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Lawyers Serving on Nonprofit Boards

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Lawyers Serving on Nonprofit Boards

It is not uncommon for lawyers to be asked to serve on board of directors of the nonprofit organizations in their communities. The issues that arise for lawyers serving on such boards are different than non-lawyers’ service. This program reviews the fiduciary duties imposed on directors of nonprofit organizations as well as the ethical issues that can arise when a lawyer is serving as only a board member and as both a board member and counsel to the organization. There is also discussion regarding protections available for a lawyer/director as well as considerations when deciding on whether to join a nonprofit board.

Transcript

Bill Boyd - Hello, this is Bill Boyd, and I will be speaking on Lawyers Serving on Nonprofit Boards.

By way of introduction, we have in the United States, over 1.6 million nonprofit organizations. The vast majority of these organizations are charitable in nature, and they cover a broad spectrum of activities that include, religion, health, social services, education, culture, community development, housing and human rights. When you look at a nonprofit corporation and its board of directors, it is not unusual to see that there is a lawyer or maybe more than one lawyer serving on the board of directors. And this makes sense, given the training that we have as lawyers naturally fits community organizations. Lawyers are good listeners, lawyers are trained problem solvers. Lawyers identify key issues and negotiate purposeful outcomes. And lawyers are pathfinders towards meaningful solutions and decision making. All these attributes can be very beneficial to a board of directors. Lawyers can serve as directors of nonprofits, as well as serving as counsel for the or organization. In either of these roles there are challenges that the lawyer needs to be mindful of and manage appropriately.

The first part of this presentation will focus on the fiduciary duties that are imposed on individuals who serve as members of the board of directors, of nonprofit corporations. The first part of this presentation will focus on fiduciary duties of individuals serving as members of the board of directors of a nonprofit corporation. We will also address some unique issues that arise in terms of fiduciary duties for individuals who are the lawyers. The second part of the program will focus on the ethical duties of lawyers serving as both a director and counsel for the organization. There are ethical issues for lawyers serving on the board, who do not represent the organization. There are also ethical and professional liability issues for lawyers who serve in the dual capacity. That is they are serving both as a director or a member of the board of directors, as well as a lawyer for the organization. The presentation will also address protections for lawyers serving on nonprofit boards and finally address considerations for serving on nonprofit boards. In terms of fiduciary duties of directors this is basically governed by state law and each state has a nonprofit corporation act that likely addresses fiduciary duties.

You will see in the presentation that there are references to the model nonprofit corporation act fourth edition. This is a model act developed by the nonprofit organizations committee of the business law section of the American Bar Association. And the fourth edition was recently approved by the nonprofit organizations in 2021. It replaced the model nonprofit corporation act third edition from 2008. Many states have adopted one version of the model nonprofit corporation act. Still it is important to look at these particular state law or state statute. Still it is always important to refer to the state nonprofit corporation law or the particular state where the nonprofit is located to determine the fiduciary duties that are imposed on directors.

In most states, there are two basic fiduciary duties, the first being the duty of care and the second the duty of loyalty. Under the duty of care, a director is required to act in good faith and with the care that a person in a light position would reasonably believe appropriate in similar circumstances. Under the duty of care, there are basically two main functions that are contemplated. One is, a director has a decision making responsibility and second, an oversight responsibility. In terms of decision making, the decision making function relates to a specific decision or action of the board as a whole, examples include considering and approving corporate policy and strategy. Selecting, evaluating, and compensating top management. Approving budgets as well as evaluating and approving major transactions. In addition, some state nonprofit corporation acts expressly recognize that a director has a duty to disclose to other board members or committee members information that's not already known by them, but it's known by the director to be material to the discharge in their decision making or oversight functions and there are some exceptions to that. One would be if the director reasonably believes disclosing the information would violate a duty imposed under law, or if there's a legally enforceable obligation of confidentiality that would preclude such disclosure as well as if there is a professional ethics rule that precludes such disclosure.

