The California Office of the Attorney General recently released its Charity Governance During the COVID-19 Pandemic guidance for nonprofits on how these organizations can fulfill some of their governance obligations remotely during the COVID-19 pandemic. In addition, the guidelines discuss the lifting of certain restrictions on the use of nonprofit endowment funds.
Emergency provisions
The California Corporations Code has provisions that provide nonprofits with flexibility on conducting ordinary business operations during an emergency. Unless expressly prohibited by an organization’s bylaws, the following actions are allowable:
- Meetings of the board of directors of a nonprofit corporation may be conducted through the use of conference calls, electronic video screen communication, or electronic transmission. For a meeting of members to be conducted through electronic transmission or through electronic video screen communication, the nonprofit corporation must implement measures to provide the members with a reasonable opportunity to participate and to vote on matters, including an opportunity to read or hear the proceedings of the meeting and keep records of the votes and actions taken at that meeting.
- Notice of director meetings can be given in any practicable manner.
- For quorum requirements, one or more of the officers present at a board meeting can be deemed a director, in order of rank and within the same rank in order of seniority, as necessary to achieve a quorum.
- Relocate the principal office during an emergency, designate alternative principal offices, or authorize the officers to do so.
- Modify the lines of succession to accommodate the incapacity of any director, officer, employee, or agent. The board cannot take any action that requires the vote of the members or take any action that is not in the corporation’s ordinary course of business unless the required vote of the members was obtained before the emergency.
Modification of endowment funds
A number of nonprofits have endowment funds to support their programs. These endowments are subject to the requirements of the Uniform Prudent Management of Institutional Funds Act (UPMIFA), which requires nonprofits to act in good faith and with prudence in the use of these funds. Under the California UPMIFA, spending more than 7% of the fair market value of an endowment fund may create a presumption of imprudence.
The California AG’s guidance recognizes that nonprofits may wish to use endowment funds to offset budget shortfalls due to COVID-19 restrictions on normal fundraising activities and a heightened need for services. However, before doing so, nonprofits are advised to contact the donor(s) to determine if they are willing to release or modify the restrictions on the fund.
The California AG provides for the modification on the use of endowment funds with the following restrictions:
Nonprofits with endowment funds that are over 20 years old with a value of less than $100,000 may modify or release restrictions on those funds after 60 days’ written notice to the California AG and the donor’s last known address. In the AG’s notice, the nonprofit must show how the endowment has become unlawful, impossible, impracticable or wasteful to operate with the restrictions. The notice should also propose an alternate use that is consistent with the charitable purposes expressed in the gift instrument.
Nonprofits with endowment funds of more than $100,000 must seek court approval to modify any restrictions on those funds, with notice of the petition provided to the AG’s office. A nonprofit must demonstrate that either the purpose of the restriction has become unlawful, impracticable, impossible to achieve or wasteful, or that restrictions in the gift instrument regarding management or investment have become impracticable or wasteful, or that due to circumstances not anticipated by the donor, a modification on the restriction will further the purposes of the fund.
The Church Law Center of California advises churches and other nonprofits on how to protect themselves from risk while furthering their mission. Call us today at (949) 892-1221 or reach out to us through our contact page.
