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The new Utah Revised Nonprofit Corporation Act (the "Act") became effective April 30, 2001. The Act affects all of the 9,100 nonprofit corporations registered in Utah
with the Division of Corporations and Commercial Code (the "Division"). Utah lawyers who represent nonprofit corporations should become familiar with the provisions of the Act
and its impact on the clients they represent.
I. Background
The Utah Nonprofit Corporation and Cooperative Association Act (the "old Act") was enacted in 1963. Over its nearly 40 year life, the old Act was amended numerous times to keep
pace with the evolution of nonprofit corporation practice. However, as with most statutory schemes, changes in federal law, politics and the economy and the increasing needs and
sophistication of users, called for a reevaluation of the effectiveness of the old Act.
In 1999, Senator Lyle Hillyard, motivated by suggestions from constituents and the Tax and Business Sections of the Bar, requested leaders of these Sections to study the need for a new
nonprofit act. Although it would have been possible to simply tweak the old Act in a piecemeal fashion, Senator Hillyard and Bar participants determined that the most efficient way to
revitalize Utah nonprofit law was to start from the beginning with a new statutory regime.
The drafting of a new nonprofit code is a complex process not undertaken lightly. Nonprofit corporations range from the largest health care organizations to neighborhood flower funds. They
include public charities, private foundations, social clubs, unions, support organizations, title holding companies, beneficiary and fraternal organizations, cooperatives, mutual
irrigation companies, mosquito abatement districts and a host of others. Some nonprofit organizations are exempt from federal and state tax while others are fully taxable like business
corporations. Certain nonprofit organizations have members while others do not. Some issue stock while most do not. Unlike business corporations whose structures generally include
shareholders, boards of directors and officers who seek to increase shareholder equity, each nonprofit corporation is organized for a purpose unique to that organization and controlled
through customized features designed to enhance contributions and further public or group purposes. More often than not, organizers of nonprofit entities have a limited budget, if at all,
to pay for legal advice in organizing and operating the entity, and often are unaware of regulatory requirements.
The Act was developed from three principal sources: Utah's Business Corporation Act, the American Bar Association (ABA) 1987 Revised Model Nonprofit Corporation Act ("Model ABA
Act") and the nonprofit acts of Colorado and Idaho, both of which states have pursued a similar course as Utah to upgrade their nonprofit codes.
In 1992, Utah passed the Utah Revised Business Corporation Act (the "Corporation Act"). As Utah practitioners became familiar with the Corporation Act, it became apparent that
many of its provisions would work equally well in the nonprofit arena. It was also believed that adopting provisions from Utah's Corporation Act insofar as relevant would ease the burden
of Utah attorneys in advising nonprofit clients by providing a familiar platform from which to operate, with the result of greater uniformity and consistency. On the other hand, because
any nonprofit statutory scheme necessarily differs in crucial aspects from its business corporation counterpart, the Model ABA Act was used to bridge that gap. Although the ABA had hoped
that its Model Act would be uniformly adopted as a nonprofit vehicle, it has been embraced by only a small handful of states. Nonetheless, a number of its provisions provide useful
language for the Act. Finally, inasmuch as Idaho and Colorado recently had undergone projects to update their own nonprofit acts (a Colorado Bar Committee of more than 30 persons spent
three years on their project), it was thought that those statutory models would be useful in enacting the new Utah law.
The Act was enacted by the Legislature in its 2000 session (S.B. 61) with an effective date of April 30, 2001. Comments were sought from law and CPA firms, the Bar and UACPA, nonprofit
corporations and various professional associations. The one year delay in the effective date was afforded practitioners and organizations to become familiar with the Act and suggest
changes for consideration by the 2001 Legislature. Based on helpful comments from members of the Bar, amendments were made to the Act by S.B. 139 (2001). It is anticipated that as Utah
nonprofit corporations and the Division become familiar with the Act through usage, additional changes will be necessary to conform the Act to the evolving needs and practices of Utah
nonprofit corporations.
It is hoped that the Act will serve the Utah nonprofit community well by addressing circumstances previously overlooked, closing potential loopholes subject to abuse, modernizing
provisions to current standards and practices, increasing drafting flexibility for representatives and providing default provisions for less sophisticated users. The Act applies to all
nonprofit corporations existing in Utah or authorized to conduct affairs in Utah after the effective date. The Division has responsibility to administer the Act. The Act gives significant
deference to the articles of incorporation and bylaws of nonprofit corporations for structural and operational standards. In the absence of such standards, however, the Act sets forth
default provisions which are much more comprehensive and robust than those in the old Act.
II. Provisions of the Act
Discussed below is a survey of the Act's provisions which add to, supercede or revitalize the old Act.