Now in carrying out the duty of care, it is recognized that while the board is responsible for decisions about the organization as well as oversight of its activities, that the board delegates operational and operational responsibility to the management. And state nonprofit corporation acts recognize that under the duty of care, a director is able to reasonably rely on others for information. And that includes officers of the organization, the organization's legal counsel and accountants, as well as other persons with regard to matters in which they have an expertise. And then finally, directors are able to rely on committees of the board. The only time that a director is not able to rely on others is if the director knows that the reliance is unwarranted. In terms of practical steps in carrying out the duty of care, it's important for a director to be fully informed about the nature of the activities of the organization. This means that when information is being sent to board members in advance of meetings, that it's essential that the board member be reviewing that information, as well as learning about the activities of the organization through orientations, as well as other activities sponsored by the organization. The duty of care expects that a director is, will be making decisions on a fully informed basis. So to the extent that there are board meetings in which matters are going to be voted on, it's important that the board member feel comfortable, that that board member is fully informed with regard to the issue that needs to be decided. If the board member has questions, those questions should be asked. In addition to that, to the extent that the board member has any concerns with regard to activities of the organization, or with regard to information that's being presented to the board, it's incumbent upon the director to be asking questions, about the information.

The second duty is the duty of loyalty, and this is the duty that gets more attention in the press. Basically under this duty, a director has a requirement to act in the best interest of the organization, as opposed to the interest of the director or another party. And situations in which the duty of loyalty can occur, relate to conflict of interest, situations, corporate opportunity, as well as confidentiality. In terms of conflict of interest, most state nonprofit corporation acts, address conflict of interest transactions and a process for handling the conflicts. And you would look at those statutes to see what a conflict of interest would cover in terms of the different types of transactions. The model nonprofit corporation act provides that a conflict occurs when the organization has a contract or is entering into a transaction with a member of the organization, a director, a member of the organization's designated body, or an officer, or an entity in which any one of these individuals holds a similar position or a financial interest.

If you have that type of transaction, then you have a possible conflict of interest. Now what's important to recognize is that not all conflicts are bad for the organization. In fact, there could be a conflict transaction that could be very beneficial to the organization because in some circumstances, directors are able to bring a good or service to the organization at a below fair market value or at a price that is lower than what the organization otherwise would've had to pay for. In that situation, it could be very beneficial to the organization to have to enter into the transaction even though there is a conflict. The problem is just the opposite occurring and that is where, a because a director is in a position of influence the organization ends up entering into a transaction with a, an organization that's tied to the director, and it's not beneficial to the organization. In that sense, you have a problem. So the key here is to manage the conflict and that you manage the conflict through the process of conflict of interest. In terms of handling that process or addressing that process, it's typically described how you are to handle a conflict in the state nonprofit corporation act.

So and typically what, what the actual will require are two main items. One is that there's full disclosure of the conflict by so that the director is fully disclosing, the nature of the conflict. And then secondly, that a disinterested part of the board or a disinterested committee is approving the transaction or determining whether to go forward with that transaction. Now those are kinda like the minimum steps that you would be expected to meet in handling a conflict of interest matter. The IRS is very interested in conflict transactions, involving tax exempt entities. And in fact, in the instructions for an application for tax exempt status for an entity seeking, tax exempt status under section 501 C3 of the internal revenue code, there's a sample conflict of interest policy. And in that policy, there's more steps that need to be taken by a nonprofit to ensure that a conflict is being properly managed.

Some additional steps that are important to be considering with regard to a conflict transaction is for instance one, after the director has disclosed the conflict and answered any questions with regard to the conflict, the director should be excused from the meeting so that the other members of the board, or if it's a committee deciding whether to go forward with the transaction are able to have a full discussion regarding the transaction without the influence of the director. Another important component to addressing conflict of interest transactions is that it's documented and it should be documented in the minutes. So the minutes would be identifying that there was a conflict describing who had the conflict, what the conflict was, how board decided the conflict. The fact that the board member who had the conflict did not participate in the discussions as well as was excused from the meeting. And finally the vote that was taken by the board to either approve or not approve the transaction.

In order to address conflict of interest, and to have a process that adequately addresses conflict of interest, It's important that the board members are asked on a regular basis about the relationships that they have with other entities, such as their employers, or major investments and so forth. And so it's incumbent upon the organization to be surveying their board with regard to these type of financial interests and with such a survey, the board and the organization itself should be in a better position to be able to address conflicts as they arise in the future. Somewhat similar to conflict of interest is the corporate opportunity situation. And this is basically a situation where a director or an officer pursues or takes advantage of a corporate opportunity that the director or officer knows or should have known would've been interest to the nonprofit.

