“It’s been a long several few years, Covid is real and tangible, but we find ourselves at a unique place where our journeys can be merged together because we have a shared experience, and through that shared experience we become better as human beings . . . As Einstein said: you cannot solve a problem with the same energy that created it. So how do we resonate at a different frequency to solve social phenomena?”– Fred Brown | President & CEO | The Forbes Funds
Morgen Cheshire is the founder of Cheshire Law Group, a sophisticated law office focused on providing legal services for nonprofits of any size and in any stage of development. Addressing everything from nonprofit legal crises to everyday client needs, Morgen is a systemic thinker who takes a holistic and pragmatic approach to legal counsel to help nonprofits to make informed decisions within their life cycles. Morgen works efficiently and resourcefully to meet the needs of nonprofits faced with any variety of conflicts, designing lasting solutions that go far beyond short-term fixes. Morgen brings 20 years of nonprofit legal experience to her position as managing editor of www.PAnonprofitlaw.com, a new resource offering downloadable legal tools and templates for use by Pennsylvania-based nonprofit organizations. Morgen’s expertise is of increasing importance for nonprofits throughout Pennsylvania as recent amendments to PA nonprofit corporation law move into effect.
Highlights of the 2022 Amendments to Pennsylvania’s Nonprofit Law
On November 3rd, 2022, Pennsylvania made major changes to its business corporation law statute governing many types of entities, including nonprofits. The impacted provisions are in Title 15 of Pennsylvania’s Consolidated Statutes. Most of the Amendments went into effect on January 3rd, 2023, others will be phased in.
Why The Changes?
Title 15 was changed for a variety of reasons including everything from the need to clarify edits, keep up with industry standards, or fix typographical errors to supporting changes in in the Pennsylvania Department of State’s goals.
- Reasons for changes: Deferred Maintenance; Clarifying Edits; Fixing Mistakes; Keeping up with industry standards; Removing gender-specific pronouns; Affording flexibility in emergency situations (natural disasters); Providing Additional safe harbors for directors and officers; Changes to support the Pennsylvania Department of State’s goals: clearing out the Corporations Bureau’s database of defunct entities, communicating using email; Changes in Delaware’s General Corporation Law and the Bar Association’s Model Business Corporation Act; Case Law Influences: clarification of Directors Duties.
Overview of the changes
The changes to Title 15 generally fall into four categories: (1) Administrative changes, (2) Governance matters, (3) Safe harbor and other rules protecting directors and officers, and (4) miscellaneous.
- Administrative Changes: including a revamp of Annual Reporting standards, requirements for administrative dissolution and reinstatement, registered office address changes, correction of filings, tax clearance certificates, and how to handle inappropriate filings
- Governance Matters: such as forum selection, the resignation of directors, the election of directors (if no directors), the later effective date for written unanimous consents, a quorum for class voting by members, data for determining members, the ratification process, emergency situations, the definition of disinterested directors, the duty of loyalty in related party transactions
- Safe Harbor & Other Rules Protecting Directors & Officers: these regulate renunciation of opportunities, mandatory indemnification, clarifying the definition of “recklessness” standard, personal liability of directors and officers, the standard of care, and the business judgment rule
- Miscellaneous: which further defined derivative suits, special litigation committees, divisions, foreign entities, binding nature of bylaws, corporate records inspection
BIGGEST CHANGE TO NOTE
The new administrative dissolution provision says that failure to file the new annual report within six months of the due date can now result in the administrative dissolution of the corporation.
- The annual report filing requirement kicks in starting in 2024. July 1st is the due date for nonprofits
- “[B]asically, this is kind of the tow truck kind of provision of Department of State has a lot of entities on the books that are just sitting there. They’re dormant. They’re taking up the names because you can’t name another corporation after an existing corporation unless you get consent from the existing corporation. But a lot of these corporations can’t be found. Their addresses are older or they’re not checking the mail where they have a street address for their organization. So, there’s no real way until these provisions came along for the Department of State to kind of clear the decks and make room for new nonprofits” – Morgen Cheshire, Esq.