A. General Provisions. The Act increases the number of sections into which it is divided from 6 to 17 and the number of definitions from 12 to 48, making it easier to reference.
In contrast to the old Act, the Act provides that notice may be given orally if reasonable under the circumstances; otherwise, notice must be in writing.1 Notice may also be made by
electronic communications, such as e-mail.2
Documents may be executed by the Chair of the board of directors, all of the directors, an officer, or an incorporator (if the directors have not been selected), or a receiver, trustee or
court-appointed fiduciary (if applicable).3 The Act provides for the filing of documents with delayed effective dates.4
Another important clarification from the old Act is that directors, officers, employees and members of a nonprofit corporation are not personally liable in those capacities for the acts,
debts, liabilities or obligations of the nonprofit corporation.5
The Act provides a list of requirements that must be followed by organizations classified as private foundations under Federal tax law, which requires these restrictions to be in the
organizing document of the private foundation if not otherwise provided by State law.6
To bring the Act to modern standards, UCA subsection 16-16a-118(1) gives the Division rulemaking authority to permit writings required or permitted to be filed with or sent by the Division
to be delivered, mailed or filed in an electronic medium or by electronic transmission or to be signed by photographic, electronic or other means. Granting the Division this authority
will permit it to flexibly implement changes based on emerging technologies and without requiring legislation.
B. Incorporation. The Act deletes the requirement under the old Act that articles of incorporation contain the street address of the nonprofit corporation's principal office.7 Also, the articles need only specify whether the nonprofit corporation will have voting members and not whether it has any type of members, as required under the old Act.8 This provision places the public on inquiry notice that members of the corporation, whose identity is not made public, have voting rights in the nonprofit corporation. The Act no longer requires the initial directors to be listed in the articles of incorporation. Rather, one or more incorporators may form the entity and subsequently appoint directors.9 Any provisions that must or may be contained in the bylaws may be set forth in the articles of incorporation.10
The provisions applying to the organization of cooperative associations set forth in the old Act remain unchanged in the Act.11
C. Purposes and Powers. A nonprofit corporation may engage in any lawful activity unless restricted by its articles of incorporation, or disallowed or subject to regulation by
other State statutes.12
A nonprofit corporation, unless otherwise provided in its articles of incorporation, has perpetual duration and succession in its corporate name.13
A new provision in the Act provides that a nonprofit corporation is imbued with emergency powers in the event of a catastrophic event that otherwise would impair its normal ability to
function. The board of directors is authorized to modify lines of succession, accommodate incapacity of directors or officers, relocate its principal office, streamline notice otherwise
provided for meetings of members and directors, and treat attendance of officers at directors meetings the same as if they were directors. Corporate action taken in good faith during an
emergency to further the ordinary business affairs of the nonprofit corporation binds the corporation.14
D. Provisions Concerning Members. A nonprofit corporation is not required to have members.15 It may, however, have one or more classes of voting or nonvoting members, with one or more members in each class.16 The class or classes of members, along with their qualifications and rights, may be designated in the bylaws.17 No person may be admitted as a member without that person's consent.18 A member may not be expelled, suspended or terminated unless provided in the bylaws or pursuant to a procedure that is fair and reasonable.19 A proceeding challenging an expulsion, suspension or termination must be commenced within one year after the effective date of the action.20 A new provision permits nonprofit corporations to provide in their bylaws for delegates having some or all of the authority of members.21 A delegate is defined as any person elected or appointed to vote in a representative assembly for the election of a director or for other matters.22
As was permitted under the old Act, members may take action by written consent.23 However, unlike the old Act, the Act provides that written consent must be signed by members having at least the minimum voting power that would be necessary to authorize or take action at a meeting of members, which need not be unanimous consent.24 Corporations in existence prior to April 30, 2001 may only take action by written consent if that consent is unanimous, unless a resolution providing otherwise has been duly approved.25 This transition provision is similar to that imposed by the Corporation Act when it was enacted.
Any action that may be taken by a meeting may also be taken without a meeting if a nonprofit corporation delivers a ballot to every member entitled to vote.26 Also, pursuant to a 2001 amendment,27 unless otherwise provided by the bylaws, a written ballot delivered to members may be used in connection with any meeting, thereby allowing members the choice of either voting in person or by written ballot delivered by a member to the nonprofit corporation in lieu of attendance at such meeting. Any written ballot is counted equally with the votes of members in attendance at any meeting for every purpose, including satisfaction of a quorum requirement.28
Unless otherwise required by the bylaws, a majority of the votes entitled to be cast on a matter constitutes a quorum.29 This is a change from the old Act which provided that
absent a provision in the bylaws, the members present in person at a meeting or represented by proxy constituted a quorum.30 Thus, in nonprofit corporations where quorum requirements are intended to be lower than a majority of members, practitioners should ensure authorization for such a provision in the bylaws.