So an example of that would be a director, an individual serves as a member of the board of directors of an art museum. And the individual director becomes aware of a piece of art that is available for purchase. And the director knows that this piece of art may be something that the art museum would like to add to its collection. Whether it could be a duty of loyalty issue arise if the director does not make that opportunity known to the art museum, as well as allow the art museum to take advantage of the opportunity. And there are cases where the duty of loyalty has been viewed as having been violated when the director has taken advantage for the director's own personal benefit, the transaction such as buying this piece of art and not allowing the art museum to buy it itself. So it's kind of similar to a conflict of interest transaction, but instead of the organization entering into a transaction, it's being precluded from taking advantage of an opportunity.



Now, some state laws or state nonprofit corporation acts address the corporate opportunity situation, and they basically provide for a process that is very similar to the conflict of interest process, that those state statutes mandate. Under the corporate opportunity provisions of the model nonprofit corporation act, it's basically two requirements. One is full disclosure to the board of the opportunity and then secondly, non participation, by the interested director in the board's decision as to whether to go forward with the opportunity. So in the art museum example, what the director would need to do is make it known to the board that this piece of art is available. And then let the other directors decide whether the art museum would like to pursue that opportunity or that acquisition. If it's determined by the disinterested board to not go forward with that acquisition, then the director would have the ability to go forward with acquiring it for the director's own benefit, without concern about duty breach of duty of loyalty.

And then another aspect of the duty of loyalty relates to confidentiality. Again, the duty of loyalty requires that a director act in the best interest of the organization. It's not unusual that during board meetings or as part of the board service, an individual has that, that the director will receive information about the nonprofit that needs to be kept in confidence, and that if it were disclosed outside of the boardroom or outside of the organization, it could be very detrimental to the organization. Assuming that it's not related to unlawful activity, it's incumbent upon the director to keep that information confidential. Otherwise the director is not acting in the best interest of the organization. Now, in terms of fiduciary duties, there is a unique issue that comes up when the director is a lawyer. Under the duty of care, directors are expected to use any expertise that they may have, in providing service to the board. That is for instance, when analyzing issues that they are using, to the extent the legal expertise applies that they are using that expertise. In other words, directors are not expected to check their expertise at the door when serving as directors.

Now, when legal issues come up, it's important for lawyers to be thinking about what those issues are, whether they have the expertise to address those issues but then also what is their role with regard to the organization. As indicated it is possible and often the case that a lawyer who's serving on the board is only serving as a director and not as the lawyer for the organization, but as issues come up in the boardroom that require the lawyer to exercise that the lawyer's expertise, the lawyer will be talking about different aspects of the law and that lawyer's thoughts with regard to how a legal issue might be handled. And to the extent that the lawyer is not acting as counsel for the organization, it's important that when the lawyer is providing the lawyer or the input as a director, that it's made very clear that the lawyer is not serving, or the director is serving as the lawyer for the organization. We'll now move to ethical duties of directors and this is really ethical duties of lawyers serving as members of the board of directors.

And for this part of the presentation, I'll be focusing on the model rules of professional conduct, which have been adopted or developed by the American Bar Association and adopted by most states. There are a number of rules that can come into play with regard to an individual serving on the board of directors of a nonprofit. And especially in the case where the lawyer is, has the dual role of both serving as a director, as well as serving as consult for the organization. But some of the rules that come into play include just the establishment of the lawyer, client relationship, the duty to provide competent representation, the duty of confidentiality, as well as duties arising when there are ethical conflicts. With regard to establishment of the lawyer client relationship, the model rules, impose requirements on a lawyer, if there is a lawyer client relationship or a prospective lawyer client relationship. And the relationship arises when the lawyer performs legal services for a client. In the nonprofit context, this could mean a lawyer serving as a member of the board of directors of the non profit, and then is asked if the lawyer could for instance, review an employment agreement or advise with regard to transaction with third parties or review the bylaws or amend the draft bylaws draft amendment to the bylaws or to the articles of incorporation.

Now, while this is while why this is important is because, many lawyers will go on the board of directors thinking that they will not serve as counsel for the nonprofit, but then are asked to provide legal services. And even if it's in the pro bono context, that is even if the lawyer is going to provide these services at no charge, by performing a legal service, such as drafting the bylaws for the organization, the creation of the lawyer client relationship has occurred. And then the ethical responsibilities to the client have arisen. As a result it's very important before lawyers who are serving as directors, agree to take on any type of activity in terms of, for instance, again, reviewing the bylaws or preparing an employment for the CEO, that the lawyer made clear the engagement of the lawyer with regards to the nonprofit and it's important to do that in writing.

