Transcript Session Name - Michael Malamut

Playing by the Rules: Maintaining
Member and Officer Discipline
Discipline of Officers and Directors
2009 Annual Association Law
Symposium in Washington, DC
September 25, 2009
Connecting Great Ideas and Great People
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.
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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 attorneygeneral, 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
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(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)
Contact Information:
Michael E. Malamut
Attorney-at-Law and Professional Parliamentarian
Phone: 781-329-9096
Mobile: 617-838-8657
Fax: 617-326-0286
E-mail: [email protected]
Websites: www.michaelmalamut.com
Connecting Great Ideas and Great People