The members may elect directors through cumulative voting if the bylaws so provide.31
E. Directors and Officers. One of the most noticeable changes in the Act refers to the members of the governing board of a nonprofit corporation as "directors," as
opposed to the former "trustees." This change represents a policy determination that recognizes the more common parlance of nonprofit corporate statutes in many other states,
eases reference and avoids confusion with trustees of trusts. Notwithstanding this change, however, a nonprofit corporation may refer to members of its governing board with any term it
may choose, including "trustees," "regents," or other designations, as set forth in its bylaws.32
The articles of incorporation may authorize one or more persons to exercise some or all of the authority of the board of directors.33 When this authority is delegated, the directors are relieved to that extent from such authority and duty.34
The Act provides that the board of directors consists of at least three members.35 The board of directors may be divided into classes with such rights and duties as the bylaws may provide.36 In the absence of any term specified in the bylaws, the term of each director is one year.37 The Act provides a number of requirements and guidelines for the resignation and removal of directors.38
The board may appoint committees of directors consisting of two or more directors serving on each committee.39 Any committee that has one or more members that are entitled to vote on committee matters and who are not also directors may not exercise any power or authority reserved to the board of directors.40
Any natural person 18 years of age or older may hold one or more officer positions in a nonprofit corporation.41
Although the Act provides guidelines for how directors and officers should discharge their duties, directors and officers, similar to the old Act, are not liable to the nonprofit
corporation or others for any action taken or failure to take action unless (1) the director or officer has breached or failed to perform the duties of the office as set forth in the Act;
and (2) the breach or failure to perform constitutes willful misconduct or intentional infliction of harm on the nonprofit corporation or its members.42
A nonprofit corporation generally may eliminate or limit the liability of a director to the nonprofit corporation or its members, with several enumerated exceptions.43 A director who assents to a distribution which is unlawful or in violation of the articles of incorporation is personally liable to the corporation for the excess amount of the distribution if it is established that the director's duties were not performed in compliance with the Act's general standards of conduct.44
Distributions are unlawful unless they consist of distributions of income or assets to a member that is a nonprofit corporation; represent payment of reasonable compensation to members,
directors or officers for services rendered; are made in connection with a cooperative nonprofit corporation making distributions consistent with its purposes; or confer benefits upon
members in conformity with the purposes of the nonprofit corporation.45 Also, a nonprofit corporation may make distributions upon dissolution in conformity with the Act.46
Actions taken by directors or parties related to directors that represent a conflict of interest may be voided, enjoined or set aside or give rise to an award of damages.47 A conflicting interest transaction may nonetheless be entered if the nonprofit corporation meets certain conditions similar to those found in the Corporation Act.48 In addition, the Act provides that a conflicting interest transaction may be entered if it is consistent with a provision in the articles of incorporation or bylaws which commits the nonprofit corporation to support other charitable entities or authorizes one or more directors to exercise discretion in making gifts or contributions to other charitable entities. This exception applies in the case of contributions by supporting organizations (defined under federal law49) to charitable entities with common directors or officers.50
A corporation generally may indemnify directors under principles similar to those of the Corporation Act, and a nonprofit corporation must indemnify a director for expenses incurred by the
director in connection with a proceeding in which the director has been successful.51
F. Corporate Actions. Under the old Act there was a question whether a nonprofit corporation could both amend and restate its articles of incorporation in the same document.52 The Act removes that ambiguity by providing specifically that a document which restates articles of incorporation can also include amendments to the articles.53 Nonprofit corporations may convert to business corporations and vice versa through the amendment of the articles of incorporation of the entity.54 Obviously, practitioners must consider the Federal and State tax consequences of a conversion prior to completing it.