Another rule that comes into play when a lawyer serving on the board of directors relates to the duty to provide competent representation. So it may be that a lawyer serving on the board and a legal issue arises, and that the lawyer is comfortable in providing legal services, legal advice to the organization that is serving in the dual capacity of being both the director, as well as the lawyer for the organization. In that case though, it's important that the lawyer be competent to provide the legal services. And that's even if again, the services are being provided on a pro bono basis. We have rule 1.1 in the model rules, which relates to, or addresses competence and it basically requires that a lawyer provide competent representation to the client. And that includes having adequate knowledge with regard to the issue. So again, regardless of whether the legal services are being provided for free, it's important that the lawyer only provide legal representation to the extent the lawyer is competent in providing that type of representation.

Another important duty relates to the duty of confidentiality and this is rule 1.6 of the model rules. And basically under rule 1.6, a lawyer's not able to reveal information relating to the representation of a client unless the client has given informed consent, or the disclosure is impliedly authorized in order to carry out the representation, or the disclosure is permitted under one of the exceptions under rule 1.6. But in terms of the exceptions, they are very limited. So rule 1.6 should be viewed very broadly in terms of being unable as a, as the lawyer for the organization to disclose any information about the organization. Now, this rule the duty of confidentiality under rule 1.6 should also be considered with regard to the fiduciary duty, the duty of loyalty and the confidentiality obligation under that duty. They, while they're similar, in some respect in that you're not supposed to disclose information about the organization, rule 1.6 is much more restrictive than, than the confidentiality obligation under the duty of loyalty.

So it may be possible then to disclose information about the organization under the duty of loyalty and not be in breach of that duty, but at the same time, if you disclose that same information and you are the lawyer for the organization, you still might be in breach of rule 1.6. So to the extent that the lawyer is in the dual, serving in the dual capacity of being both the director, a director for the organization, as well as being the lawyer for the organization, the lawyer needs to be mindful of both of those obligations and the fact that they may not be consistent. Another ethical issue that can arise with regard to service on the board of directors by a lawyer, relate to ethical conflicts. And the model rules have a number of specific rules that address conflict of interest situations specifically with regard to prospective clients, current clients, as well as former clients. Under these rules a lawyer is generally unable to represent the party if there is a conflict, unless an exception applies. Such as the lawyer obtains informed consent from both of the parties that are involved.

Now, rule 1.7 deals with concurrent conflict of interest, and it basically identifies or defines a concurrent conflict of interest to be a situation where the representation of one client, which my may be the nonprofit, will be directly adverse to another client, which may be another client of the lawyer. And that, and let's say that they're entering into a transaction with each other, that would be considered a direct conflict. You can also have a conflict under rule 1.7, if there's a significant risk that the representation of one or more clients. So let's say the representation of the nonprofit will be materially limited by the lawyer's responsibilities to another client. A former client, or a third person, or by the personal interest of the lawyer. And we'll get into an example when that type of situation may arise. But if you have a concurrent conflict of interest, because either a there's a direct conflict, or maybe an indirect conflict, then the representation cannot go forward without an informed consent from both of the parties. In terms of conflicts, to the extent that the lawyer is serving only as the director of the organization and not in the dual capacity as being both a director and counsel for the organization, then there's less risk with regard to conflict of interest under our model rules. But still even in that situation, a conflict can exist.

And I have two examples here one is where the lawyer who's serving as a director is asked to vote on funding to be provided by the nonprofit to another nonprofit that the lawyer or the lawyer's law firm represents. Well in that situation, the lawyer has a conflict and it has a, the lawyer could be viewed both a conflict under the duty of loyalty and given that the, it is the duty of loyalty, what would be important is that the lawyer and the nonprofit proceed in accordance with a, the process that has been developed, by that organization to handle conflict of interest transactions. Again, the basic steps there would be full disclosure of the conflict. So the lawyer would need to disclose that the lawyer, has an interest in the other nonprofit, and then recuse the lawyer from being involved in voting on it. Now, it may be that the lawyer's not able to disclose that the lawyer has represents the, the other nonprofit grantee applicant under rule 1.6 of the model rules of professional conduct. But even in that situation, the lawyer still would need to recuse or be recused from participating in the discussions and the vote on that particular matter. A second possible conflict that can occur, when the lawyers just, again, only serving as the director, a director of the nonprofit organization, is where the lawyers law firm is adverse on a matter involving the nonprofit.

So it's possible that the lawyers serving on a nonprofit corporation board, it might have a lease with a landlord, and that landlord may be represented by the lawyer or the lawyer's law firm while there is definitely a conflict for the lawyer. And again, what would be important is for the lawyer to follow the conflict of interest process and disclose that there is a conflict and not participate in the decision as to, in this case, go forward with a lease or negotiate a lease with the client of the lawyer. And in this type of situation, it's good for the lawyer to think possibly at the time of becoming a director of the nonprofit, whether there's likely going to be situations where conflicts like these can arise and it's possible for the lawyer to disclose to and get the agreement of the nonprofit, that it's fine with the nonprofit, that the lawyer be adverse or the lawyer's law firm be adverse to the nonprofit with regard to these matters. But again, follow the conflict of interest process going forward as those conflicts arise so that the lawyer is not involved in the decision making on the part of the non profit, as to whether to go forward with that type of transaction.

Now shifting to the situation where the lawyer is serving in the dual capacity. So that is where the lawyer is both a director, as well as counsel for the organization. In that type of situation there are other types of conflicts that can arise, and there is an ABA formal opinion. It's formal opinion number 98-410, that addresses various types of conflict issues that can arise, when the director is the dual capacity or serving in a dual capacity. This opinion is really focused on for profit organizations, but it applies equally to nonprofit organizations and provides good guidance with regard to how directors are lawyers serving this dual capacity should handle matters.

The first situation is where a lawyer is asked to pursue an objective on behalf of the client the lawyer as the director opposed. So let's say for instance, that you have a board meeting, the board is deciding whether or not to pursue a lawsuit against another party and the lawyer votes against pursuing the lawsuit, but is in the minority in the vote and the board ultimately votes to approve going forward with the lawsuit. The question is, can the lawyer go forward in terms of representing the non profit client in the lawsuit, even though the lawyer opposed going forward to it, when the board was making its decision. This can bring into play rule 1.7 and it's the indirect conflict of interest going back to that particular rule, it provides that a lawyer has a conflict. There's going to be a material limitation on the part of a lawyer in the representation due to the personal interests of the lawyer. Well, here the question is because the lawyer objected to pursuing the lawsuit, does that somehow preclude the lawyer from being able to fill the ethical obligations under the model rules to fully represent a client? I think from a practical matter, that should not preclude a lawyer from being able to represent the nonprofit. I think lawyers are asked to pursue objectives, lawful objectives that they might otherwise not believe are in the best interests of the organization, or the best alternative for the organization, but they are still able to pursue that in an objective manner. And I think that I think this type of situation can be addressed by the lawyer. It's important to be thinking about whether there's any kind of material limitation, but in the end, I think a lawyer is able to adequately address or in many situations would be able to adequately represent the organization, even though the lawyer personally opposed the course of action as a board member.

The second type of issue or conflict that can arise, relates to situations where a lawyer is asked to opine on a board action that was taken and it's board action that the lawyer participated in. So let's say the board voted to proceed with certain course of action, and then subsequently the nonprofit decides it needs a legal opinion, from a lawyer as to the lawfulness of the action that was voted on by the board of directors. Well, in that case, there is a conflict for the lawyer because the lawyer was involved in the actual decision making. And now is being asked to opine on that particular decision. In that situation there's a conflict it needs to be addressed. I think quite likely what would happen in this type of situation is the lawyer would not be able to go forward with the representation of the organization in terms of providing the opinion. It's probably more optimal to seek legal counsel from another law firm who'd be able to provide more objective advice, with regard to this particular issue. A third situation that's addressed in the formal opinion, are corporate actions that are taken that is the board voting on a matter that involves the lawyer's law firm or the lawyer providing legal services. So this may be where the board is deciding whether to retain the law firm in which the lawyer is a partner or works or otherwise works. In that situation, you have basically a traditional conflict of interest transaction.

