaders must be careful to review their organizing documents as well as the applicable sections of the RCL to confirm whether they have the requisite power to call virtual membership meetings or, if not, whether they could amend their governing documents to acquire that power.

Any boards considering adopting a virtual format for their upcoming membership meeting should consult with an advisor to review their organizational documents. Any nonprofit or religious corporations whose certificate of incorporation or by-laws prohibits virtual membership meetings should consider whether and how to revise their documents to provide the board with additional flexibility. We anticipate that many organizations and their members will decide to operate under virtual or hybrid formats in the near future.

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Attorneys for nonprofits are ultimately responsible to their boards.

Since there are no owners or shareholders of a nonprofit organization, they are supervised by their boards in accordance with the directors’ fiduciary duties.  This means that boards must be informed of any problems or possible issues by senior staff and/or by the organization’s attorneys.  It is incumbent upon legal counsel to ensure that the board is notified of such problems in a timely manner and engaged in their resolution.

Depending on the circumstances, attorneys should maintain communication with the Board Chair, and with the entire board when appropriate. 

This is particularly important if there are problems meriting board knowledge and involvement.  Attorneys should ensure that board members are informed and engaged and act in an independent manner.

There are no specific ethical rules governing representation of nonprofit organizations.

The rules and cases construing professional responsibility in the for-profit context offer significant guidance.  Certainly, court decisions that apply the attorney ethics rules to situations involving nonprofit clients can be of particular assistance.

An attorney representing an organization owes a duty to the organization rather than any persons employed by or associated with the organization. (See ABA Model Rule 1.13)

When an attorney who is employed or retained by an organization is dealing with its directors, officers, or employees, if it appears that the organization’s interests may differ from the individual’s interests, the attorney is obligated to explain to the individual that he or she represents the organization and not the individual.  NYRPC 1.13(a).

If the attorney knows that a person involved with the organization is acting in a manner that violates, or is likely to violate, the legal obligations of the organization, and the attorney determines that this violation is likely to result in substantial injury to the organization, the attorney is obligated to proceed as is “reasonably necessary in the best interests of the organization.”  NYRPC 1.13(b).

If an issue arises whereby the attorney may have a conflict of interest as a result of prior representation of the organization, the attorney should consider advising the organization to retain other counsel.  For example, if an attorney has handled a transaction for a client that later winds up in litigation, the client should retain an attorney for the litigation who was not involved in the initial transaction.

Examples of where an attorney should ensure that nonprofit boards act appropriately and independently from senior leadership include:

• Setting compensation for top executives
• Overseeing conduct and performance of executives
• Addressing complaints or problems involving executives, including allegations of discrimination or harassment
• Addressing allegedly inappropriate or illegal conduct within the organization
• Responding properly to whistleblower complaints
• Complying with conflict of interest and related party rules and law

Summary:

In the practice of representing a nonprofit organization, attorneys must consider their ethical obligations to ensure that the organization will be well-served and in compliance with legal requirements.

The information provided in this article does not constitute legal advice, and is not intended to substitute for legal counsel.

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One serious challenge in the age of COVID is how, or whether, to hold in-person meetings. We have received a number of questions from clients about their ability to hold virtual meetings for directors and members. While many states have relaxed rules around virtual meetings, nonprofits must continue to be vigilant. In this post I briefly discuss how nonprofits can make sure they are able to hold virtual meetings while complying with applicable law.

Meetings are important!

Board and member meetings serve important functions. Membership meetings allow the members to elect directors and weigh in on important issues facing the nonprofit. Directors’ fiduciary duties continue, notwithstanding the pandemic – their duties include effective oversight of the nonprofit’s activities and management. While some nonprofit activity has ground to a halt, other organizations are busier than ever, being asked to cope with the intersecting challenges of a pandemic, economic recession, and civil rights movement taking place at the same time. Board members cannot put their fiduciary duties on hold because in-person meetings are more difficult. Directors have to find a way to carry out their normal board activities in these abnormal times. Virtual meetings are one tool.

Check your documents!

Before the Board can arrange a virtual board or member meeting, the Board needs to confirm that virtual meetings aren’t prohibited by the nonprofit’s own rules. Any restriction on virtual meetings would typically be spelled out in the organization’s bylaws. Most nonprofits formed in the past ten years will likely have language that expressly allows for virtual meetings, or will be silent on virtual meetings. If your organization has members, check the sections of the bylaws that apply to member meetings and then check the section that deals with board meetings – sometimes there are different rules!  Also, if your bylaws reference Robert’s Rules of Order as rules applicable to the organization, you should also review those rules with respect to the conduct of virtual meetings.

Unfortunately, some bylaws specifically require in-person meetings. If your bylaws specifically require in-person meetings, the organization cannot move forward without making a revision that allows virtual meetings. Bylaws revisions are important to get right procedurally – I recommend checking with counsel to ensure that any bylaws revisions are properly handled.

