What happens when nonprofit leaders diverge significantly about an organization’s mission, and then pursue a corporate merger or other major change? Our law firm recently concluded litigation acutely illustrating the serious problems that can be caused by a few individuals exerting power to seek a nonprofit merger – fraught with conflicting interests, cultural and mission misalignment, and defective corporate processes. In National Woman’s Christian Temperance Union v. Center for Women’s History and Leadership, an intended merger threatened to substantially alter a nonprofit’s mission and imperil its future.
Spanning several years and factual complexities, this case provides excellent opportunities to learn from what can happen when a power shift snowballs into an illegitimate corporate transaction. The following sections describe the highlights of this nonprofit litigation story, identify the substantial problems that developed, and provide key corporate pointers for all nonprofit leaders especially with respect to potential mergers.
NWCTU’s Venerable History, Then Potential Merger
NWCTU’s Development and Assets
The National Woman’s Christian Temperance Union (NWCTU) is an historic, storied woman’s organization that recently celebrated its 150th anniversary. Founded by Frances Willard and others in 1874, NWCTU was incorporated as an Illinois non-profit corporation in 1907 with its headquarters in Evanston. At the time of NWCTU’s founding, the temperance movement was a world force with annual convention attendance in the thousands and attendees from most every continent. NWCTU presently focuses on educational efforts regarding the benefits of abstaining from alcohol, illegal drugs, and tobacco use, as well as other social issues.
Over time, NWCTU expanded its property holdings in Evanston and, by the early 1900s, owned four buildings located in what is now the “Woman’s Christian Temperance Union Historic District.” These buildings include Frances Willard’s home (now the Willard House Museum), two residential houses, and the WCTU Administration Building (“Admin Building”). The Admin Building contains the largest depository of temperance movement records in the world.
Enter FWHA
When the leaders of NWCTU moved away from Evanston, NWCTU sought assistance in caring for its properties and enlisted another group to assist with property management and upkeep. Consequently, the Frances Willard Historical Association (FWHA) was formed as a second nonprofit.
Although initially formed and controlled by NWCTU, FWHA eventually changed its governance structure. FWHA then became organizationally independent of NWCTU, which later becomes highly significant. Over time, the two organizations diverged ideologically - with FWHA taking a decidedly progressive direction, while NWCTU retained its traditional values and conservative ideology.
Merger?
Fast forward to the mid 2010s, NWCTU’s leadership considered various proposals for creating a new charitable organization to which some or all NWCTU properties would be transferred. This new organization would promote the properties’ preservation and maintenance, but with NWCTU retaining some control. General terms of these proposals were occasionally communicated to NWCTU’s roughly 1,500 members.
In Spring 2017, however, a new idea emerged. Rather than NWCTU creating a new entity to which its properties would be transferred, NWCTU would merge with FWHA. As noted above, FWHA was previously created by NWCTU, but now operated independently, and with a markedly different mission. That would prove quite problematic later.
FWHA owned no real estate and held no other significant assets. The proposed merger would effectively transfer all of NWCTU’s real estate as well as NWCTU’s other extensive financial assets to FWHA. FWHA would then become the surviving corporation following the merger. As part of this transaction, FWHA would be re-named the “Center for Women’s History and Leadership” (“CWHL”).
Corporate lawyers may recognize this as a reverse merger or, proverbially speaking, the “minnow swallowing the whale.” By any name, however, the proposed merger would have resulted in extinguishment of NWCTU as a corporate entity, transfer by operation of law of all NWCTU’s property and financial assets to CWHL, and permanent loss of NWCTU membership rights. NWCTU’s membership and legacy would thus dissipate with CWHL’s ascendency, new missional direction, and enormously improved financial wherewithal.
Nonprofit Governance Problems Leading to Litigation
CWHL’s leaders were eager to proceed with the merger and obtain ownership of NWCTU’s assets. The push was then made for NWCTU’s membership approval at its summer 2017 convention. As described in the following paragraphs, that process was fraught with questionable behavior and major problems that resulted in contentious litigation spanning several years.