And going back to the duty of loyalty, you would be looking at the state laws requirements for conflict of interest. You'd be looking at the nonprofits policies with regard to conflict of interest, and then following those procedures to make a determination as to whether or not the law firm should be retained. Now, basic to those procedures is that the lawyer would disclose that there's a conflict the lawyer would make it clear that the lawyer has a financial interest with regard to the law firm being retained. And then the lawyer would not be involved in the decision making, with regard to whether in fact, the board does retain the law firm. So I think what can happen here is that the lawyer discloses, if it's not already known that the lawyer is a partner or otherwise works for the law firm, answer any questions that the board may have, and then be excused from the board meeting so that the board members can discuss the issue and take action as to whether or not it makes sense to go forward with the retaining that particular law firm. But I think if you proceed under the procedures under they're set forth for under the duty of loyalty, that there should be protection for that type of engagement of the law firm.

And then the third-fourth situation is a situation where a lawyer might be asked to represent the organization, the nonprofit entity in litigation. Where both the entity itself, as well as the directors are defendants. Well in that situation, there's a concern about a lack of independence on the part of the lawyer, because the lawyer is also a defendant in the action. There's concerns about conflicts of interest, as well as, whether the organization can be adequately represented by the lawyer. And I think in those type of situations, what's advised is that the nonprofit should consider retaining a different law firm to represent it with regard to that particular type of litigation. The model rules do not have a specific rule that addresses the dual service. That is a lawyer serving as both a director, as well as the lawyer for the organization.

However, in rule 1.7, there's a comment to the rule and it's comment 35, which specifically recognizes that it's possible that there will be this dual capacity. And what's important to recognize with regard to this comment in comment 35 is, first of all, it's recognized that this dual could capacity is not prohibited, but that it does present risks. And the comment talks about some of those risks that need to be considered. It talks about the importance of determining whether the responsibilities that is the dual responsibilities may conflict, as well as having the lawyer consider the likelihood that there's a specific reference to one of the conflicts identified in the formal opinion. And that is the situation where the lawyer may be called to advise the organization in matters involving the actions of the directors. That's kind of an example of a conflict that could rise. The comment also advises that lawyers, if they're going to be serving in the dual capacity, that they should be thinking about the frequency in which conflicts are going to arise, the potential intensity of the conflicts, as well as the effect of the lawyer's resignation from the board or possibly as the lawyer for the organization, if conflicts do arise.

In addition to that, the comment notes that if there is a material risk that the dual role will compromise the lawyer's independence of professional judgment, that the lawyers should step back and not either serve as a director or not serve as the lawyer of the organization. That is not take on that dual role with regard to the organization. The comment also notes that the lawyer should be communicating with other members of the board about the issues that do arise as a result of the dual capacity. So that the lawyers should be advising with the other board members that there may not be attorney-client privilege protection with regard to the discussions that take place. And we'll be getting that to that in just a minute, as well as addressing the fact that the lawyer may have to recuse or be recused from certain discussions because of the conflict and that the other board members should understand that and be agreeable to that, the fact that that may occur. Now in terms of attorney client privilege, when a lawyer is serving in the dual capacity. And so of being both the director, as well as the lawyer for the organization, if the lawyer is speaking to the board or communicating with the board in the role of being the counsel for the organization, then the attorney client privilege can protect the communications taking place between the lawyer and the board on a particular matter. That's where the attorney-client privilege will attach.

However, in other situations where the lawyer is just acting as a board member and not as counsel for the organization, there is not the protection of the attorney-client privilege. Now from the lawyer standpoint, the lawyer likely will know when it is that the attorney-client privilege protection is in place with regard to what is taking place possibly in the boardroom, because the lawyer understands when the lawyer's acting for as counsel for the organization, as opposed to just as a board member. The problem is, that the other members of the board may not appreciate the distinction. And they may think just because the individual lawyer who represents the organization is in the boardroom, that everything that's being said in the boardroom or communicated among the board members is protected by the attorney-client privilege, just because one of the directors is also the counsel for the organization. And that's not going to be the case. So if becomes incumbent upon the lawyer to make clear to the other board members that there may not be protection of the attorney-client privilege with regard to certain aspects of board meetings or communications among board members. And that the mere presence of the or involvement of the lawyer in those type of communications is not enough. The lawyer needs to be acting as counsel for the organization. Moving to protections for lawyers serving on board of directors. When you look at each state's nonprofit corporation act, many of them have liability shields for individuals serving as directors or officers of organizations of nonprofit organizations. And these liability shields basically can provide that an individual serving the director will not be liable for any actions or inactions, except in limited circumstances. The model nonprofit corporation act has a provision that applies automatically to charitable organizations.

