Idaho Nonprofit Corporation Act Reform
David S. Jensen
Published January 2022
The current Idaho Nonprofit Corporation Act (Idaho Act) is one of the “spokes” of the Idaho Uniform Business Organizations Code (UBOC). Idaho adopted the UBOC in 2015. At that time, the Idaho Act was modified only to the extent necessary to fit it into the “hub and spoke” structure of the UBOC. The core of the Idaho Act, however, remains the same as it was when enacted in 1993, closely following the 2nd edition of the Model Nonprofit Corporation Act (Model Act) published by the American Bar Association’s Business Law Section. After almost 30 years with little substantive change, it is time to update Idaho’s nonprofit corporation statutes to reflect recent developments in nonprofit and corporate law and to improve and modernize Idaho law for nonprofits.
For the past year, a committee of the Business and Corporate Law Section (Committee) has been reviewing the Idaho Act and the 4th edition of the Model Act in order to propose to the Idaho Legislature revisions to the Idaho Act.1
The Model Act
In order to get the full benefit from using a model act, the Committee decided that the language in the 4th edition of the Model Act2 should be adopted in Idaho unless a specific reason was identified for alternate language. This approach is useful in Idaho since we generally do not have a lot of judicial decisions interpreting the Idaho Act. By following a model act, the judicial decisions from the other states that have adopted the Model Act can be researched for potential guidance in Idaho.
The general approach of the 4th edition of the Model Act is to follow the language of the Model Business Corporation Act except where a substantive difference between the two laws is intended. Where the language is the same, it should be interpreted in the same way.
Idaho differences from the Model Act
The hub chapter and the entity transactions chapter of the UBOC, Chapters 21 and 22, Title 30, Idaho Code, govern many aspects of business organizations that are the same for the different entities included within the UBOC. As a result, the revised act (defined below) does not incorporate the full Model Act. The provisions from the Model Act with respect to corporate name, registered office and agent, and foreign corporations are covered in the hub chapter of the UBOC. Many of the definitions and filing provisions in chapter 1 of the Model Act are likewise covered in the UBOC hub.
Similarly, most of the provisions covering mergers, interest exchanges, domestications, and conversions are principally covered in the entity transactions chapter of the UBOC. No changes are proposed to the hub or entity transactions chapters of the UBOC as part of the revised act. References in this article to the “revised act” means the Idaho Act as will be proposed to the Idaho Legislature by the Committee.
The revised act continues several differences from the Model Act that were incorporated into the Idaho Act when the current act was enacted in 1993. For example, the Idaho Act includes many provisions that are applicable to cooperative corporations. While many states have a separate act governing cooperative corporations, Idaho includes such corporations within the scope of nonprofit corporations.
A cooperative corporation is defined in the Idaho Act as “any nonprofit corporation, operating on a cooperative basis, owned, operated, organized and maintained by its members, for the purpose of providing goods or services to its members.” Under the revised act, cooperative corporations will continue to be subject to the same rules as any nonprofit corporation, unless an exception is specified, and all existing substantive exceptions will remain.
The 4th edition of the Model Act includes several special rules for religious nonprofit corporations. Most of these are a continuation of rules for religious nonprofit corporations in the current Idaho Act. In several instances, though, the 4th edition of the Model Act chose to drop the special rule for religious corporations. While the drafters of the 4th edition may not have intended a substantive change as a result of reducing the instances of special rules for religious corporations, the Committee has chosen to retain all previous substantive special rules for religious corporations.
Another example of the revised act continuing a previous difference from the Model Act involves action by the members of a nonprofit corporation without a meeting. Under the Model Act, the default rule is that all the members entitled to vote on a matter must sign a written consent to take action. The articles of incorporation or bylaws may provide for consent by less than all the members or prohibit any action without a meeting. The current Idaho Act requires that a written consent be signed by at least 80% of the members for a nonprofit corporation to act without a meeting. The revised act will continue the 80% threshold as the default rule but will also follow the Model Act and allow the articles or bylaws to set a lesser percentage.
The bulk of the proposed changes to the Idaho Act are not substantive, but merely use different language in order to follow the language of the Model Act. Of the limited number of substantive changes to the Idaho Act, the majority are additions to the act. The following are descriptions of several of the more substantive changes in the revised act.
The revised act adds the concept of a “charitable corporation.” A charitable corporation is defined as “a domestic nonprofit corporation that is operated primarily or exclusively for one or more charitable purposes.” “Charitable purpose” is defined to mean a purpose: “(i) that would make a corporation operated exclusively for that purpose eligible to be exempt from taxation under Section 501(c)(3) or (4) of the Internal Revenue Code; or (ii) considered charitable under law other than this [act] or the Internal Revenue Code.”
The comments to the model act explain that “there are certain areas in which public policy concerns are more sensitive with respect to some nonprofit corporations than others. The act accordingly provides different rules for charitable corporations with respect to certain subjects.” For example, the new section on standards of liability for directors provides an automatic liability shield for directors of a charitable corporation. To limit the liability of a director of a non-charitable corporation, the limitation must be included in the corporation’s articles of incorporation. Another example is the restriction that a person who is a member of a charitable corporation may not receive a financial benefit in connection with a disposition of assets by the corporation unless the person is a charitable corporation or an unincorporated entity that has a charitable purpose.
