2005 IOWA CODE

Senate File 2274

2274 Bill History

Willard L. Boyd III is a member of the Nonprofit Corporations Committee of the Business Law Section of the Iowa State Bar Association. He is an attorney with the Des Moines law firm of Nyemaster, Goode, West, Hansell & O'Brien, P.C.

Willard L. Boyd III 1

©Iowa State Bar Association and Willard L. Boyd III (reprinted with the permission of the Iowa State Bar Association and author).

Recognition of Different Types of Nonprofit Corporations

RINCA recognizes that nonprofit corporations hold themselves out as: (1) operating for public or charitable purposes (public benefit corporations); (2) benefiting their members or a group of people they serve or represent (mutual benefit corporations); and (3) operating primarily or exclusively for religious purposes (religious corporations). 5 Examples of public benefit corporations are museums, libraries and hospitals. Examples of mutual benefit corporations are trade associations, country clubs and cooperatives.

The distinction in the type of nonprofit corporation is important because it affects certain requirements relating to nonprofit corporations, such as members' rights, duties imposed on directors, and merger/sale of assets/dissolution procedures.

RINCA departs from RMNCA by not requiring nonprofit corporations to affirmatively elect whether they are public benefit, mutual benefit or religious corporations. In addition, some of the distinctions RINCA makes with regard to the different type of nonprofits are not incorporated in RINCA.

Members and Delegates

INCA allows for members with or without voting rights. RINCA focuses on the rights and obligations of members with voting rights (relating to election of directors). 6 As a result, a person would need to meet the requirements of "member" under RINCA in order to have member rights under the new statute. Still, nonprofit corporations may have a group of persons that it calls "members" that do not meet the statutory definition of "member." Such persons can be called "members" but will have only those rights set forth in the articles of incorporation and bylaws of the corporation. 7

INCA does not address the transferability of membership interests in a nonprofit corporation. Under RINCA, a public benefit and religious corporation are prohibited from purchasing membership interests from members whose memberships have been terminated. RINCA also prohibits the transfer of such memberships in these types of nonprofit corporations to others. Still, recognizing that mutual benefit corporations are intended to benefit their membership, RINCA allows a mutual benefit corporation to provide the ability of members to transfer memberships as well as the nonprofit corporation's purchase of memberships. 8

INCA is silent with regard to the ability of a member to challenge corporate action. The case law in this area has developed to recognize that voting members may have standing to bring derivative-type actions. RINCA gives members and directors the right to bring a suit on behalf of a corporation in a manner similar to a shareholder derivative action under the Iowa Business Corporation Act. 9

INCA is silent with regard to termination of memberships. While the right of expulsion of a member as a penalty for an infraction or disobedience of the laws of the organization is well settled, case law in this area has developed to a point where there is a presumption against the power to expel because it is in the nature of a forfeiture. 10 RINCA provides that no member of a public benefit or mutual benefit corporation may be expelled or suspended and no membership may be terminated or suspended except pursuant to a procedure that is fair and reasonable and carried out in good faith. 11 The statute provides a safe harbor for "fair and reasonable" procedures.

INCA has no provisions expressly addressing the use of delegates in the governance of the nonprofit corporation. Some nonprofit corporations in Iowa operate with the use of delegates who meet and decide various organizational and policy matters. Under RINCA, delegates may exercise some or all of the powers of the board of directors or its members. 12

Directors and Officers

RINCA addresses many areas relating to directors and officers that are not addressed in INCA. For instance, INCA does not address the duties imposed on directors and officers of nonprofit corporations. RINCA, however, adopts, with certain modifications, the duty of care standard set forth in the Iowa Business Corporation Act. 13 In addition, RINCA includes a provision addressing conflict of interest transactions that is based on the provision contained in the Iowa Business Corporation Act. 14 RINCA also incorporates the business judgment rule protection for directors and officers that was adopted in the recent Iowa Business Corporation Act amendments. 15

Personal Liability of Directors, Officers, Members and Other Volunteers

Under INCA, directors, officers, members and other volunteers have protection from liability unless their conduct constitutes a breach of duty of loyalty to the corporation, an act or omission not in good faith or which involves intentional misconduct or knowing violation of law, or a transaction from which the person derives an improper personal benefit. 16 Statutes similar to this one have been criticized because of the uncertainty that has arisen in determining whether a particular exception is applicable.

RINCA incorporates the recent changes that were made to the Iowa Business Corporation Act with regard to the director liability shield to make more certain the circumstances under which a director, officer, member or other volunteer would be immune from liability. In particular, RINCA provides that a director, officer, member or other volunteer is not personally liable in that capacity for any action taken or failure to take any action except liability for any of the following: (1) the amount of any financial benefit to which the person is not entitled; (2) an intentional infliction of harm on the corporation or members; (3) a violation of the unlawful distribution provision; and (4) an intentional violation of criminal law. 17 With more certainty, volunteers should be more willing to serve on nonprofit corporation boards or volunteer for nonprofit activities.

