The fourth edition of the Model Nonprofit Corporation Act (“MNCA”), adopted by the Committee on Nonprofit Organizations of the Business Law Section, is based in large measure on the Model Business Corporation Act (“MBCA”) adopted by the Corporate Laws Committee of the Section. The Fourth Edition includes the new and revised provisions of the 2016 revision of the MBCA and some changes to the MBCA since the 2016 revision. As a result, states adopting the Fourth Edition will have a statute that includes important, up-to-date provisions relating to nonprofit corporations that are consistent with the provisions of the MBCA, as well as revised and updated Official Comment.
Brief History of Prior Editions of the MNCA and the MNCA’s Close Relationship to the MBCA
The MNCA has a long relationship with the MBCA. The original MNCA was drafted in 1952 by the Corporate Laws Committee as a model act, along the lines of the MBCA, providing uniform provisions in contrast to the welter of conflicting statutes that existed at that time in various states. Subsequently, a growing interest in nonprofit corporation law led to the creation of the Committee on Nonprofit Corporations (now known as the Committee on Nonprofit Organizations) of the Business Law Section, which issued an update in 1957 for the primary purpose of bringing the text of the MNCA into closer alignment with the MBCA. This policy of parallelism proved of paramount importance; consequently, the MNCA was submitted to the Corporate Laws Committee, which prepared a 1964 version. Since that time, drafting committees of the Nonprofit Organizations Committee have prepared subsequent versions of the MNCA, which were finalized in 1987 and 2008.
There are various benefits to having the MNCA track the MBCA. Among other things, nonprofit corporations have developed to be more like business corporations than charitable trusts, and as a result, many of the MBCA provisions work equally well for nonprofit corporations. Also, as case law interpreting nonprofit corporation statutes is generally limited, having provisions in the MNCA that are the same as or similar to the MBCA should be useful to practitioners in advising nonprofit corporations because they can consider case law interpreting similar MBCA provisions. In addition, having the MNCA track the MBCA makes it easier for states that have adopted the MBCA to adopt the MNCA because they will not have to review or work with an unfamiliar structure.
While an objective of each of the drafting committees has been to generally track the MBCA, the MNCA diverges from the MBCA where appropriate given the unique aspects of nonprofit corporation law. For instance, the MNCA does not have provisions on shareholders because nonprofit corporations do not have equity owners. Instead, the MNCA provides for nonequity members, delegates, and designated bodies, each of which can have governance rights similar to shareholders. Notably, the MNCA prohibits the payment of dividends or distributions to members or members of a designated body except in very limited circumstances. It also provides that a person who is a member of or otherwise affiliated with a charitable corporation may not receive a direct or indirect financial benefit in connection with the dissolution of the corporation unless the person is a charitable corporation, a charitable trust, or an unincorporated entity that has a charitable purpose.
The MNCA provides flexibility for the various types of nonprofit corporations and their different structures. It allows a nonprofit corporation to have members or no members; it requires the membership corporation to have a board of directors that is elected either by the members or as otherwise provided in the articles or bylaws, or, in the case of a nonmembership corporation, it requires a board elected as provided in the articles or bylaws. It also allows for a designated body to assume some of the functions of a board of directors.
Highlights of the 1987 and 2008 Editions of the MNCA
The 1987 MNCA (referred to as the “Revised Model Nonprofit Corporation Act”) included important updates that brought it closer in form and content to the provisions of the 1984 revision of the MBCA. Provisions not previously contained in the MNCA were added, including provisions addressing the duties, liabilities, and indemnification rights of directors and officers, with some unique features given the nature of nonprofit corporations. In addition, following developments in New York and California, the 1987 MNCA adopted a scheme of classifying nonprofit corporations into three categories: (1) public benefit, (2) mutual benefit, and (3) religious—with the mutual benefit category being the default classification for any nonprofit corporation that was not a public benefit or religious corporation. Although many of the provisions of the 1987 MNCA applied to all types of nonprofit corporations, there were different rules depending on the classification as they related to different topics, including member rights, board duties, and fundamental changes of the nonprofit corporation. The 1987 MNCA also added more detailed provisions addressing the role of the state attorney general, particularly with regard to public benefit corporations and religious corporations. These provisions were included in recognition of the fact that in some states the state attorney general has a role in the oversight of charitable organizations. In addition, the 1987 MNCA included provisions on derivative proceedings and provisions on records and financial reporting, all of which were based in large part on the MBCA.