Under the current Idaho Act, the articles of incorporation may “authorize a person or persons to exercise some or all of the powers which would otherwise be exercised by a board.3” The Model Act expands this concept and makes it more transparent. The revised act follows the Model Act and adds the concept of a “designated body.” A “designated body” is defined as: “A person or group, other than a committee of the board of directors, that has been vested by the articles of incorporation or bylaws with powers that, if not vested by the articles or bylaws in that person or group, would be required by this chapter to be exercised by the board or the members.4”
A new section of the revised act provides that some, but less than all, of the powers, authority, or functions of the board of directors may be vested in a designated body. If that is done, provisions of law relating to the board of directors will apply to the designated body (§812(a)(1)), directors will be relieved from their duties and liabilities with respect to the powers, authority, and functions to the extent they have been vested in a designated body (§812(a)(2)), and members of the designated body are entitled to indemnification and exoneration from liability the same as the directors (§812(a)(3)).
Director duties and liabilities
The provisions of the revised act with respect to the duties and liabilities of directors of nonprofit corporations closely follow the provisions of the Idaho Business Corporation Act, which is based on the Model Business Corporation Act, on the same subjects. This is consistent with the view that the relationship of directors to a nonprofit corporation is more like that of directors of business corporations than to that of trustees to their beneficiaries. As explained above, a liability shield automatically applies to directors of charitable corporations with an optional liability shield available for directors of other corporations. The director indemnification provisions in the revised act also follow the business corporation statutes.
What it means to be a member
The revised act adopts a new definition of “member,” which means “a person in whose name a membership is registered on the records of the corporation and who has the right, not solely as a delegate, to select or vote for the election of directors or delegates or to vote on any type of fundamental transaction.”5 With this new definition, voting becomes central to what it means to be a member, as explained in an official comment to the definition: “A nonprofit corporation will sometimes refer to contributors or other persons interested in the activities of the corporation as ‘members’ even though those persons do not fit within the definition of ‘member.’” However, “[i]f a person does not have the right to vote for the election of directors or delegates or to vote on fundamental transactions, the person will not be a ‘member’ for purposes of the Act even though the person may be referred to by the corporation as a member.”6 Therefore, just because a person is referred to as a member, if they do not have voting rights, they are not a member within the meaning of the Idaho Act.
Elimination of cumulative voting
The current Idaho Act permits the articles of incorporation or bylaws of a nonprofit corporation to authorize cumulative voting. The revised act prohibits cumulative voting, but existing cumulative voting rights are grandfathered in so that a provision in a corporation’s articles or bylaws that authorizes cumulative voting and is adopted before the enactment of the revised act will continue to apply until the articles or bylaws are amended.
The revised act broadly validates the use of electronic technology and uses terminology developed in the Uniform Electronic Transmissions Act (UETA) and the federal Electronic Signatures in Global and National Commerce Act (E-Sign).
In the past few years, the manner in which corporations hold meetings has changed significantly. The revised act authorizes the board of directors to permit members to participate in meetings by means of remote communication, such as over the internet or through telephone conference calls, subject to certain conditions set forth in the revised act and any other guidelines and procedures that the board of directors may adopt.
This would include the use of electronic ballots to the extent authorized by the board of directors. The revised act also authorizes the board of directors to provide for a meeting of members to be held solely by means of remote communication and to dispense with having a geographic location for the meeting. This authority may be eliminated in the corporation’s articles of incorporation or bylaws.
In addition to the authorization for remote participation in member meetings, the revised act provides that “directors may participate in a meeting of the board through the use of any means of communication by which all directors participating may simultaneously hear each other during the meeting.” This authorization for remote participation in board of director meetings may be restricted by the articles of incorporation or bylaws.
Ratification of defective corporate actions
The revised act provides a statutory ratification procedure for corporate actions that may not have been properly authorized. Examples of defective corporate actions subject to ratification include corporate action taken without board resolutions or other action of the board or members that authorizes the action and corporate action taken without obtaining member approval when member approval of the corporate action is required. This statutory ratification procedure is designed to supplement common law ratification.
At the time this article was written, the Committee had not completed its proposed revisions to the Idaho Act, so the final proposal to the Legislature could be different in some respects from what is reflected in this article. For more information about the revised act, contact one of the members of the Committee.
The revised act should prove to be very helpful to Idaho nonprofit corporation by providing an up-to-date statute that provides the structure and flexibility necessary for the various types of nonprofit corporations that exist today.
David S. Jensen is a shareholder in the Boise office of Parsons, Behle, & Latimer. David represents clients in real estate transactions, commercial and consumer lending, business entity formation, mergers and acquisitions, leasing, and general business planning.
1. The members of the Committee are Crystal Berry, Thomas Everson, Eric Taylor, Nicholas Gourley, James Hovren, David Jensen, Jason Mau, Matthew Purcell, Sarah Reed, Michael Short, and Paul Street, with research assistance from law student Charlotte Cunnington.
2. The 4th edition of the Model Act with comments can be found at the following link: www.americanbar.org/content/dam/aba/administrative/business_law/nonprofit/mnca.pdf.
3. I.C. § 30-30-601(3).
4. Model Act (4th ed.), § 102.
6. Model Act (4th ed.) § 102, cmt. 10.