Seven Key Steps for Managing Nonprofit Corporate Governance Disputes [SUBSCRIBERS-ONLY]
For most nonprofit organizations, it is a rare occurrence for internal corporate governance disputes to escalate to the point of litigation. However, court cases are sometimes unavoidable. A notable D.C. Court of Appeals decision addressed several important issues related to corporate governance challenges and illustrated some key steps nonprofits can take to better manage these disputes.
Summary of the Case
This case, OverDrive, Inc. v. The Open eBook Forum, 288 A.3d 305 (D.C. 2023), happened to be one with which I was directly connected. The organization (one of my clients) was a 501(c)(6) trade association whose Board of Directors and voting members voted to approve a transaction similar to a merger with a larger organization. The transaction was challenged in court by a dissenting member, leading to over six years of litigation. With the help of litigation attorney David G. Ross (now with Garris Horn LLP), the organization ultimately won a case-ending victory in the D.C. Court of Appeals, which affirmed the lower court’s summary judgment ruling declining to invalidate the transaction.
Specifically, OverDrive was the first case to address a provision of the D.C. Nonprofit Corporation Act, D.C. Code § 29-401.22(c), that limits the court’s power under certain circumstances to “hear and determine the validity of a corporation action” if the nonprofit corporation has “provided in its articles of incorporation or bylaws for a means of resolving a challenge to a corporate action.”
The D.C. Court of Appeals held that so long as this mechanism is not illusory, a D.C. court’s power to review the validity of a corporate action pursuant to a case brought under D.C. Code § 29-401.22(a) is limited to enforcing the organization’s Articles of Incorporation and Bylaws. The court determined that the organization satisfied this standard based on a Bylaws provision establishing that a vote to rescind any Board action would be held upon the petition of a group of voting members at least equal in number to the number of Board members (14, in this case), a process that the dissenting here failed to use.
Additionally, the court held that this mechanism was not rendered illusory by the fact that the organization did not provide the dissenting member with the email addresses and names of the specific individuals designated by the other members to vote on their behalf (note, the D.C. Nonprofit Corporation Act generally entitles members only to the “names and addresses” of voting members. See D.C. Code §§ 29–405.20 and 29-413.02). Mr. Ross has written a helpful summary of the case with additional details that you can read here.
Lessons for Other Nonprofits
As a technical matter, the holding in the OverDrive case is limited to organizations that are incorporated in the District of Columbia, and there not many other jurisdictions that have this same language in their nonprofit corporation statutes (the State of Washington is one that does have similar language).
Further, this holding is not likely to apply in certain other contexts in which there may be challenges to corporate actions, such as “derivative lawsuits” brought in the name of the organization to address fiduciary breaches and similar issues, claims based on a member’s allegation of direct injury such as an improper termination of membership status, and petitions for enforcement of member rights such as the right to hold meetings and inspect documents.
Nonetheless, this case and the facts addressed therein illustrate some lessons that could have a far-reaching impact on nonprofit organizations in general, particularly those that are structured as membership organizations and/or are exploring potentially contentious transactions or decisions.
The following recommendations will help nonprofit organizations to manage internal disputes more effectively and mitigate the potential damage of these disputes if they escalate to the point of litigation:
