Sep
06
2010

Delaware Revised Statutes – Part II

I don’t like members. Not as individuals, but as a non-profit corporate law term of art, mostly because it so often leads to confusion.  I plan to rant more about this in a future blog. But for purposes of analyzing the changes to the Delaware General Corporation Law (“DGCL“) though, I will simply note that in many jurisdictions, a “member” is someone (other than a director or delegate) entitled to vote for directors; members also generally get to vote for important corporate actions, like mergers and dissolutions. And, in all jurisdictions I know of, a non-profit corporation may, but is not required to, have members. If it doesn’t, its directors themselves may vote for the next slate of directors and approve all corporate actions. As I noted in my August 19 post, unlike most jurisdictions, Delaware does not have a nonprofit corporation act; rather corporations that want to be exempt are organized as Delaware nonstock corporations under the DGCL. And I noted some of the changes to the DCGL that improved its application to non-profits.
 
Another change to the DCGL is that section 102 now provides that all Delaware nonstock corporations “shall have members”, but if neither the corporate charter or bylaws provide for members, then the members shall be deemed to be those persons entitled to vote for directors. Thus, for the many Delaware non-stock non-profit corporations that have self-perpetuating boards of directors, their directors are also their members. It gets more confusing. For example, DGCL 276 provides that, where the directors desire to dissolve, they shall so resolve and submit it to the members to vote. But if there are no members, then the vote of the directors is sufficient. So, how does dissolution work in the context of a Delaware non-profit non-stock corporation that does not provide for members? Before the revisions to the DGCL, section 276 led to the conclusion that only the directors need to vote. Now, that part of DGCL 276 seems to apply to nothing–there are no member-less corporations; rather, if we follow the current letter of the law, the directors approve dissolution and then recommend it to themselves (but now wearing their member hats). As a practical matter, a joint written consent of the directors and members will work. As a theoretical matter, this has all the clarity of the plot of Inception. 
 
In addition, since nonstock corporations under the DGCL may or may not be non-profit non-stock corporations, new section 114 of the DGCL defines a “membership interest” as a member’s share of the profits and losses or a member’s right to receive distributions of the non-stock corporation’s assets (both rights that non-profit non-stocks cannot grant). But the rights and interests of a member of a non-profit non-stock corporation are referred to simply as “memberships.” The similarity of these terms and the fact that both are commonly used with different meanings in other contexts can also cause confusion in interpreting the DGCL. Thus, with respect to members, I think the DGCL is more confusing now than it was before the revision. I will continue to consider this a strike against Delaware when doing a choice of law analysis for a non-profit corporation. 

3 comments

  • Dennis P. Spates says:

    May the majority of the Board of Directors of a Delaware or NY not-for-profit corporation be comprised of non-US citizens?

    • Nathan Boyce says:

      As far as I can tell from the statutes, yes. Neither the statues of New York nor Delaware provide restrictions on the citizenship of directors. (Delaware only limits directors by requiring that they be natural persons (141(b) of the DGCL) and New York by requiring directors to generally be at least 18 years old (701(a) of the Not-for-Profit Corporation Law)). But, I do not know if there is any caselaw in either jurisdiction that discusses citizenship of directors (though I’d be surprised if there was).

  • Dennis P. Spates says:

    Thanks for your response Nathan! My analysis is exactly the same.

    Best,
    Dennis P. Spates

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