The Act contains a number of specific provisions relating to the merger of one or more nonprofit corporations into other nonprofit corporations, including foreign nonprofit corporations.55
Provisions of the Act concerning sale of property in the ordinary course of business and other than in the ordinary course of business are similar to those contained in the Corporation Act.56
The Act sets forth specific requirements for the dissolution of nonprofit corporations by directors and members.57
The Act authorizes the conduct of business in Utah by foreign nonprofit corporations and sets forth the requirements and provisions affecting foreign nonprofit corporations.58 The Act also provides for the domestication of a foreign nonprofit corporation in Utah.59
Directors or members are entitled to inspect and copy records required to be kept by nonprofit corporations by providing at least five business days' notice to the nonprofit corporation
prior to inspection.60
The Act authorizes the Division to propound interrogatories as necessary to determine whether a nonprofit corporation has complied with the requirements of the Act.61 The interrogatories may be directed to any nonprofit corporation subject to the Act or to any officer or director of such a corporation.62 Those who fail to answer interrogatories truthfully and fully by the deadline provided are subject to potentially severe penalties.63
The Act contains a number of transitional provisions relating to its effective date of April 30, 2001.64 Specifically, these provisions provide that the Act does not apply to corporations sole except with respect to mergers and consolidations nor to domestic or foreign nonprofit corporations governed by U.C.A. subsection 3-1, et seq. (provisions relating to agricultural cooperative associations).65 Indemnification for an act or omission of a director or officer, if the act or omission occurred prior to April 30, 2001, is governed by the old Act.66
III. Conclusion
Practitioners should become familiar with the terms and provisions of the Act, a process eased by practitioners' familiarity with the Corporation Act. The Act does not require nonprofit
corporations to amend their articles of incorporation or bylaws. However, practitioners should become familiar with issues that may call for modernizing and updating bylaws, and in some
cases the articles of incorporation, of nonprofit corporations with which they are involved. In particular, practitioners may wish to advise their nonprofit corporation clients to add
provisions to the bylaws relating to electronic communications and more flexible provisions which involve members, delegates and directors. Practitioners may also wish to suggest a bylaws
provision or a resolution which permits written consent by less than all of the members and to ensure bylaws authority for a quorum of members less than a majority of the members, if
appropriate in the context. Practitioners may further wish to consider a bylaws provision referring to members of the governing board as "directors" in the event such term is
desired, ensure that provisions for the inspection of corporate records are consistent with provisions of the Act, avoid distributions other than those authorized in the Act, delete the
address of the principal office from future amended or restated articles, and make allowance for streamlined operational provisions in the event of an emergency. In all cases,
practitioners should be aware of the effects of Federal and State tax law on the organization and operation of nonprofit corporations they represent.
Footnotes
1. Utah Code subsection 16-6a-103(1).
2. Utah Code subsection 16-6a-103(2)(a)(iii).
3. Utah Code subsection 16-6a-105(6)(b).
4. Utah Code subsection 16-6a-108.
5 . Utah Code subsection 16-6a-115; Cf. Utah Code subsection 16-6-107.
6. Utah Code subsection 16-6a-116; see I.R.C. subsection 508(e).
7. Utah Code subsection 16-6a-202.
8. Id.
9. Utah Code subsection 16-6a-202(2)(a); Utah Code subsection 16-6a-205(1)(b).
10. Utah Code subsectionsubsection 16-6a-202(2)(c), (7)(a).
11. Utah Code subsection 16-6a-207.
12. Utah Code subsection 16-6a-301.
13. Utah Code subsection 16-6a-302(1).
14. Utah Code subsection 16-6a-303.
15. Utah Code subsection 16-6a-601.
16. Utah Code subsection 16-6a-602(1).
17. Utah Code subsection 16-6a-602(2).
18. Utah Code subsection 16-6a-603(2).
19. Utah Code subsection 16-6a-609(1).
20. Utah Code subsection 16-6a-609(4).
21. Utah Code subsection 16-6a-613.
22. Utah Code subsection 16-6a-102(14).
23. Utah Code subsection 16-6a-707.
24. Id.
25. Utah Code subsection 16-6-1704(3).
26. Utah Code subsection 16-6a-709(1).
27. See S.B. 139.
28. Utah Code subsection 16-6a-709(7).
29. Utah Code subsection 16-6a-714(1)(b).
30. Utah Code subsection 16-6-29.
31. Utah Code subsection 16-6a-717.
32. Utah Code subsection 16-6a-801(4).
33. Utah Code subsection 16-6a-801(2)(b).
34. Id.
35. Utah Code subsection 16-6a-803, S.B. 61 in 2000 initially provided that a nonprofit corporation could have fewer than three directors. That provision was
deleted prior to enactment because of opposition by a major association of nonprofit corporations.
36. Utah Code subsection 16-6a-801(3).
37. Utah Code subsection 16-6a-805(1)(b).
38. Utah Code subsection 16-6a-807, 808.
39. Utah Code subsection 16-6a-817(1)(b), as amended by S.B. 139 (2001).
40. Utah Code subsection 16-6a-817(6)(b).
41. Utah Code subsection 16-6a-818(4).
42. Utah Code subsection 16-6a-822(6)(b).
43. Utah Code subsection 16-6a-823(1).
44. Utah Code subsection 16-6a-824(1)(a).
45. Utah Code subsection 16-6a-1302(1).
46. Utah Code subsection 16-6a-1302(2).
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