Protection of Records

Under INCA, a corporation is to allow its members the ability to inspect for any proper purpose, among other things, the record of the names and addresses of the members entitled to vote. In addition, a nonprofit corporation that receives federal and state funding must provide to any person, upon request, a list of the names of the members of the corporation's or agency's board of directors, and the salary of each officer and director's fee of each director of the corporation or nonprofit agency.

Similar to INCA, RINCA gives members the right to inspect and copy membership lists; however, membership lists can provide a valuable list of names and addresses of contributors, members, and supporters. Recognizing that the use of such lists for improper purposes could be extremely harmful to a nonprofit corporation, RINCA places limits on the access and use of such lists. RINCA requires the member to make the demand for inspection in good faith and for a proper purpose. RINCA also requires the member to describe with reasonable particularity the purpose and the records that are desired for the inspection. In addition, RINCA requires that the requested records have a connection with the purpose reported by the member in the request. A corporation may, within ten days of receiving a demand for inspection of a membership list, deliver a written offer of a reasonable alternative of achieving the purpose identified in the demand without providing access to or a copy of the membership list. A reasonable alternative may include a member-prepared communication mailed by the corporation at the expense of the member. Access to records for purposes unrelated to a member's interest as a member of the corporation is allowed only upon the approval of the corporation's board of directors. For religious corporations, the right to inspect may be abolished. 18

Other Changes under RINCA

RINCA also provides clarification and more flexibility with regard to the various matters including the following:

•  Steps for incorporation

•  Written action of members

•  Electronic filings with the Secretary of State's office

•  Electronic notices to members, directors and electronic proxies

•  Ballot voting for members

•  Removal of directors

•  Establishing the number of directors

•  Members and other parties' involvement in election of directors

•  Committees of the board

•  Indemnification

•  Mergers, sale of assets and dissolution

•  Right of directors to inspect corporate records

Relationship to Iowa Business Corporation Act

RINCA tracks the Iowa Business Corporation Act in form and substance, particularly in regard to the filings with the Secretary of State, formation of corporations, corporation powers, qualification of foreign corporations and requirements for corporate office and agent. In addition, as noted above, many of the recent amendments to the Iowa Business Corporation Act have been incorporated in RINCA.

Effective Date

The effective date of RINCA was January 1, 2005 for all nonprofit corporations organized on or after such date. The effective date of RINCA for corporations existing prior to January 1, 2005 will be July 1, 2005 unless such corporation elects to have the new law apply earlier.

Existing Nonprofit Corporations

RINCA was drafted with the intent to not require existing nonprofit corporations organized under INCA to amend their articles or bylaws. For instance, RINCA imposes certain requirements regarding items that need to be addressed in the articles of incorporation that are not required under INCA (i.e., identifying whether the corporation will have members and addressing distribution of the corporation's assets upon dissolution); however, those requirements that are "new" will not be imposed on existing nonprofit corporations (i.e., nonprofit corporations incorporated prior to January 1, 2005). 19 Nevertheless, an "existing" nonprofit corporation may desire to amend its articles of incorporation and/or bylaws to take advantage of new provisions of RINCA, such as those relating record date, use of delegates, indemnification of directors and officers, director attendance requirements, director resignation and removal, use of electronic notices, member ballot voting, member and board consents, and electronic transmission of member and board consents.

1 Willard L. Boyd III is a member of the Nonprofit Corporations Committee of the Business Law Section of the Iowa State Bar Association. He is an attorney with the Des Moines law firm of Nyemaster, Goode, West, Hansell & O'Brien, P.C.

2 Iowa Code Chapter 504 (2005).

3 Iowa Code Chapter 504A.

4 See Hone, Revised Model Nonprofit Corporation Act (Prentice Hall Law and Business 1988), at xx.

5 Iowa Code section 504.1705.

6 Iowa Code section 504.141(22).

7 Iowa Code section 504.611.

8 Iowa Code sections 504.612 and 504.623.

9 Iowa Code sections 504.631-.639.

10 See, e.g., Phelan , Representing Nonprofit Corporations (Callaghan & Co. 1987), at Section 2.11.

11 Iowa Code section 504.622.

12 Iowa Code section 504.641.

13 Iowa Code section 504.831 and 504.843.

14 Iowa Code section 504.833.

15 Iowa Code section 504.832.

16 Iowa Code section 504A.101.

17 Iowa Code section 504.901.

18 Iowa Code sections 504.1601-.1607.

19 Iowa Code section 504.202.