Check the law!

Assuming the bylaws do not prohibit virtual meetings, you should check applicable state law to see how state law deals with virtual meetings. The law that applies depends on where the nonprofit is legally incorporated. That can differ from where the nonprofit’s headquarters is located or where it conducts its activities. Be sure to check the appropriate state rules (or get your favorite attorney to check for you)!

State laws vary, but in general they permit virtual board meetings if the nonprofit’s bylaws don’t prohibit such meetings. State laws with regards to member meetings tend to favor in-person meetings, but some states permit virtual meetings. Look for other requirements – some state laws specify that all participants in the virtual meeting must be able to hear and be heard throughout the meeting. Other states have different participation requirements for members and directors.

The “hear and be heard” requirement is tricky when dealing with large meetings (especially in the member context). Logistically, many organizations use the “mute” function of a videoconferencing app for large meetings. The mute function guarantees that there are no unexpected or unintentional disruptions during the meeting. However, in order to comply with state law, your participants need to be able to voice their opinions throughout the meeting. If they’re muted by the organizer, your meeting may technically be in violation of state law unless members are able to un-mute themselves. I recommend asking members to voluntarily mute themselves, or if muted by the organizer, allow users to un-mute themselves if they would like to contribute to the conversation. The organizer could also mute participants for the presentation of each agenda item, then the floor can be opened for discussion for each agenda item so all participants have a chance to weigh in on each piece of business before the organizer mutes the participants again.

Some states require a physical location to be designated in the notices for the meetings, even if they are to be held virtually. I generally recommend designating the organization’s principal office, but clarifying that all aspects of the meeting will be virtual.

Finally, check to see if the state has issued special guidance related to meetings. Many state regulators and governors have attempted to loosen restrictions on virtual meetings during COVID, to the extent they are permitted by law. Their guidance may affect whether you need to make any changes to your organization’s bylaws. For instance, New York’s Charities Bureau issued special guidance with regards to virtual meetings early in the pandemic. The notice discussed temporary changes to New York law during the pandemic allowing annual members’ meetings to take place virtually. The state also provided helpful information to guide organizations as they prepare to carry out a virtual meeting for the first time.

Be Careful!

To ensure that your organization doesn’t become too relaxed with its compliance around meetings, I offer the following cautionary tale. Just as directors must continue to observe their fiduciary duties, state regulators are keeping an eye on nonprofits during the pandemic. In July, the Pennsylvania Attorney General filed a lawsuit against Lincoln University’s Board of Trustees for failing to follow statutory and internal policies and procedures with regards to their meetings. While there were a number of other issues,** a large portion of the lawsuit relates to two main problems: (i) a portion of the Board was unable to participate in a Zoom when their microphones were muted by the host; and (ii) the Board allegedly failed to comply with the notice provisions in its own bylaws.

** The main dispute relates to the ability for newly designated Trustees to be seated without approval of the Board’s Nominations Committee. But the AG’s hook to bring the suit related to relatively dry issues of governance compliance.

Conclusion

While boards and members should make use of the tool of virtual meetings, it’s important to do so while complying with the nonprofit’s internal governance and applicable state law. If virtual meetings are new to your organization, it’s a good idea to check in with your legal counsel to make sure you’re doing everything right.

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August 9, 2019 – Politico – Liberty University [1]
Disclaimer – This article discusses the nonprofit governance principles at issue in publicly-reported allegations in an attempt to glean a clear lesson for current and future nonprofit leaders. We have no knowledge of the truth of the facts in the article discussed, and merely reference them for purposes of discussing nonprofit governance issues applicable to nonprofit leaders.

On August 9, 2019, Politico Magazine posted an article about alleged discontent by current and former Liberty University officials. The article described governance issues related to a variety of matters ranging from real estate deals, loans, political events, and the evolution of Liberty University since the death of its founder, the Rev. Jerry Falwell Sr. in 2007.

The overarching theme from the article – issues that arise from control over a major nonprofit institution by a family, or perhaps one person – can provide lessons in governance for the sector. In the paragraphs that follow, I’m going to walk through some of the allegations from the Politico article in order to highlight key governance lessons for nonprofit leaders.

Overview of the allegations
One of the undisputed statements in the article is that Jerry Falwell Jr., currently the President of Liberty University, is central to the University’s revenue-generating activities. Also undisputed is that the University’s finances have dramatically improved under Mr. Falwell Jr.’s leadership, ballooning from assets of $259 million in 2007 to $2.5 billion in 2017. Understandably, these two factors may have generated substantial goodwill and a certain level of trust from the University’s trustees, who have faith in their President’s ability to grow the University and reach more students.

