Part 1 – Legal Duties and Responsibilities of Directors ...



“THE TIMES THEY ARE A CHANGIN’” Robert Allen Zimmerman (1964)The Legal Duties of Nonprofit Directorsin our Evolving Legal LandscapeAssociation for Biblical Higher EducationBoard Chair Certification TrackFebruary 21, 2019Presented by:John R. WylieSherman & Howard L.L.C.90 South Cascade Avenue, Suite 1500Colorado Springs, CO 80903Tel: (719) 448-4037E-mail: jwylie@Part 1 – Legal Duties and Responsibilities of Directors/Trustees of Bible Colleges and SeminariesINTRODUCTIONNonprofit corporations are “limited liability” entities; that is, the directors, officers, employees, and members of a nonprofit corporation are not, as such, personally liable for the acts, debts, liabilities or obligations of the nonprofit corporation.Nonetheless, directors and officers have duties and responsibilities to the corporation, its members, the IRS and to the general public. If they fail to properly perform these duties and responsibilities, they may, at least theoretically, be personally liable for damages.You must distinguish liability that may arise by reason of one’s own professional errors or omissions or one’s own torts (such as personal negligence, assault, slander or fraud). Such liability does not arise only by reason of one’s service as an officer or director and is not covered by directors’ and officers’ indemnifications or liability insurance.Potential sources for trouble in the area of directors’ and officers’ liability include the following:negligencemismanagementmisrepresentationimprudent delegationinadequate supervisioninsufficient inquiryimprudent investmentsimproper allocations of assetswrongful terminationsviolation of employee plan rulesviolation of environmental standardsviolation of employee health and safety standardssexual harassmentcivil rights violations, including racial, age and sex discriminationfailure to satisfy tax code obligations, including the so-called “intermediate sanctions” rulesDUTIES OF DIRECTORS AND OFFICERSDuty of Care.The duty of care: Each director shall discharge the director’s duties as a director . . . with the care an ordinarily prudent person in a like position would exercise under similar circumstances. Elements usually taken into consideration to evaluate whether the duty of care has been fulfilled include whether or not the directors have attended meetings, followed proper procedures, made due diligence inquiries, properly educated themselves about issues and risks, followed a prudent decision-making process, and were reasonable in relying upon the advice of others, such as accountants, attorneys and consultants. Directors who reasonably exercise honest, unbiased judgment in the management of a corporation’s affairs have traditionally been allowed wide discretion in the decisions they make before liability is imposed. This is commonly referred to as the “business judgment rule.” The business judgment rule can be summed up in the following statement: In the absence of fraud, self-dealing, or conflict of interest, there is a presumption that in making a decision, trustees act on an informed basis, in good faith, and on honest belief that the action taken was in the best interest of the corporation. Duty of Loyalty. The duty of loyalty: Each director shall discharge the director’s duties as a director . . . in good faith . . . in a manner the director reasonably believes to be in the best interests of the corporation.Generally, the duty of loyalty prohibits the director or officer from acting to advance his or her own interests, or the interests of his or her family, close friends, business associates, or the best interests of another organization with whom the individual is associated.If there is a transaction between a nonprofit organization and a director or officer, it should be preceded by complete disclosure to the Board of Directors. Ideally, the decision made by the Board to approve the transaction should be made with the interested director abstaining.Best governance practices include the board adopting and following a clear and thorough conflict of interest policy. The duty of loyalty also precludes a director or officer from appropriating for himself an opportunity to engage in an activity in which the organization would otherwise be interested. A director or officer would generally be deemed to have appropriated a “corporate opportunity” if he or she becomes aware of an opportunity for the organization to engage in an activity related to its present or prospective activities, but takes advantage of the opportunity personally or for the benefit of one or more third parties without obtaining the approval of the Board of Directors. STEPS THAT CAN BE TAKEN TO PROTECT AGAINST DIRECTOR AND OFFICER LIABILITYReview Articles of Incorporation. Some states allow for special language to be added to the governing documents that eliminates or limits personal liability of directors to the corporation and to its members as permitted thereunder. Review Bylaws. The corporation should amend its Bylaws to provide for indemnification of all of its directors, officers, employees and agents, to the fullest extent permitted, against any liability arising by reason of their serving in such capacities. It is important to note, however, that a corporate indemnification is only as good as the corporation’s financial ability to honor it.Educate Board Members and Officers. A corporation should be certain that the directors and officers are well educated as to their responsibilities and as to potential areas of liability. To minimize their risk, Board members should: attend board meetings; review information from subordinates; request and review additional information that may be necessary before a decision can be made; keep informed about the plans and activities of an organization; understand the size, complexity and other circumstances of an organization and of a transaction; seek outside advice or counsel when special expertise is needed; insure that appropriate legal and accounting/audit support is in place; implement a conflict of interest policy; and insure that particularly difficult issues are adequately addressed by officers, top-level management or special board committees.Directors’ and Officers’ Insurance.The corporation should consider purchasing directors’ and officers’ liability insurance.Whether or not to purchase this insurance coverage is really a cost-benefit business decision, and costs for such insurance have been increasing dramatically over the last 20 years.The proposed insurance should be reviewed carefully since the proposed coverage and exclusions vary greatly. Among the areas to be reviewed are the following:Are committee members, employees and volunteers covered?Is there any coverage for the entity itself, apart from its indemnification obligations?Are directors, officers, etc., of subsidiaries and affiliates covered?Are legal and investigation expenses covered if no claim is ultimately filed?Are legal costs included in policy limits or in addition to limits?Are the following covered?race, age, sex and religious discriminationantitrust claimsenvironmental damagelibel and slandercopyright infringementERISAPersonal Umbrella Liability Insurance. A nonprofit corporation may want to suggest to its directors and officers that they individually purchase personal umbrella liability insurance if they do not already have such coverage. This coverage typically covers liability (and defense costs) arising as a result of the insured’s volunteer activities as an officer or director of religious or charitable organizations, provided that the activity is not connected with the insured’s business, profession or occupation. Here again it is necessary to review the policy carefully to determine its coverage and exclusions, as the policies vary significantly. Personal umbrella liability insurance is generally only available if one has basic homeowners and automobile liability coverage, but in that event, it is relatively inexpensive. Costs may only be $90 to $125 for $1 million of coverage. These policies cover other potential exposures as well.Part 2 – The Importance of Understanding Legal Risks – A Look at the Collision of Religious Liberties and Sexual Liberties in the LawIntroductionThe Advance of Religious LibertyMostly good cases and legislation1987 – Amos1993 – Church of Lukumi Babalu Aye 1993 – RFRA2000 – RLUIPA1996 – DOMA2012 – Hosanna-Tabor2014 – Hobby Lobby2014 – YMCA2017 – Trinity Lutheran2018 – Masterpiece CakeshopWhat is a religious organization or religious activity or religious worship?Where we are in 2019The Advance of Sexual LibertyThe changing culture (and resulting culture wars)1960s1970s1980s1990s2000sThe cases and the legislation1986 – Bowers1992 – Colorado Amendment 21996 – Evans v. Romer2003 - Lawrence 2008 – Prop 82013 – Windsor; Hollingsworth2015 – Obergefell2016 – U.S. Civil Rights Commission ReportWhere we are in 2019Difficult Issues on HorizonEmploymentPublic accommodationsCommercial activityPotential impact on insurance coveragesProactive Steps to ConsiderBroad brush stepsAdopt a Christian community policyConsider “church” and/or “minister” statusPublic AccommodationsConclusions ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download