- There is a 3-year phase-in for this rule which applies first to annual reports due July 1st 2027
- Do not confuse this with the IRS rule of non-filing. Just because there’s a 3-year roll-out period, does not mean it’s a 3-consecutive year of non-filing rule
- Annual Report Grace Period: There is a 6-month grace period after the July 1st deadline, then the organization has another 60 days to cure after the department of state provides notice of failure to file
- The soonest we are likely to see administrative dissolutions will be March 2028
- There is no filing fee for annual reports filed by nonprofits
- What’s Nice: New annual report can be a used as a way of changing the nonprofit’s registered address at no charge – and it has the effect of amending the address in the articles of incorporation
- What is included in the annual report?: (1) Organization’s name, (2) Jurisdiction of formation, (3) Address of registered office, (4) Name of at least one board member, (5) names and titles of the organization’s principle officers, (6) address of the organization’s principle office, (7) PA Dept. of State entity number
- Advance Notice: PA Department of State (DOS) has an obligation to notify organizations of the annual report requirements at least 2 months before the annual report is due. Failure of the DOS to provide this notice or an organization’s failure to receive this notice does not relieve an organization of the obligation to file its annual report.
Administrative Dissolution: Explanations & Implications
- The purpose of the administrative dissolution provision is to create a more accurate picture of entitles actually doing business in the Commonwealth and to allow the Department of State to free up organization names.
- The effect of administrative dissolution: If a nonprofit corporation is administratively dissolved, the nonprofit may not carry on any activities except to wind up and liquidates its assets or to apply for reinstatement. Because tax clearances are not required for a nonprofit corporation to be administratively dissolved, some organizations may be counseled to take the administrative dissolution route as a simpler path to dissolution, though under PA law, directors (assuming they have not resigned) have a continuing obligation to the organization after an administrative dissolution. An entity that is administratively dissolved continues to be managed by or under the direction of its board members, who remain subject to the same standards of conduct s before administrative dissolution
- Reinstatement: The Process of reinstatement is simple but there are some important things to note about the process: (1) It allows for retroactive reinstatement back to the date of dissolution; (2) There is no deadline for reinstatement; and (3) If another entity has claimed the administratively dissolved nonprofit’s name during the period of dissolution, the nonprofit corporation seeking reinstatement will have to choose a new name
Putting it into Practice: What does this mean for nonprofits?
It is now clear that it is not possible to file a Statement of Correction as a way of revoking an organization’s initial incorporation document or its registration document as an alternative to the dissolution process.
- If you make a mistake in filing, you can fix it, the original mistake (and the correct filing) will always be on public record.
- The DOS may reject a document for filing if they believe the document is: (1) being filed fraudulently; or (2) may be used to accomplish a fraudulent, criminal, or unlawful purpose
Amended Provisions about Emergency Meetings: Entities outside of PA do not have to register to do business inside of PA if they are operating in PA simply for the purpose of responding to disasters or emergencies in PA. Corporate actions taken in good faith during an emergency in furtherance of a nonprofit’s ordinary business and in accordance with emergency bylaws are valid and binding on the nonprofit. The amendments redefined ‘emergency’ In a much broader way. Authorized representatives are still obligated to make payments of taxes, even under emergency circumstances. Self-dealing and recklessness and crimes are not excused in the midst of emergencies. Title 15 was amended to make it clear that representatives acting on behalf of the nonprofit in accordance with any emergency bylaws are not liable for monetary damages unless their actions constitute self-dealing, willful misconduct, recklessness, or a criminal violation (only willful misconduct was previously included).
New Safe Harbor Renunciation Opportunities: There’s now a safe harbor for nonprofit directors, officers, and members who may have competing interests with the nonprofit organizations they serve. A new provision protects those who are taking advantage of business opportunities and who do not offer the opportunities to the nonprofit corporation. A new statutory provision authorizes a nonprofit corporation to limit or eliminate, in advance, the duty of its directors, officers, or members to offer opportunities to the nonprofit.
New Indemnification Provisions: New amendments make clear PA’s mandatory indemnification rule is applicable only to present and former directors and officers, and no longer applies so broadly to include any representative as was previously the case. The limitation only applies prospectively, to acts occurring after the effective date of the amendment: January 3, 2023
Amended Standard of Care & Business Judgement Rule for Directors and Officers: Amendments clarified the standard of care & business judgment provisions for fiduciaries:
- A conscious disregard for risk and consideration of circumstances actually “known to” a person are required to establish that a person acted recklessly
- The definition of the term “recklessness” was added – It is patterned after the definition in the PA crimes code
- Directors fulfill their fiduciary duties by adhering to the business judgment rule when it is applicable.