Some states have shields that apply automatically if the directors are not compensated for their services, but many states do have some type of liability shield. The model nonprofit corporation act basically provides that, a director will not be liable for any actions or inactions, except the amount of any financial benefit to which the person is not entitled. So that would be for instance, a conflict of interest transaction that did not go through the proper process for handling conflicts. The second would be an intentional infliction of harm on the corporation or its members. The third would be an unlawful or a violation of the unlawful distribution rule for nonprofits. And then fourth would be an intentional violation of criminal law, but those are a narrow exceptions. And so if there is a liability shield and the directors are entitled to the protection under that liability shield, it can be very helpful in terms of precluding liability.

There, for other types of nonprofits, the model nonprofit corporation act allows that a corporation can kind of similar to a business corporation, include a liability shield provision in its articles of incorporation. And that would give protection to the directors with regard to liability. The problem with the liability shield is that while it may ultimately protect a director from liability, and that includes a lawyer director from liability, it does not preclude the lawyer or the director from incurring attorney fees and it doesn't provide for reimbursement of those fees if ultimately you're found not to have liability. So other protections that are important to look at include indemnification and most nonprofit corporation acts allow for corporations or nonprofit corporations to indemnify their directors and officers. The model nonprofit corporation act can allow, allows a nonprofit to agree that it will, in all circumstances, indemnify its directors, except to the extent that they fall into one of those exceptions where the liability shield is not applicable. So that can be very helpful in terms of protection for a director.

But with indemnification, you have to look at the assets of the organization and for, to the extent that an organization does not have significant assets, the indemnification may not be a great deal of protection for the lawyer or the lawyer serving as a director. So it's important to be looking to see if there is directors and officers liability coverage for the directors. And basically D&O coverage is put in place to protect the directors as well as others involved in the governance and operation of the organization against liabilities relating to governance, fiduciary liability as well, and can include employment practices liability. So D&O coverage becomes very important. If a lawyer is also serving as the, not just as the director for the organization, but also as the lawyer for the organization, then it's important for the lawyer to be looking at the lawyer's professional liability coverage to determine what type of coverage the lawyer will have with regard to, the legal services provided to the organization.

Now some, and in this situation, it will be important that the nonprofit is considered a client of the lawyer or the lawyer's law firm and that has been properly documented. And moving to considerations in determining on the board of directors of a nonprofit corporation. First of all, it's important to determine what the expectations are of the directors and officers of the organization. This was a time commitment and as we discussed, the duty of care requires that the director be fully informed about the activities of the organization and the issues that are before the board and that takes time to be able to review documents and to attend meetings. To the extent that lawyers interested in serving on the board, but will not have time to go to the board meetings there's a concern under the duty of care as to whether, that particular fiduciary duty will be met since the lawyer is not attending board meetings. So time obligations are important. It's also important to be considering what other, what are the other expectations that the organization has, with regard to board service.

For many smaller nonprofits, there could be a fundraising expectation and lawyers, as well as anyone else serving on the board of directors need to be thinking about, whether they have the time as well as the interest and willingness to do that type of fundraising for an organization. And then for lawyers in particular, thinking about board service, it's important to be considering whether or not the organization expects other types of services such as providing legal representation to the organization. And if it is important to understand that expectation upfront so that you can plan for it accordingly.

Another consideration with regard to board services, what is the likelihood that the lawyer or the lawyer's law firm will become adverse to the nonprofit organization? And again, we've identified a few situations where that could occur. It could occur where the nonprofit is entering into a transaction with a client of the firm, or maybe has a dispute with the client of the firm. It could also arise in the situation where the nonprofit is a grant-making type entity and is considering making a grant or other contribution to a client of the firm and those type of situations. It's important to be thinking about what's the likelihood that's going to occur. And can there be an agreement at the outset with regard to how the parties will address that type of conflict when it arises? And maybe, as we discussed that the best process is for the lawyer to identify that there is a conflict and to then be recused from participating in the discussions and the determination with regard to that particular activity. Whether it be a transaction, an agreement, a dispute, or whether it be some type of grant being made to a client of the firm that the lawyer be excused and not participate in that type of decision making. But again, that's a consideration that should be occur early in the decision as to whether or not to go forward with serving on the board.

