Five Ways Nonprofit Board Actions Can Be Challenged Under Law [SUBSCRIBERS-ONLY]

It is well-known that Board members are subject to fiduciary duties in their oversight and decision-making role, among other rules that apply to nonprofit orgnizations. However, the practical reality of how these requirements are scrutinized, applied, and enforced is less understood. This article provides a brief overview of some common ways that Board decisions and actions could be challenged in court.

Standard nonprofit Board orientations and trainings usually include an overview of the three core fiduciary duties (the duty of care, duty of loyalty, and duty of obedience), and there is no shortage of guidance and resources on important topics such as complying with an organization’s governing documents, donor restrictions, and conflict of interest rules and policies.

This education is essential, but understanding these principles in the abstract does not necessarily translate to an awareness of how these rules play out in the real world. Having a basic understanding of who may be in a position to challenge a Board action and how they would do so will deepen your understanding of your legal duties as well as the potential stakes.

This article discusses five common legal mechanisms for challenging Board decisions and actions, with a primary focus on mechanisms that are typical under state or local law (with less focus on federal law):

1. Actions by the Attorney General

2. Actions by Claimants with a Direct Injury

3. Derivative Actions

4. Court Review of the Validity of Corporate Actions

5. Actions by Receivers or Trustees

For the sake of brevity, this article does not address the enforcement of tax rules applicable to nonprofit organizations, such as Internal Revenue Service audits, assessment of excise taxes and penalties, and decisions to revoke an organization’s tax-exempt status. While this is a clearly important and relevant topic for nonprofit organizations and their Boards, the complexity of this area would require a separate article.