Public Act 222 of 2008 was enacted effective July 16, 2008, to amend several provisions of the Michigan Nonprofit Corporation Act (the Act). Several of the provisions in PA 222 create issues for health care and other nonprofit corporations. The Nonprofit Corporations Committee of the Business Law Section of the Michigan State Bar has prepared, and the Section Council has approved, proposed bills amending the Nonprofit Corporation Act and the statute governing dissolution of charitable purpose corporations. These bills are designed to address issues raised by PA 222 by making the changes outlined below.
- Board Size. Effective January 16, 2009, the boards of all Michigan nonprofit corporations must have at least three directors. Annual reports for 2008 due by October 1, 2009 must show that the corporation has three directors. One of the proposed bills would create exceptions to the requirement that nonprofit corporations have at least three directors for (1) private foundations; (2) organizations classified as “type I” supporting organizations under Section 509(a)(3) of the Internal Revenue Code (i.e., wholly owned subsidiaries that typically hold property on behalf of their exempt parent); and (3) nonprofit corporations formed pursuant to the Public Health Code to provide Medicaid-funded dental hygiene services.
- Definition of Charitable Purpose. The Act was amended to include a definition of “charitable purpose corporation” as a nonprofit corporation that (1) is exempt or qualifies for exemption as a Section 501(c)(3) organization under the Internal Revenue Code of 1986, as amended; (2) has purposes, structure or activities that are exclusively those described in Section 501(c)(3) of the Code; or (3) is organized or held out to be organized exclusively for one or more charitable purposes.
- Loans to Officers. A charitable purpose corporation is prohibited from providing loans or guarantees of an obligation to an officer or director of the corporation or a subsidiary of the corporation. The only exception to this prohibition is if the officer or director is also a client of the charitable purpose corporation and the loan or guaranty is necessary to carry out the charitable purpose of the corporation. This provision presents potential problems for hospital physician recruitment programs that involve recruitment payments structured as loans. Because of the potential difficulties in recruiting physicians, clergy and other personnel who may be “officers,” the proposed legislation eliminates the prohibition on all loans by charitable purpose corporations to officers. Such loans would, however, remain subject to requirements that they be consistent with corporate purposes and with applicable rules governing taxexempt status.
- Dissolution of Charities. A charitable purpose corporation must notify the Attorney General within 60 days if it is automatically dissolved for failure to file an annual report as required by the Act. The charitable purpose corporation may not dispose of any of its assets without the written approval of the Attorney General. There are several difficulties with this language. One issue is that it can prevent organizations from functioning properly, by, for example, prohibiting private foundations from making charitable contributions that are required under federal tax laws. The language also seems to be inconsistent with the procedures of the Department of Attorney General, which ordinarily require that all assets of a charitable corporation be distributed before the Department will consent to dissolution. The proposed bills would (1) eliminate the prohibition on distributions; and (2) allow a dissolved corporation the option of either filing the reports necessary to get back into good standing or complying with the requirements for obtaining Department of Attorney General approval of dissolution.
- Technical Changes. The proposed bills also include provisions correcting inconsistencies in previous legislation regarding participation by members and shareholders of nonprofit corporations and their proxies in meetings conducted by conference call and other means of electronic communication.
In the meantime, charitable purpose corporations are required to abide by the provisions of Public Act 222.