Another consideration is the governance documents for the organization. What do the articles of incorporation and the bylaws provide with regard to the governance of the organization as well as to the protection, with regard to the directors and officers of the organization. It may be that when you look at those documents, you'll be able to see that there's either a liability shield that has been placed in the articles of incorporation or possibly the bylaws of the entity, as well as indemnification provisions.

And these are important because another important aspect of thinking through whether you need to, would like to serve on the board of directors or whether it makes sense to serve on the board of directors of a nonprofit is what protections, what type of protections does the organization have in place to protect the directors and officers of the organization? So again, you'd be looking at the articles of incorporation likely, as to whether there's a liability shield. That is a provision says that the directors will not be liable for their actions or inactions, except in limited circumstances, you might also be looking at state law to see what, what type of statutory shield applies as well as what do the governance documents say about indemnification? Is it permissive that is, does the, does the board decide on a case by case basis whether indemnify directors or has the organization agreed that in all situations it will indemnify the directors except in limited circumstances. And then given the limited resources of nonprofits, it's always important to be looking at what type of directors and officers liability coverage does the nonprofit have? because that is going to be the real protection that likely will need to be relied upon in the event that there's a dispute that arises, that brings in the lawyer director as a possible defendant in an action. Another consideration is if the legals, if there is an expectation that legal services are gonna be provided, then it's important to understand what type of legal services are expected and to determine whether the lawyer is qualified to perform those services. So while the nonprofit may look at a lawyer as being able to represent the nonprofit on any legal issue that might arise, it will be important for the lawyer to make clear the lawyer's limitations with regard to any possible representation that the lawyer may be willing to provide. In addition, if the lawyer is going to be serving as the lawyer for the organization it will be important for the lawyer to be reviewing the lawyer's own professional liability coverage. To ensure that there will be coverage for the lawyer, even if the lawyer is providing limited legal services to the nonprofit and doing it on a pro bono basis.

And then there needs to be clear expectations made with the nonprofit, with regard to the exact role of the lawyer. Even if the lawyer is serving only as the director of the, as a member of the board of directors and not as the counsel for the nonprofit, it should be made clear in writing that the lawyer is only serving in that single capacity and will not be providing legal services. Some law firms require that their lawyers actually obtain written acknowledgement from the nonprofit that the lawyer who will be serving, as a member of the board of directors will not be expected or be providing legal services to that nonprofit. In the event that the lawyer director decides to in fact, provide legal services, then it's going to be important to make clear what is the scope of the engagement for the lawyer. If it's going to be limited to a specific activity such as reviewing the employment agreement for the CEO of the organization, or assisting with the application for tax-exempt status for the organization, there should be some type of documentation, some type of retention letter that makes clear that it is a limited scope engagement so that it doesn't become an engagement where the parties start thinking, or the, at least the nonprofit views, the lawyer as kind of the general counsel for the organization if that is not what the lawyer is intending to occur. It's also going to be important for the lawyer director, especially when serving in the dual capacity to be alert as ethical issues arise, and to alert others about the fact that there are ethical issues and the planned approached with handling those issues again, under the comment 35 and rule 1.7, it's expected that lawyers make the other board members aware of the, these type of situations and the fact that it may be necessary for the lawyer to recuse or be recused from participating in certain board activities because of the conflicts that can arise. In terms of protecting the attorney-client privilege when the lawyer is serving in dual roles, there's a thought that the lawyer needs to be mindful of those situations, where the lawyer is acting as the lawyer counsel for the organization and when the lawyer is not. And to make sure that the other board members recognize that distinction.

The ABA formal opinion talks about the need for the lawyer director avoiding the temptation of providing business or financial advice, except to the extent that it affects legal considerations. And it also provides that when appropriate, the lawyer director should have a another member of the lawyer's firm present at the meeting to provide legal advice. That approach can help avoid situations where board members are confused as to whether or not the attorney-client privilege attaches because they will know that it attaches when another member of the lawyer's law firm is in the room, as opposed to when the lawyer who's also a director is in the room. So in conclusion, a lawyer serving on the board presents certain risks and the risks are enhanced when the lawyer is serving as both the lawyer for the organization, as well as a member of the board of directors. But these are risks that can be managed, but need to be thought through. And it's incumbent upon the lawyer to be thinking about those issues on a continued basis.

But with that, and with that, this presentation is concluded and do good, well. Thank you.


Presenter(s)

Willard Boyd
Member
Nyemaster Goode, P.C.

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