The 2008 MNCA (referred to as the “Model Nonprofit Corporation Act, Third Edition”) was a product of a drafting task force of the Nonprofit Organizations Committee chaired by Lizabeth A. Moody. The 2008 MNCA continued to follow the provisions of the MBCA to the extent possible. As states were not widely adopting the classification scheme adopted in the 1987 MNCA, the 2008 MNCA eliminated the classification system while still recognizing that there are some situations where a charitable or religious nonprofit corporation should be treated differently.
The 2008 MNCA added new provisions unique to nonprofit corporations, including those addressing in more detail the concept of a “designated body,” which is a person or group other than a committee of the board of directors that has been vested by the articles or bylaws with powers that would otherwise be exercised by the board or the members. The concept of a designated body was included in recognition that some nonprofits use that governance model. In addition, the 2008 MNCA eliminated the detailed provisions addressing the authority of the state attorney general and replaced them with provisions acknowledging the authority of the state attorney general (some of which are optional) but recognizing that more detailed provisions regarding the power of the state attorney general would be more appropriately addressed in a different statute. The 2008 MNCA also eliminated cumulative voting by members in the election of directors based on a determination that the voting power of members should not be tied to their economic contributions and based on the fact that directors of a nonprofit corporation are often chosen on a basis other than furthering the financial interests of the corporation.
Fourth Edition of the MNCA
After the publication of the 2008 MNCA, a subcommittee of the Nonprofit Organizations Committee worked on updates to the 2008 MNCA. It followed a process that is similar to the process followed by the Corporate Laws Committee for the MBCA. Changes to the 2008 MNCA were published in The Business Lawyer and then adopted on a third reading. With the Corporate Laws Committee’s adoption of the 2016 revision of the MBCA, it was an easy decision for the subcommittee to move forward with a new edition of the MNCA. Lawrence J. Beaser chaired the MNCA task force, and William H. Clark Jr., who also served as the reporter for the 2008 MNCA, served as the reporter for the Fourth Edition.
Except in circumstances where substantive issues require a different rule for nonprofit corporations, the Fourth Edition continues to closely track the MBCA. In addition, it generally follows the numbering system and sequence of the MBCA provisions, with the most important substantive provisions retaining section numbers similar to those of the MBCA provisions. These include chapter 2 (Incorporation), chapter 6 (Memberships and Financial Provisions), chapter 7 (Member Meetings), chapter 8 (Directors and Officers), and chapter 9 (Amendment of Articles of Incorporation and Bylaws). The provisions of the Fourth Edition have been renumbered in certain places to eliminate gaps in the numbering sequence.
Following the approach taken by the Corporate Laws Committee in the 2016 revision of the MBCA, the Fourth Edition includes an Official Comment that has been simplified, with elimination of portions that merely restated or paraphrased an MNCA provision. As with the MBCA, the Official Comment for the Fourth Edition should be helpful to practitioners and judges in interpreting provisions of state statutes based on the MNCA. The Fourth Edition also includes source notes that set forth citations to the provisions of the MBCA that were the source for specific provisions of the Fourth Edition.
Many of the new provisions in the 2016 revision of the MBCA are included in the Fourth Edition with some modifications based on the unique nature of nonprofit corporations. These include (1) provisions authorizing articles of incorporation to limit or eliminate the liability of directors relating to corporate opportunities; (2) provisions similar to the MBCA on ratification of defective corporate actions, which should be very useful to nonprofits that may have previously taken actions that did not comply with the applicable state statute; (3) provisions permitting forum-selection provisions to be included in the bylaws; and (4) provisions for virtual member meetings that are based on the MBCA virtual shareholder meeting provisions.
