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May board change bylaws on control?

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May board change bylaws on control?

The bylaws of a public school educational foundation state that the corporation shall be managed by a board of directors “with the approval” of the Board of Education, and the board of the foundation is appointed by the Board of Education. Can the board of the foundation change the bylaws to assume separate independent status without the approval of the Board of Education?

These bylaws do not seem to be a model of clarity.  It is not clear how the foundation board is supposed to obtain the approval of the Board of Ed to know whether the foundation’s decisions are OK.  If the bylaws do not also give the Board of Ed the right to remove the directors, they really haven’t given the Board of Ed true control over the foundation.

Normally, when one organization wants to control another, the bylaws of the subordinate organization provide that they can’t be amended (at least on important issues) without the approval of the controlling entity.  I assume that these bylaws do not contain such a limitation or you wouldn’t ask the question.

Without researching the statute and case law of the state in which the foundation is incorporated, I can’t answer the question.  There is at least one case in Pennsylvania in which a court held that a Board of County Commissioners, which had reserved significant powers in governing the county nursing home but not the power to disapprove amendments to the bylaws, should be treated as a “member” of the corporation (like a shareholder of a business) even though it wasn’t classified as a member under the bylaws.  Under the Nonprofit Corporation Law, the Court said, the bylaws could not be amended on significant governance issues without the approval of the member. 

I have also seen cases holding that if the bylaws don’t specifically give another party the right to veto amendments on issues concerning their powers, there is no such right.

This is the kind of litigation that can be avoided if the bylaws are written carefully.  (See Ready Reference Page: “Bylaws Function as ‘Constitution” of Nonprofit Corporations”)  (See our Store for our most recent webinar on "Bylaws: The 'Constitution'oa of Nonprofits")

If the foundation wants to change the rules, however, it may have the leverage to get approval from the Board of Education.  It is the foundation, after all, that is raising the all-important extra funds for the schools.

Tuesday, July 15, 2014

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