What gave rise to concerns of some current and former University officials, and scrutiny from the media, were transactions in which Mr. Falwell Jr. was allegedly steering university business opportunities to his friends and family. As I discuss in the paragraphs that follow, there are steps that other similarly-situated nonprofits can take to help avoid these types of conflicts of interest, or, if they do arise, provide evidence to reporters and concerned staff that the nonprofit’s dealings are fully above-board.

A Powerful President
One detail that is clear throughout much of the recent reporting on Liberty University is that Mr. Falwell Jr. is the main decision-maker at the University[2].  Major strategic decisions, such as where and when to make substantial investments of the University’s time and resources in the near and medium term, seem to have begun and ended on his desk. This raises the question – what is the appropriate role of the President of a nonprofit organization vis-à-vis its Board?

It’s not uncommon for a Board to give its President a substantial amount of authority, especially where the President has a track record of success. While the Board bears ultimate legal oversight responsibility for the nonprofit, Board members aren’t expected to be involved in all day-to-day decisions. Boards can pass resolutions specifying what the President’s (or other senior staff’s) authority is to enter into agreements or to otherwise bind the nonprofit. A nonprofit’s Bylaws also sometimes describe, and thereby limit, the role of the nonprofit’s senior-most staff.

It’s important, however, for the Board to keep abreast of big or risky transactions (such as purchases of real property, investments in unrelated businesses, or c-suite staffing) to ensure the parameters set by the Board are observed. Periodic reviews of the President’s performance should be standard, with a report issued to the full Board and communicated to the President. Among other, broader issues relating to the President’s performance, a periodic review allows the Board to re-evaluate whether the guidelines in the Bylaws and any Board resolutions are appropriate or if they should be clearer about what transactions require Board approval and what authority the President has to act alone.

A lesson for nonprofit leaders is that they should build parameters for their officers into their core policies, officers’ job descriptions, and even occasionally the Bylaws. In addition, the Board should provide ongoing oversight of the senior staff, and the Board must review their performance regularly. This is for the Board’s and the staff’s benefit – whenever roles and authorities are clearly defined, an officer has greater clarity as to whether he or she is effectively carrying out his or her responsibilities effectively, and the Board can more easily and objectively assess an officer’s actions against established performance criteria.

Conflict of Interest can be Managed
Another theme in the recent reporting on Liberty University is conflict of interest (whether actual or apparent). Mr. Falwell Jr. disputed allegations that he or the University acted improperly, while reports and sources in those articles argued that Mr. Falwell Jr. used his position to improperly benefit himself, his family, and his friends. Examples included allegedly directing business to his son, co-investing University assets with a business partner, and issuing University-backed loans to friends.

We don’t know enough facts for certain to determine whether the transactions described were actual conflicts of interest and, further, whether those transactions were inappropriate. Some conflict of interest transactions can be in the best interests of a nonprofit. For instance, imagine a situation in which a nonprofit needs to build a new gymnasium to support its community programs. If the only contractor in town capable of building a gymnasium also happens to sit on the nonprofit’s Board, that doesn’t mean the nonprofit can’t move forward. It just means that the nonprofit’s Board needs to manage the conflict of interest carefully to make sure the contractor doesn’t abuse his position on the board to overcharge for the construction of the gymnasium.

The process of managing a conflict of interest usually includes a few key features. First, a written conflict of interest policy should be approved by the Board. This policy should (i) require that any conflicts, or potential conflicts, be disclosed, (ii) outline how potential conflicts are to be reviewed, and (iii) state in what circumstances alternatives should be sought, and (iv) spell out how the conflict transaction can be approved. The policy should require any conflicted individual to recuse themselves from the discussion and deliberation of the conflict transaction (other than to answer questions asked by the other board members).

Written evidence of the review and approval should be kept on hand. The process creates a record that can be used to rebut accusations of improper benefits. Just as clearly defined roles and responsibilities (discussed above) protect the organization, the board, and the individuals involved, a good conflict of interest policy protects everyone. The individuals who allegedly have a conflict can insulate themselves from later critique; the board can demonstrate it followed a robust and fair process; and the nonprofit can be sure its assets are not improperly used to benefit an insider. Sample conflict of interest policies abound and many states (such as New York) require nonprofits to include certain elements in their policies.

Policies are Helpful
The article on Liberty’s alleged problems also implies that rules that applied to some employees didn’t seem to apply to all. One example was a Liberty University employee, John Gauger, who also ran an online business that was paid by Liberty and on which Mr. Gauger was alleged to have worked while technically being on-the-clock for Liberty. Other instances included allegations that Mr. Falwell Jr.’s wife Becki took part in employment decisions regarding Liberty staff, and that Trey Falwell, the son of Mr. Falwell Jr., was allowed to work with Mr. Gauger, operate a real estate business, and manage properties owned by Liberty, all while serving as a vice president of the University.

