Many businesspeople serve on the boards of directors or trustees for charities and nonprofits statewide with the intention of giving back. But before accepting a board seat, consider the legal implications. People often overlook the fact that as a director or trustee, there are legal obligations to the organization that can leave you personally liable if legal action is taken against the organization.
Before committing to serve on any board, make sure the charity has director and officer liability insurance. Without it, the charity's limited resources can be at risk, and so can your personal assets. This insurance often covers many types of damages for which board members can be held liable. Even if the nonprofit and board members aren't found liable in court, this insurance can cover the costs of legal action, which can be staggering. If the charity has employees, the policy should include coverage for employment practices liability claims, such as harassment, discrimination and wrongful termination.
Duty and Liability
In becoming a board member, you assume several duties that carry responsibility and liability-duties of care, loyalty and fiduciary responsibility to ensure assets are used for the charitable purpose for which they were donated. Conversely, directors or trustees do not have a duty to actively manage the day-to-day operations of the charity or become involved in personnel matters. The charity's professional management handles those demands.
Directors and trustees are required to act with a minimum degree of diligence and attention and engage in informed decision-making. They are not legally obligated to make correct decisions, just decisions made with sufficient care. Board members are required to be actively involved in board duties, including attending board meetings.
Missing meetings would not, most likely, give rise to legal liability. But, it could, though, be one of a number of factors cited that, in the aggregate, constitute some abandonment of duties that facilitated the bad deed. So alone, missing meetings is probably not enough to expose someone to liability, but this is an easy exposure to avoid. If you agree to serve, then serve, or get off the board.
Conflicts of Interest
Board members also have a duty to act in the best collective interests of the charity and its mission, and avoid conflicts of interest, seeking personal benefits, and deals that personally benefit them.
By statute, charitable organizations in NH are required to have a written policy regarding conflict of interest governing transactions between the charity and its directors, trustees, officers and their families. Nonprofits must file reports annually with the director of the Office of Charitable Trusts in the Attorney General's Office listing all pecuniary benefit transactions in excess of $500 (transactions involving the nonprofit where a director, officer, or trustee has a direct or indirect financial interest).
Deals involving board members of charities also require approval by a super-majority of disinterested directors or trustees, and, under certain circumstances, publishing a notice in a newspaper. The conflict-of-interest statute also imposes other restrictions: Charities may not lend money or property to directors, officers or trustees, and any director, officer or trustee who consents to such a loan is personally liable for it. The charity may not buy or sell real estate to or from an officer, director or trustee, or lease it for more than five years without the prior approval of the probate court.
Protecting Board Members
Charities that are formally organized as a nonprofit corporation (or voluntary corporation) bear the brunt of liability for board members as opposed to an organization that is an informal group of people working on a project or cause. Forming a nonprofit corporation in NH requires five individuals who are unrelated by blood or marriage to sign Articles of Agreement and file them with the Secretary of
State's office.
New Hampshire has a statute-RSA 508:16-that limits the liability of a volunteer director or officer of certain charities. Directors and officers will not be liable for certain damages if they were acting in good faith. They also must doing an activity for the charity. The covered damages include those resulting from bodily injury, personal injury or property damage.
Merely being a nonprofit is not enough for a charity to benefit from this statute. The charity must also perform some public good for the general public, including in part NH citizens.
A similar federal statute exists (the Federal Volunteer Protection Act of 1997), but NH has opted out of it. For circumstances involving non-NH residents, that Act is applicable.
Under NH's nonprofit corporations statute, a nonprofit is allowed to put into its Articles of Agreement provisions eliminating or limiting the liability of a director or an officer for damages due to a breach of fiduciary duty, with certain exceptions.
The exceptions are a breach of the duty of loyalty, or anything which was not in good faith or which involved intentional misconduct or a knowing violation of the law, or any transaction from which the officer or director derived an improper personal benefit.
By paying attention to these issues, and taking appropriate precautionary steps, serving on the board of a charity can be a rewarding experience without any unanticipated adverse consequences.
Scott W. Ellison is a partner in the business law firm of Cook Little Rosenblatt & Manson PLLC in Manchester, where his practice focuses on representing closely held businesses and nonprofit entities. He can be reached at 603-621-7122 or s.ellison@clrm.com and followed at @NHBusinessAtty.
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