Unique provisions of the 2008 MNCA continue in the Fourth Edition, including, for example, provisions on members (and the option of having no members), delegates, and designated bodies. In terms of incorporating documents, the Fourth Edition contemplates that the articles may include provisions complying with applicable Internal Revenue Code requirements for tax-exempt organizations. Like the 2008 MNCA, the Fourth Edition includes a provision allowing for advisory committees made up of nondirectors. Although the Fourth Edition—like the 2016 revision of the MBCA—allows for the articles to include a director liability-shield provision (as well as an indemnification provision that follows the shield language), a liability-shield provision in the articles is not necessary for a charitable corporation because the directors of those corporations receive statutory liability protection under the MNCA, with certain limited exceptions. The Fourth Edition retains provisions to protect the charitable assets of a nonprofit corporation in the event of a sale of assets or dissolution, as well as in the event of any entity transaction, such as a merger, interest exchange, domestication, or conversion.
It is expected that, like the 2016 revision of the MBCA, there will be a “spoke” version of the Fourth Edition that can be adopted as a “spoke” by states using the Uniform Law Commission’s Uniform Business Organization Code (“UBOC”) hub-and-spoke structure.
A substantial number of states’ nonprofit acts are based on the first and second editions of the Model Nonprofit Corporation Act, which were published in the 1960s and 1980s. As noted above, significant changes have been made to the Model Nonprofit Corporation Act since that time. The Fourth Edition should prove to be very helpful to states by having an up-to-date model statute that provides the structure and flexibility necessary for the various types of nonprofit corporations that exist today.
An earlier version of this article appeared in the September 2021 issue of the Model Business Corporation Act Newsletter, the newsletter of the ABA Business Law Section’s Corporate Laws Committee. Read the full issue and previous issues on the Corporate Laws Committee web page. The views expressed in this article are solely those of the author and not his law firm or clients. No legal advice is being given in this article.
Model Nonprofit Corporation Act, Fourth Edition (Am. Bar Ass’n 2022) [hereinafter MNCA Fourth Edition]. ↑
The fourth edition of the MNCA is referred to herein as the “Fourth Edition.” ↑
Model Non-Profit Corp. Act, at vii (Am. L. Inst. 1964). ↑
Michael C. Hone, Introduction to Revised Model Nonprofit Corporation Act, at xxxv (1988). ↑
Id. at xxxv–xxxvii, xl. ↑
Id. at xxi–xxxii. ↑
Id. at xxxvii. ↑
Lizabeth A. Moody, Foreword to Model Business Corporation Act: Third Edition, at xxiii–xxiv (Am. Bar Ass’n 2009). ↑
Id. at xxi–xxiv. ↑
Id. at xxiii; see also MNCA Fourth Edition, supra note 1, § 140 (“Nothing in this Act affects the role of the attorney general with respect to nonprofit corporations under other law.”). ↑
Moody, supra note 10, at xxiv. ↑
The Model Nonprofit Corporation Act Subcommittee, Committee on Nonprofit Organizations, ABA Section of Business Law, Adoption of Changes to the Model Nonprofit Corporation Act – Miscellaneous and Technical Amendments, 68 Bus. Law. 821 (May 2013). ↑
See Lawrence J. Beaser & William H. Clark Jr., Foreword to Model Nonprofit Corporation Act, Fourth Edition, at xx (Am. Bar Ass’n 2022). ↑
MNCA Fourth Edition, supra note 1, § 202(b)(10). ↑
Id. §§ 120–27. ↑
Id. § 207. ↑
Id. § 709. ↑
Id. § 825(g). ↑
Id. § 831(d). ↑
Id. §§ 1003, 1105(c), 1203(b). ↑