Nonprofit Legal Risk Management
Introduction
The operation of not-for-profit organizations today is much more complex and litigation against not-for-profit organizations much more rampant. The exposure of the assets of not-for-profit organizations to liability goes further than just the loss of the assets themselves and/or the insolvency or winding up of the not-for-profit. Directors of these not-for-profit organizations may now also be faced with possible legal action being brought against them personally by donors, members, third parties and governmental authorities for breach of their fiduciary duties as directors. Given the threats to both not-for-profit organizations and their directors, there is developing an urgent need to protect their assets from future lawsuits and creditors and to do so on a pro-active basis.
The purpose of this checklist is to briefly outline the responsibility of directors of not-for-profit organizations, whether incorporated or not, to protect the assets of the not-for-profit organization, and then to provide an overview of some new and existing areas of liability exposure currently being faced by not-for-profit organizations in Canada as well as the means available to protect not-for-profit organizations against such risks. As it is impossible to adequately address all aspects of the liability exposure being faced by not-for-profit organizations today and the pro-active steps which need to taken, this checklist will instead provide a general overview of the recommended procedures that not-for-profit organizations and their board of directors need to be aware of to both identify and manage legal liabilities.
B. IDENTIFICATION AND MANAGEMENT OF LEGAL RISKS
1. Is charitable status even necessary?
2. General Overview Of Organizational & Legal Documentation:
a) Identifying existence and location of key organizational documents
b) Key organizational documents for an unincorporated not-for-profit organization
o Constitution and amendments to Constitution, if applicable
c) Key organizational documents for an incorporated not-for-profit organization
o Letters Patent and Supplementary Letters Patent, if applicable
o Membership Covenant or Mission Statement, if applicable
o By-laws and Resolutions
o Directors, Members and debt registers
o Copies of government filings
d) Determining other key legal documents:
o Leases, Deeds and Mortgages
o Agency, Association and Joint Venture Agreements
o License Agreements
o Business name, trade-mark and Section 9 Official Mark Registrations
3. Review Of Documents For Unincorporated Not-for-profit Organization:
Are there objects stated in the Constitution?
Do constitutional documents correctly reflect how the organization is actually structured and operated?
Is a copy of the Constitution filed with the appropriate government agencies?
4. Review Of Corporate Structure
a) Review of Letters Patent:
Is the name in Letters Patent the correct name and descriptive of objects?
Are the objects appropriate for a not-for-profit organization, i.e. not exclusively charitable?
Are the activities of the not-for-profit organization authorized by its objects?
b) Review of Supplementary Letters Patent:
Change of corporate name and/or objects
c) Letters Patent of Amalgamation (only for Ontario corporations):
Requires the same or similar objects
d) Need to review corporate by-law for basic terms.
e) Was initial corporate organization of the not-for-profit organization properly done?
f) Are the records of Board decisions and Membership Meetings complete?
g) Need to ensure that there is not inadequate Board and/or Members authorization for indebtedness.
h) Have there been improper maintenance of corporate records?
i) Need to maintain corporate filings and registration
Ontario corporations:
o Initial Notice and Notice of Change - Form 1
o Business Name Act Registration
o Report to Public Guardian and Trustee
Canada corporations:
o Annual Summary (Form 3) Canada
o Extra-Provincial Initial Notice (Form 2) Ontario
o Business Name Act- Ontario registration
o Report to Public Guardian and Trustee Ontario
Does the not-for-profit operate and/or fundraise in any other provinces? May need to register as extra-provincial corporation and/or as a fundraiser.
j) Developing, adopting and implementing Policy Statements on child abuse, sexual abuse and sexual harassment.
k) Loss of corporate status and dissolution for failure to maintain government filings.
l) Proper use of corporate name and business names other than corporate name.
m) Can the not-for-profit organization use multiple non-share capital corporations for its various activities to reduce liability exposure activities?
C. BOARD MANAGEMENT ISSUES
1. Identifying what group is in charge of the not-for-profit organization:
Where does defacto control lie?
Is Board authority recognized by Membership?
