Members Can’t Remove Directors of Board-Only Nonprofit

Members Can’t Remove Directors of Board-Only Nonprofit

Court holds improperly ousted directors in contempt for failing to turn over documents pursuant to Order

The members of a Michigan nonprofit corporation have no authority to remove directors when the corporation’s articles of incorporation provide that it will be governed by the board alone, the Michigan Court of Appeals has held.  It has nevertheless upheld a trial court’s contempt citation against directors who refused to turn over corporate records after they were improperly ousted.  (Michigan Military Moms v. VanHooser, Ct. of App., MI, No. 306553, 1/24/13.)

The controversy arose out of a governance dispute in the Michigan Military Moms, a 501(c)(3) organization providing support for military families.  At a meeting of members in January 2011, where 21 members were present, the members voted to remove six directors and elect new directors to the board, including a woman who was then elected president and another elected secretary. The new president was given authority over the bank accounts.

Four of the ousted directors sued to overturn the action, claiming the meeting had been called without proper notice and in contravention of the bylaws.  The trial court ordered a new election and, before the vote, ruled that the members had the right to vote in the election.

The election was held.  The newly elected directors were re-elected and the ousted directors were not.  The court ruled that the election was held in accordance with its order and ordered the ousted directors to turn over financial and other records to the new officers.  When they failed to do so, the trial court found them in contempt and ordered the four ousted directors to pay $500 in lieu of returning certain personal property to the corporation.  The ousted directors appealed both rulings.

The Michigan Nonprofit Corporation Act allows a non-stock nonprofit corporation to be formed on either a “membership” or “directorship” basis, and the articles of incorporation require the organization to make a choice.  The Act provides that a corporation organized on a “directorship” basis may or may not have members, but that “the members shall not be entitled to vote” and that matters that would be subject to membership vote in a membership corporation shall be effected by vote of the directors.

The articles of incorporation of Military Moms chose to be a “directorship” corporation.  The bylaws, however, provided for members with voting rights and provided a procedure for removal of directors by the members.  The Court of Appeals ruled that the language “conflicts” with the statute, and was therefore invalid.

“The bylaws therefore purport to allow conduct that is prohibited by the directorship statute,” it said.  The Act “provides that non-profit corporation bylaws ‘may contain any provision for the regulation and management of the affairs of the corporation not inconsistent with law or the articles of incorporation.’  (Emphasis added.)  This language of the bylaws is inconsistent with the [Act] and with the articles’ designation of the corporation as a directorship.

“Bylaws are a contract between a corporation and its shareholders,” it said.  “A contract that conflicts with a statute is void.”  It reversed the trial court’s ruling that had permitted the members to vote.
The Court refused to reverse the contempt order, however.  Although the individuals argued that the order was directed to the corporation and not to them individually, the Court said that a corporation acts only through its officers and agents, and that those individuals who are officially responsible for the corporation’s actions can be held responsible if the corporation fails to act. 

It also held that the fact that it had reversed and vacated the underlying order on the election procedure did not affect the trial court’s order of contempt.  “A trial court has the inherent and statutory authority to enforce its orders,” the Court of Appeals said.  The officers were required to follow those orders.  “We remind [those officers] that the validity of an order is determined by the courts, not the parties,” it concluded.

The choice of whether or not to have voting members is critical to the structure and operation of a nonprofit corporation.  (See Ready Reference Page:  “Articles of Incorporation Establish Basic Form of Nonprofit Corporation”)  The choice and the practice, as this case shows, do not always align.  The articles of incorporation normally override both the bylaws and the practice, but when there is a conflict, as this case also shows, it is a classic opportunity for two years (or more) of litigation.  It is so much better to resolve the question properly with correct articles of incorporation and bylaws before there is a dispute.

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