WHAT EVERY NOT-FOR-PROFIT DIRECTOR SHOULD KNOW

By REUBEN S. SEGURITAN450 Seventh Avenue, Suite 1400, New York, NY 10123

Phone 212 695 5281 Fax 212 563 2664www.seguritan.com

December 12, 2006, New York, NY

I. Characteristics of Not-for-Profits (NFPs)

A separate and distinct legal entity established to serve a charitable purpose.

Includes charitable, educational, religious, scientific, cultural

Governed by the state laws on corporations (Not for Profit Corporation Law or “N-PCL” in New York); the applicable provisions of the Internal Revenue Code; and the charter documents (the Certificate of Incorporation and By-laws)

May not engage in “substantial” lobbying and may not participate in political activities (election campaigns) if organized as a 501 (c) (3) organization

II. Organization and Governance

Board of Directors - principal governing body

Executive Committee – optional, except for large boards; no statutory duties

Officers - discharge duties provided in the By-laws or delegated by the Board through board resolutions

Members

III. Accountability of Directors

CHARITABLE CLASS - referred in the incorporation documents, such as the needy; homeless; veterans; inner-city youth, etc.

MEMBERS - generally are interested in the NFP’s objectives and activities; voting members have the right to elect and/or remove directors; approve amendments to charter documents (certificate of incorporation or by- laws); or decide to dissolve the NFP.

DONORS – may impose restrictions and other terms on their gifts or contributions; directors must know these donation terms of the donation and determine whether the NFP can comply with them.

PUBLIC – Directors have no legal obligation to the public, but they still have to consider the public’s perception of the corporation as revealed through its fundraising materials, IRS Forms 990 / 990PF; website or news items about its activities.

GOVERNMENT Internal Revenue Service - the NFP must comply with reportorial

requirements to the IRS which also oversees and examines the corporation’s audit processes. The organization must be mindful of the limitations on its activities in order to retain tax exemptions or other benefits.

State Attorney General - represents the charitable class and may sue the organization on behalf of such class.

IV. Legal Duties of Directors

Duty of Care - duties must be discharged in good faith and with that degree of diligence, care and skills which ordinarily prudent men would exercise under the same circumstances.

Duty of Loyalty – must pursue the objectives and interests of the organization with undivided allegiance.

Duty of Obedience - must be faithful to the mission and objectives of the organization

Duty of Care

Know the corporate documents (charter and by-laws)

Track finances directly or through committees

Review corporate records

Attend Board, committee and membership meetings

Review written materials distributed at meetings

Delegate duties to qualified professionals

Duty of Loyalty

Duty to the corporation comes before individual

Private interest loans from NFP to director or officer is forbidden

“Interested party transactions” allowed only if full disclosure is made and authorized without interested director’s vote

No private inurement (self-dealing prohibited)

Duty of Obedience

Know the purposes of the organization as stated in the Certificate of Incorporation

Exercise independent judgment

Organization’s activities must be consistent with the stated purposes

Comply with all appropriate laws, including registering with the Attorney General; comply with registration and reporting laws and other laws in which it conducts its activities and or solicit contributions; file financial reports

VI. Enforcement of Directors’ Duties

Legal action may be brought against the erring director by any of the following:

State Attorney General; Another director; or Members representing at least 5% of the membership.

Erring director may be removed and/or ordered to return the benefits received in violation of his/her duties.

VI. Tort Liability of Directors

Liability to third parties could occur with regard to accidents or employment claims.

In New York, a volunteer director is NOT liable for third party claims unless s/he acted with either:

gross negligence

intent to cause harm

VII. Indemnification and Liability Insurance

Indemnification

As a general rule, directors have the right to claim and corporations have the authority to pay reimbursement for costs of litigation against directors.

Indemnification may be beyond what the law requires under certain circumstances.

Indemnification required

If director is successful on the merits, s/he must be indemnified the judgments, fines, settlement payments and other reasonable expenses of litigation.

Indemnification allowed but not required

If director acted in good faith and had a reasonable belief s/he acted in the best interest of the corporation , even if the case had been settled or the case was not successful on the merits.

As to criminal proceedings, indemnification is allowed if the director had no reasonable cause to believe his conduct was unlawful.

Where it is provided for in the Certificate of Incorporation, or the By-laws, Board Resolution or contract.

Indemnification prohibited

In derivative actions, which is a lawsuit brought by a member on behalf of the NFP against the directors or officers to enforce the NFP’s rights.

Where the director acted in bad faith, with active or deliberate dishonesty or gained personal profit or other advantage in an adverse judgment.

NFP may purchase directors’ and officers’ liability insurance

NFP director or officer must therefore determine the following:

NFP policy on indemnification (check certificate of incorporation and by-laws)

Whether directors and officers have liability insurance.

If there is liability insurance, determine the scope, whether correct titles of the officers are used; whether expenses of investigation and excise taxes are covered; whether defense costs are included.