Noteworthy Developments inNonprofit Corporation Law

Michael W. Peregrine

Gardner, Carton & Douglas

April 25, 2003

WELCOME

Goals of Presentation

• To review the significant series of developments in nonprofit and charitable trust law that have occurred in the last several years.

• To focus on specific developments with implications for the not-for-profit corporate director.

• To provide specific recommendations for addressing these issues with nonprofit charitable clients.

The Outline/Bibliography/Other Resources

Part IRecent Noteworthy Case

Law Developments

Health Midwest:– Kansas Litigation– Missouri Litigation

• CareFirst: the opinion of the Insurance Commission.

HealthPartners– Business Compliance Review– “Appointment of Directors” Litigation

• Note: The Implications of the HealthSouth Controversy.

• Note: Recently Released OIG/AHLA Guidance.

In Re Milton Hershey School Trust– The “Public Interest” as a Trust Beneficiary– Liberalized Preliminary Injunction Criteria– Impact on Governance

The Banner Health System Litigation– Increase in value from contributions and

benefits should be retained by the community

Littauer v. Spitzer– “Good News” for Nonprofit “M&A”?

The AHERF Settlement– Continued Focus on Application of

Restricted Gifts– “Zone of Insolvency” Issues

The Virginia Experience

Allina Health System– Affiliate Divestiture– Waste of Charitable Assets– Impact on Management, Governance

Emerging Issues:– Parent/Subsidiary Conflicts– Charitable Solicitation Concerns– Imprudent Investment

Notable Private Actions– Chairman of the Board v. Trinity– Smithers v. St. Luke’s-Roosevelt Hospital– Eychaner v. Roosevelt University– In re: Terra Foundation

– The Cleveland Clinic– Art Institute of Chicago– United Way of National Capital Area– Barnes Foundation Museum

• Note: Emerging Issue Conflicts of Interest in Integrated Parent/Subsidiary Health Systems.

Part IIThe Impact of the “CorporateResponsibility Environment”

And Just What Is ThatEnvironment?

NASCOThe National Association of State Charity Officials

Key Developments– Powers Report– NYSE Report– Sarbanes– NASCO Focus– IRS Announcement

“The Powers Report”

Report by the Special Investigative Committee of the Board of Directors of Enron Corp.

February 1, 2002

• Board and Management oversight failed for many reasons.

• The concept of the related party transactions was flawed.

• Board-adopted controls were inadequate and not adequately implemented.

• Senior management did not exercise sufficient oversight.

• Senior management did not respond adequately when issues arose that required a vigorous response.

• The Audit and Compliance Committee of the Board carried out its assigned review in a cursory manner.

• The Board was denied important information that might have led it to take action.

• The Board did not fully appreciate the significance of some of the specific information that came before it.

NYSE Corporate Accountability Report

(June 6, 2002)– Increasing Role and Authority of

Independent Directors– New Audit Committee Requirements

– Encouraging Focus on Good Corporate Governance

– New Control and Enforcement Mechanisms– Improving Board Education and Training

Sarbanes-Oxley Act (July 30)– Designed to protect the interests of investors

and provide market stability.– Does not apply to nonprofits

– Oversight for public accounting industry– Rules for auditor/client relationship– Penalties for corporate financial crimes

– Procedures for Executive and Board Conduct

– Ethical obligations for corporate counsel– Financial disclosure protections for investors

NASCO– Focus at state level of oversight of charitable

corporations and protection of charitable assets, and the duties and obligations of officers and directors.

IRS– Modification of Form 990 Return to Include

Questions Related to the Integrity of the Organization’s Financial Statements.

Part IIIThe Relevance to Nonprofits

– Need to preserve charitable assets– Preserve reliability of financial statements

• Donors’ reliance

• “Early warning systems”

– Bondholders

– State charity officials perceive an enhanced oversight obligation over nonprofit charities following AHERF

– The “Few Bad Apples” Analogy

Part IVLessons Learned;

Governance Guidelines

Conclusion