There could be legitimate reasons to permit staff to work on outside business during work hours, to outsource staff decisions to experts in HR or bring in real estate experts to manage a vast portfolio of properties. For instance, when a nonprofit seeks to attract talent in a particular industry, the nonprofit may offer flexibility in terms of working time, location, and outside businesses. When it is not able to compete at industry pay scales, the nonprofit may rely on outside professionals if it lacks in-house human resources capabilities. Problems arise, however, when the organization doesn’t have an adequate decision-making process in place, such that decisions appear to be made arbitrarily, or it appears that assets are being used for a private purpose.

Presumably, Liberty University has an employee handbook that addresses issues such as conflict of interest, engaging in outside employment, and grounds for dismissal. Unclear in the Politico article is whether those policies were followed in the course of dealings with Mrs. Falwell, Trey Falwell, or Mr. Gauger. If they were, the Board and the nonprofit should have kept a paper trail to demonstrate that their policies were properly implemented and any exceptions made were justifiable.

Every nonprofit with employees should take the time to re-examine its employment policies to make sure they (1) comply with local, state, and federal law and (2) meet the organization’s needs. If the leadership wants to cultivate an entrepreneurial environment within the organization, it can remove any restrictions on outside activities as long as staff are meeting their responsibilities to the organization. What matters is whether the Board and senior staff have thought about the policies, communicated them to throughout the organization, and implemented the policies fairly. The Board and President should periodically review the policies to ensure they are up to date and being properly applied.

Political Activity
Lastly, the Liberty University story makes a number of references to “political campaign activity” – the oft-underenforced third rail for 501(c)(3) organizations. Liberty University was alleged to have tweeted support of a candidate for federal office, as a “thank you” for making a speech at the University’s convocation. Furthermore, the University’s Chief Information Officer was hired by a presidential candidate to try to increase the candidate’s poll numbers. The University was also alleged to have rearranged its calendar in order to influence local elections.

The IRS definition of 501(c)(3) organization includes a prohibition on political campaign activity. Under the definition, an organization that wants to be exempt from federal income taxation under section 501(c)(3) of the Internal Revenue code cannot “participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.”

Colleges and universities are uniquely situated, being treated as public spaces (or quasi-public spaces) for First Amendment purposes but with civically-engaged students who crave civic and political engagement. There are many politics-adjacent activities that all 501(c)(3)s, including colleges and universities, can engage in, such as voter registration drives, hosting candidate fora, and overseeing student groups that are expressly political (College Republicans, for example). These activities should be carefully undertaken with the advice of counsel to ensure that the activities stay within the permissible bounds of the organization’s 501(c)(3) exemption.

Nonprofit leaders, even those like Mr. Falwell Jr. who are closely associated with the organization they lead, are also allowed to hold and express their own political views. They can campaign with or for their chosen candidates. But nonprofit leaders must be careful that their personal activities stay separate from the organization they lead or they jeopardize the organization’s exemption. As always, a trusted legal advisor is indispensable to ensure leaders don’t sacrifice their First Amendment rights while the organization preserves its tax exemption.

In Conclusion
Sometimes my clients hate it when I tell them to adopt a conflict of interest policy. They don’t like reviewing their employee handbook. Executive Directors want the freedom to make quick decisions and boards don’t want the hassle of looking over everyone’s shoulder. But as I tell my clients, and as the article on Liberty University bears out, a lack of process can come back to hurt you. Even if the organization reaches the same decision, a good process provides backup for the Board and the organization’s leaders to defend their decisions against critics within and without. And perhaps most importantly, a good process protects the organization so it can focus on achieving its charitable mission.

[1] This post references the version of the Politico Magazine article, ‘Someone’s Gotta Tell the Freakin’ Truth: Jerry Falwell’s Aides Break Their Silence: More than two dozen current and former Liberty University officials describe a culture of fear and self-dealing at the largest Christian college in the world, By BRANDON AMBROSINO, available at http://politico.com/magazine/story/2019/09/09/jerry-falwell-liberty-university-loans-227914 on September 09, 2019

[2] Such as https://www.washingtonpost.com/outlook/2019/07/24/inside-liberty-universitys-culture-fear-how-jerry-falwell-jr-silences-students-professors-who-reject-his-pro-trump-politics/?noredirect=on (accessed 9.11.19, published 7.24.19); https://world.wng.org/2018/08/papered_over (last accessed 9.11.19, published 8.16.18); https://www.reuters.com/article/us-usa-falwell-trainer-exclusive/exclusive-falwell-steered-liberty-university-land-deal-benefiting-his-personal-trainer-idUSKCN1VH283 (last accessed 9.11.19, published 8.27.19).

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