Takeaway: DC nonprofit corporations formed prior to 1963 have a choice to remain under DC's old nonprofit corporation act or to come under the new act. If the entity wants clearer guidance on structure, then electing to come under the new act would be an appropriate decision. But if it prefers to stay under the old act, it must be careful to follow some new regulations or it will end up coming under the New Act.
Discussion: The DC Nonprofit Corporation Act of 2010 (“New Act”) went into effect on January 1, 2012. Under the New Act, so called “Old Act” corporations (those incorporated in DC prior to January 1, 1963 that have not previously elected to come under the new law) have until January 1, 2014, to decide whether they will elect to come under the New Act or remain under the Old Act.
DC’s Department of Consumer and Regulatory Affairs (“DCRA”) published proposed regulations for the second time on August 9 with the intent that they go into effect within 30 days of publication. The regulations describe the actions that must be taken by Old Act corporations to make this election. Whether they decide to remain under the Old Act or go under the New Act, for the first time Old Act corporations have to file a biennial report by April 1, 2014.
If an Old Act corporation elects not to come under the New Act, it must be careful as certain action (or inaction) will cause it to come under the New Act regardless. To keep its Old Act status a corporation must:
- Follow the proposed regulations precisely;
- Make its election to stay under the Old Act by January 1, 2014; and
- File its biennial report and apply for reinstatement after an administrative dissolution of the corporation.
The process for declaring its intention to remain under the Old Act or come under the New Act is similar. In both cases the corporation:
- Adopts a resolution (suggested language is provided in the proposed regulations) in accordance with its articles and bylaws, expressly electing or not electing to become subject to the New Act; and
- Files a copy of the resolution and a copy of its articles of incorporation with the DCRA.
If the corporation is electing to remain under the Old Act, it must also file with the DCRA a list of the names and address of all current officers and directors of the corporation and a designation of a registered agent (someone to receive notices from the DC Government and court filings).
If the corporation is electing to come under the New Act and it has members, unless members are already mentioned in its articles of incorporation, the articles must be amended to state that the corporation has members.
DC was the first jurisdiction to adopt the latest version of the Model Nonprofit Corporation Act. It includes some up to date features such as allowing members to hold a virtual meeting via a chat room or similar technology.
It also provides greater flexibility in governance structures than the prior Act such as:
- Not requiring specific titles and duties of officers;
- Allowing for a voting delegate assembly;
- Allowing electronic voting by members; and
- Allowing an organization to be run by its members, as opposed to a board.
The New Act has faced many tests in the 19 months since it went into effect as its provisions have been applied to real world situations. The proposed regulations are intended to clarify some of the vague or missing terms in the New Act that were identified during the first year it was in effect.
The major benefit of electing to come under the New Act is that the organization will have guidance in terms of its governance. The Old Act provides little guidance on corporate governance as the chapter on charitable, educational and religious associations is only three pages long. In contrast, in the New Act, the Nonprofit Corporation Act is 139 pages. On the other hand, under the Old Act, nonprofit corporations had wide discretion in terms of their governance, and some organizations might very well want to keep it that way.
Under the Old Act, nonprofit corporations were created and then they had no further interaction with the DCRA unless they wanted to file articles of amendment to their articles of incorporation. They were not required to file reports or maintain a registered agent. The New Act has taken away that benefit, since even Old Act corporations must file biennial reports and maintain a registered agent in DC beginning in 2014.
As noted above, if an entity desires more guidance on structure, then electing to come under the New Act would be appropriate, but if not, you must be careful to follow the new regulations outlined above or you will end up coming under the New Act.