2. Determining lines of control between Board and the Executive Director.
3. Are Board meetings held frequently enough and do Directors regularly attend?
4. Do audit committees need to be established?
5. Communicating Board responsibilities to existing and future Board Members:
Need to create a Board Binder consisting of all corporate documents, as well as legal explanation of the general operations of the corporation, operating a corporation as a not-for-profit organization and Board legal duties and liabilities, to provide to all Board Members.
D. REDUCING BOARD LIABILITY
1. Do any Directors receive direct or indirect remuneration or benefit from the not-for-profit organization?
2. Does the not-for-profit organization indemnify its Directors and Officers?
3. Has the Board delegated too much responsibility to others?
4. Should the not-for-profit organization consider reducing the size of the Board?
5. If the not-for-profit organization effectively making use of committees?
6. Should the not-for-profit organization consider implementing an Advisory Board?
7. Has the not-for-profit organization reviewed all the ways of protecting the personal assets of Directors?
8. The not-for-profit organization needs to establish appropriate and comprehensive due diligence procedures for Board Members.
E. INSURANCE CONSIDERATIONS
1. Need to maintain historical record of insurance coverage.
2. Need to obtain annual report on existing coverage and recommendations from insurance broker.
3. Regularly review and upgrade general liability coverage and property insurance.
4. Need to secure directors and officers liability coverage.
F. THIRD PARTY USE OF PROPERTY
1. Potential liability exposure whenever a not-for-profit organization permits third party use of property.
2. Need to develop a property uses policy.
3. Need to develop a sample licence agreement with indemnification.
4. Need to obtain evidence of liability insurance from third party.
5. Need to charge appropriate rental fees.
6. Need to effectively implementing a property use policy.
G. REAL PROPERTY ISSUES
1. Re-register deeds within forty (40) years to maintain priority under the Registry Act.
2. Are there any Planning Act (Ontario) pitfalls?
3. Need to be aware of any encroachments with neighbouring land.
4. Are municipal zoning and legal non-conforming uses be complied with?
5. Need to identify if any liability for toxic property.
H. LEASING ISSUES
1. Are there any pitfalls in the not-for-profit organizations offers to lease?
2. Need to be aware of the effects of personal guarantees in leases.
3. Registering notice of lease on title when and why should this be done?
I. INTELLECTUAL PROPERTY ISSUES
1. Should the not-for-profit organization register any of its key names and/or logos as trade-marks or Section 9 official marks?
2. Who owns the copyright for publications of the not-for-profit organization? Should copyright be registered, assigned or licensed?
J. EMPLOYMENT AND VOLUNTEER MATTERS
1. Need to develop appropriate hiring policies and practices.
2. Need to establish general policy statements on lifestyle expectations for employees and appropriately document.
3. Need to develop and adopt specific policy statements for employees and volunteers.
4. The not-for-profit organization should establish suitable employment contracts.
5. Volunteers need to be properly selected and supervised.
6. Need to develop and implement an employee and volunteer manual.
7. Is there an appropriate discipline process in place?
8. Has an Occupational Health and Safety program been implemented?
9. Is the not-for-profit organization aware of and complying with collateral statutory compliance matters, including pay equity, employment standards, human rights legislation and privacy legislation?
K. ACTIVITIES
1. The not-for-profit organization needs to ensure that operations are done in accordance with its objects.
2. Need to be aware of any prohibitive fundraising activities by staff.
L. FISCAL MANAGEMENT ISSUES
1. Are all salaries and benefits being paid?
2. Is the not-for-profit organization operating with a deficit and for how long?
3. How is deficit being funded?
4. Has a sinking fund been established to retire debt?
5. Are improper fund raising vehicles in use?
6. Are investments being offered to the public without full disclosure?
7. Are funds being correctly invested and managed?
M. NATIONAL/INTERNATIONAL RELATIONSHIPS
1. Need to document relationships with national organizations and/or subsidiary chapters.
2. Need to document relationship of national organization to international structure.
3. Need to establish ownership of trademarks and licensing documentation.
DISCLAIMER:
This is intended for general information purposes only. Before making decisions based on your specific situation it is advisable to consult a lawyer.