Seventh Circuit Decides Indiana Nonprofit Corporation Case, Part 2: Members and Membership

[This post is one in a series written by Smith Rayl’s newest member, Rose Shingledecker.]

Earlier this month, the Seventh Circuit Court of Appeals decided Doermer v. Callen, No. 15-3734 (7th Cir. Feb. 1, 2017). In a previous post, we reviewed the facts and explored what the case had to say about the board of directors and directors’ terms. Today we’ll inch closer to the issue at the center of the case: whether a non-member director of an Indiana nonprofit corporation has standing to bring derivative claims on behalf of the corporation.

But before getting to derivative claims, let’s consider what it means to be a member of a nonprofit corporation. Perhaps you’ve made a donation to a nonprofit in your community and been recognized as an “annual member” for your contribution. Generally it is okay for an organization to refer to its donors and other people who support the organization as members. However, these types of donor membership programs usually do not grant the donor legal or statutory membership in an organization.

Under the Indiana Nonprofit Corporation Act of 1991 (the “Act”), a “member” is “a person who, on more than one (1) occasion, has the right to vote for the election of a director under a corporation’s articles of incorporation or bylaws.” Ind. Code § 23-17-2-17(a). Chapter 7 of the Act discusses membership in more detail (including admission criteria, liability, rights, and duties), but the key is that a member is a person who, once he or she is admitted or meets the admission criteria, has the right to vote for a director.

In organizations in which the board of directors elects its own directors – known as a self-perpetuating board – directors have voting rights. But the Act is clear that having the rights of a director alone does not make a person a member. I.C. § 23-17-2-17(b)(3). This provision clarifies that a member is a special class of person in a nonprofit corporation.

Under the Act, a corporation is not required to have members. I.C. § 23-17-7-3. When an organization has members, certain actions by the board of directors may be subject to the approval of the members. For example, the members’ approval may be required before an organization is dissolved. I.C. § 23-17-22-2. On the other hand, boards of organizations without members may act without these restrictions.

Whether a nonprofit corporation should have members depends on the goals and objectives of the specific organization. For certain organizations, such as a neighborhood organization in which the board of directors represents a broader community, a membership structure may help advance the goals of the organization by giving the community members a voting voice in how they are represented. For other nonprofit corporations, like the small family foundation in Doermer, it may be less desirable to have members than a self-perpetuating board of directors.

If you are starting a nonprofit corporation, consider whether members will help or hinder the organization from achieving its goals. It may be helpful to talk to an attorney about the benefits and disadvantages of having members before you organize your nonprofit corporation. Please let the attorneys in the Business Law Department of Smith Rayl Law Office, LLC know how we can help.