- Clarified Business Judgment Rule: Business Judgment rule—a Director who makes a business judgment in good faith fulfills the duties under this section if:
- The subject of the business judgment does not involve self-dealing by the director or an associate or affiliate of the director
- The director is informed with respect to the business judgment to the extent that the director reasonably believes to be appropriate under the circumstances; or
- The director rationally believes that the business judgment is in the best interests of the corporation.
- Section 102 Definition: “Recklessness” includes “conduct that involves a conscious disregard of a substantial unjustifiable risk. The risk must be of such a nature and degree that, considering the nature and intent of the actor’s conduct and the circumstances known to the actor, its conscious disregard involves a gross deviation from the standard of conduct that a reasonable person would observe in the actor’s situation.”
- If you want to include more personal liability protection: New sections add that an article of incorporation or bylaws provision affording personal liability protection for a director or officer that is allowable under title 15 is generally only effective prospectively from the date of the enactment of the provisions.
- New Provision for internal claim forums selection: A new section authorizes nonprofit corporations to add provision to their bylaws or articles of incorporation specifying an exclusive forum for the adjudication of “internal corporate claims” (e.g. claims based on an alleged breach of duty, internal governance disputes, and derivative suits).
- Clarified Business Judgment Rule: Business Judgment rule—a Director who makes a business judgment in good faith fulfills the duties under this section if:
Remember, Articles always trump bylaws: Amended section of article 15 explains that any provision that may be included in the bylaws may be included in the articles instead. Amendments added clarification that bylaws are not an end-run around the articles and articles always trump bylaws when two documents conflict
Additional Considerations for PA Nonprofits
Resignation of directors: A new provision that provides detail about the resignation of directors: A director’s resignation can be conditioned and effective upon the happening of a certain event or events
Election of new officers if no directors in office: Section 5725(c.1) No directors in office – at any time when the offices of all directors of a membership corporation are left vacant, any officer, member of any other body, or member may call a special meeting of members for the purpose of electing directors.
Escrowing consents: Amendments permit signatories to sign unanimous consents ahead of time so that the consents only become effective at a later time or upon the happening of a certain event or event. These sections address the nuances of what happens when an individual is not a director or member at the time the consent is signed (but will be when it goes into effect), and when a director or member is no longer a director or member when the consent is supposed to be effective.
Duty of Loyalty in transactions with related entities: Safe Harbor Duty of Loyalty
- Amendments make clear that a contract or transaction between a nonprofit corporation and a wholly owned or controlled affiliate will not be void simply because the entities have overlapping directors or officers and provide a safe harbor for when one or more directors or officers serve on the boards of a nonprofit corporation and its non-wholly owned or controlled affiliate.
- These new provisions do not address a situation in which a director or officer has a “financial or other interest” – the new provisions simply address when directors or officers serve on more than one board.
Binding Nature of Bylaws: Title 15 now explicitly the provisions of the bylaws are binding with respect to the nonprofit corporation’s internal affairs, regardless of whether a member, director, officer, or member of another body has actual knowledge of the provisions of the bylaws.
An annotated version of Title 15 by the Cheshire Law Group can be found here: www.PAnonprofitlaw.com
“We find ourselves at the precipice of our very existence. We have a myriad of challenges in our universe, both in a mental, physical, and emotional financial sense. Given that the role of the not-for-profit is ever more prevalent and important as many new nonprofits are emerging, as well as those who are shuddering so The Forbes Funds finds itself in this unique space where we’re looking to be a bridge to help emerging organizations find their pathways forward, and those who may need to pivot or shutter do so in a tangible way, without losing their base. How might we help them find different places at their base and functioning? We can help them find different ways that they can operationalize their work.”– Fred Brown | President & CEO | The Forbes Funds
Understanding the legal and policy implications of nonprofit work is necessary for meeting the U.N Sustainable development goals of reducing inequality and ensuring the cultivation of peace, justice, and strong institutions. Morgen’s work reminds nonprofit professionals that a 501c3 charitable organization is a legal entity, at the base, and is both bound and empowered by government policy, providing a means for strategically leveraging the systems that by in favor of nonprofit mission and nonprofit stakeholder interests.
In addition to fulfilling these sustainable development goals, understanding Morgen’s approach to nonprofit law helps nonprofit leaders to rise to the challenge of ensuring that their organizations meet the demand for social determinants of health-related to economic stability and the goods of our social and community context. By understanding these policy-based social determinants of health together, Morgen’s work turns the challenges and conflicts common to a charitable organization into opportunities for innovation, iteration, and intervention.