United States: Recent Governance And Gift-Giving Guidance From The Non-Profit/Public Charities Division

Last Updated: September 23 2016
Article by Sharon C. Lincoln

The Non-Profit Organizations/ Public Charities Division of the Office of the Attorney General (the "Division") recently released helpful guidance regarding (i) good governance of charitable organization and (ii) the rules that apply to significant gifts between charities.

Governance Guidance

On May 25, 2016, the Division released a letter to the Board of Trustees of Suffolk University and its then-president Margaret McKenna. Although the letter primarily summarized the findings of the Division regarding a public dispute between the university's board and president, the letter includes several general observations regarding what characterizes good governance on the part of charitable boards.

While the letter to Suffolk University does not purport to replace or supersede the guide to good governance previously published by the Office of the Attorney General, the letter highlights the following as indicative of good governance:

  • Attention to governance best practices. This includes periodic updating of an organization's bylaws and regular reviews of board and committee operations.
  • Transparency. Minutes should be taken at all board and committee meetings. In addition, the board should adopt a transparent process for the nomination and selection of new board members, with attention paid to including diverse perspectives and skillsets on the board.
  • Board Training. Orientation and training for new board members should include information about fiduciary duties and best practices for nonprofit governance.
  • Good communication. Clear lines of communication and authority should be established by the board and the chief executive.
  • Stakeholder management. The board should make efforts to establish good relationships with stakeholders both within and without the organization.
  • Performance review. The board should conduct a periodic performance evaluation of the organization's chief executive.
  • Managing conflicts. The board should pay careful attention to and make a periodic examination of the organization's conflict of interest policy.
  • Deliberate delegation. As stated in the letter, "all members of [a] Board are fiduciaries and the Board has an obligation to ensure that its most important actions and decisions...are considered and acted upon by the full Board with the benefit of full discussion by all its members." (Emphasis added.) For example, the delegation of significant authority to an executive committee is "not consistent with best practice."

Of particular note is last item, since an executive committee may be used to relieve the full board of having to convene for more frequent meetings. The presence of an executive committeedoes not relieve the full board from being fully informed about and participating in discussions regarding key decisions.

Guidance Regarding Significant Gifts

In July, the Division issued specific guidance, entitled "Attorney General Guidelines on Requirements Imposed by Massachusetts Charitable Mechanics Association v. Beede, 320 Mass. 601 (1947)", regarding the regulatory and judicial requirements related to making "significant" gifts from one charity to another ("Beede Guidance"). The guidance follows up on previously issued guidelines regarding the notice requirement in M.G.L. Chapter 180, Section 8A(c), which applies when a charitable organization contemplates a sale of all or substantially all of its assets with an accompanying material change in the organization's activities.

The Beede Transaction

Certain transactions involving the transfer of charitable assets require more than merely providing notice to the Division. One such transaction (a "Beede Transaction") occurs when all of the following four conditions are met:

  1. The transferor and transferee must both be a public charities;
  2. The transaction must involve "a large part" of the transferor charity's property;
  3. The transferor charity must be receiving less than fair value in exchange for the property; and
  4. The transferor charity does not control the intended recipient of the assets.

A Beede Transaction requires notice to the Division and prior approval of the Supreme Judicial Court (Single Justice Session for Suffolk County).

Although an organization seeking to dissolve and distribute all of its assets to another charity appears to fall under the definition of a Beede Transaction, the process of obtaining court approval for a charity to dissolve and distribute all of its assets is different.

Note that the Beede Guidance does not provide specific guidelines regarding how to determine whether a particular gift or bargain sale involves a "large part" of a charity's property. Whether "a large part" is measured by a certain percentage of an organization's property or by a fixed dollar amount may need to be determined in the context of the facts and circumstances specific to the proposed transaction. The guidance provides that organizations that are not certain whether a given transaction is a Beede Transaction should seek informal guidance from the Division.

The Beede Petition

The Division must review and assent to an organization's Beede petition before the petition is filed with the court. While the exact contents of a Beede petition may vary, the guidance provides that each Beede petition must, at a minimum, contain several required elements, including:

  1. The Reason(s) for the Transaction. The petition must provide an explanation as to why the transfer is being made at less than fair value.
  2. A Summary of the Transaction. The petition must summarize the terms of the transaction, identify any liabilities assumed by the transferee, explain why the transferee is the appropriate recipient of the assets, and include a representation that the transferee will use the assets for the same purposes as the transferor.
  3. Explanation Regarding Whether Any of the Transferred Assets are Restricted. The petition must identify any permanent or temporary restrictions apply to the property being transferred. If any such restrictions do apply, then the petition must state that the transferee accepts those assets subject to those restrictions.
  4. Representations Regarding the Transferor's Liabilities. The petition must represent that the transferor will not be left insolvent by the transfer; specifically, that the transferor either (a) will have no liabilities remaining after the transfer or (b) will retain sufficient assets to satisfy any liabilities not transferred.

A complete list of the required elements is included in the Beede Guidance.

Although samples of Beede petitions are publicly available, the Beede Guidance provides a clear and concise explanation of the rationale for the Beede petition requirement and the specific steps required of a charitable organization that is contemplating a significant gift or bargain sale of a large portion of its assets.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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