Posted: May 28th, 2017
By: Tommy Tobin*| Guest Writer
Are you considering joining a non-profit board of directors? Non-profit boards in North Carolina operate similarly to those of their for-profit cousins but important differences exist, especially with regard to liability exposure. State law encourages non-profit board service and offers additional immunity protections for volunteer board members.
Comparing North Carolina Non-Profit and For-Profit Boards
Both for-profit and non-profit corporations in the state have similar corporate forms, requiring articles of incorporation and a board of directors. Board members are each expected to act within set fiduciary duties. Board members for non-profit and for-profit entities must act in good faith, with the care of an ordinarily prudent person in a similar situation, and in the best interests of the organization.
For non-profit and for-profit boards, North Carolina law also allows the articles of incorporation to include a provision either limiting or eliminating the personal liability of directors for monetary damages arising from their service on the board. Accordingly, those presently serving on either for-profit or non-profit boards may wish to investigate whether their organization has such a provision in their governing documents. It’s worth noting that this provision would not include situations where directors receive an improper personal benefit or intentional act against the best interests of the organization.
Even without a provision explicitly limiting a director’s personal liability, directors of both for-profit and non-profit organizations are not liable for any action—or failure to take action—if they act as a director in accordance with their fiduciary duties. In fact, the relevant statutes regarding for-profits and non-profits are virtually identical on this point. Further, board members who are challenged in court based on their service and succeed must be indemnified by the organization for their reasonable expenses involved in the suit. Again, the relevant statutes are mirrored between for-profit businesses and non-profit organizations.
Highlighting Important Distinctions
Even North Carolina law recognizes a distinction between for-profit corporations and those operated not-for-profit. Whereas non-profit corporations are governed under N.C. Gen. Stat. Chapter 55A, those operated for-profit fall within N.C. Gen. Stat. Chapter 55. Those considering board service are encouraged to review some of the relevant sections of the applicable statute.
Perhaps the most important distinction between non-profit and for-profit boards is the potential risk exposure when directors are alleged to have breached a fiduciary duty. In the absence of an express limitation of personal liability for board members in the governing documents, a for-profit director’s personal liability may be indemnified by the organization if he or she is eventually successful. By contrast, a non-profit director has that same indemnification protection in addition to multiple layers of immunity.
The Federal Volunteer Protection Act of 1997 generally limits liability for volunteers who are acting within the scope of their responsibilities—including board members who are volunteering their time. State law creates additional protections for non-profit boards. Under N.C. Gen. Stat. §55a-8-60, volunteer board members have fairly generous immunity protections from civil liability for monetary damages arising from their board service. This qualified immunity covers most actions arising out of the board member’s service.
Much like the TV show “Survivor,” immunity can be crucially important but difficult to obtain for some non-profit board members. The protections under federal law and §55a-8-60 are waived to the extent that the director is covered by liability insurance and waived where the director receives an improper personal benefit, acts without good faith, or is compensated beyond reimbursement expenses. As such, the law recognizes that not all non-profit boards are the same. For example, a large non-profit hospital system may be able to compensate its directors more than a local condo board. To the extent that directors are compensated beyond reimbursement expenses, they lose the immunity protections afforded to volunteer board members.
While non-profit boards may see this qualified immunity as a reason to forgo Directors and Officers (D&O) insurance, a 2012 North Carolina Law Review article notes that it would be prudent for charity boards to inquire about such policies. As UNC Law’s Tom Hazen and his co-author explained there,
“While at first glance, it might appear that this means that nonprofit directors should not ask for director and officer (“D&O”) liability insurance, that is not a good idea. One of the major benefits of D&O insurance is that the insurance covers not only liability but also the defense of any suit. If suit is brought and the director wins on the basis of the qualified statutory immunity, the prevailing director would still pay out of pocket for his or her legal defense costs. Accordingly, it is prudent for nonprofit directors to assure that the charity carries D&O insurance for its board members.”
While the articles of incorporation may expressly limit or eliminate the personal liability of directors, N.C. Gen. Stat. §55-a-8-60 allows for non-profit organizations to use the articles to remove or decrease the qualified immunity protections afforded to non-profit directors. Individuals considering board service on a non-profit board may also wish to identify whether their organization’s articles of incorporation have altered the state’s qualified immunity rules.
In order to encourage volunteer board service, North Carolina has afforded qualified immunity for volunteer members of a non-profit’s board. For the most part, non-profit board members are covered by qualified immunity against civil liability for their actions. Notably, this immunity extends only to volunteers, not directors who are compensated beyond reimbursement expenses. Those considering board service—or currently serving on an non-profit board—may wish to inquire about the existence and need for D&O insurance as well as express provisions regarding director liability within the articles of incorporation.
Tommy Tobin is a graduate of Harvard Law School and the Harvard Kennedy School. Tommy has served as a Teaching Fellow in the Harvard Economics Department and Instructor of Law at UC Berkeley’s Goldman School of Public Policy. His writing has appeared in scholarly journals and major newspapers, such as the Baltimore Sun, Charlotte Observer, and San Francisco Chronicle.