Applicable Illinois Nonprofit Merger Law – Timely Notice of Merger Plan
The Illinois General Not for Profit Corporation Act governs nonprofit mergers. The Act applies to the corporate entities involved here, since they were all formed under it. The Act specifies certain procedures by which non-profit mergers must follow. The most relevant for this situation are the following requirements: (1) members entitled to vote on mergers must receive a copy of the plan of merger, or a summary thereof (typically provided by the governing leaders); and (2) such information must be provided to members no less than twenty days and no more than sixty days prior to a scheduled merger vote. For a merger to be legally effective, the statutory requirements must be followed.
Further regarding the notice requirement, it is possible for voting members to waive notice by attending a meeting where a merger is considered and not objecting to lack of proper notice. In other words, so long as no one objects, a nonprofit merger may well go through, even though members do not receive proper notice. But not here: significant confusion and controversy at NWCTU’s 2017 convention led to objections which were vigorously pursued by concerned NWCTU members.
Insufficient Notice - Defective Merger Vote
For purposes of the intended NWCTU merger, the statutory notice requirements were clearly not met. The plan of merger which NWCTU’s members were to consider and vote upon came into existence about twenty days before the scheduled vote. Other than a lone NWCTU leader, the first NWCTU members to receive the plan of merger received it seven days before the vote. Most voting members did not receive the plan until they arrived at their Convention where the merger would be addressed, and some members never received a copy. Copies of the plan were even passed out while members were voting due to the lack of sufficient prior notice.
Without question, the process here failed to meet the legally required minimum of twenty days’ notice. Members thus were prevented from exercising their right to review details of the proposed merger for the proper amount of time in advance of a decision.
Intractable Conflicts of Interest Issues
Unfortunately, there’s more. One nonprofit leader served simultaneously on both Board of Directors. Such dual service created an inherent conflict of interest, since corporate directors owe a legal duty of loyalty to act in the best interests of the corporation they serve.
As a result, this leader therefore had conflicted loyalties. The leader owed a fiduciary duty to act in NWCTU’s best interests and a duty to act in CWHL’s best interests. Such interests could conceivably be aligned, but not necessarily so.
While this situation involves extensive factual complexities, major points included anticipated transfer of multimillion-dollar real estate portfolio, substantial cash, and priceless artifacts and archives of the temperance movement. Such matters warranted careful evaluation by leaders focusing on their own organization’s best interests. Dual board service here thus severely tainted the proposed merger. To avoid this clear conflict, resignation from one or both Boards would have been appropriate; likewise, recusal from any involvement in the merger deliberations and any resulting vote was certainly warranted. Failure to take such measures, consistent with applicable duty of loyalty obligations, constituted another legal basis for voiding the merger transaction.
Incomplete Merger Documents Resulting in Illegitimate Vote
The merger documents were hastily assembled in the days prior to the vote. The proposed plan of merger for NWCTU members’ vote was significantly incomplete (e.g., blank spaces for when NWCTU’s existence would end). Additionally, the merger plan version considered and voted on by CWHL contained materially different terms, such as to allow a small minority of NWCTU’s members to vote to close NWCTU at any moment. Such difference reflected a lack of the requisite “meeting of the minds,” or mutual understanding that likewise warranted voiding the merger.
More Problems
Before, during, and after consideration of the merger, certain NWCTU leaders made statements about the merger terms that seemed materially false. In particular, they instructed NWCTU members not to read the merger and chastised members for discussing it prior to the vote. All of these events involved fraud, providing an additional basis for voiding the merger.
Resolution Through Litigation
As a result of these legal flaws with the proposed merger and membership vote, NWCTU pursued litigation against CWHL. The case has now been resolved, resulting in a court ruling that the merger vote was legally void, with no merger proceeding forward, and no transfer of NWCTU’s real estate or other assets. This favorable result for NWCTU came only after years of litigation, enormous effort and expense, and faithful dedication by NWCTU’s leaders.
Lessons for Nonprofit Leaders
This situation provides a litany of lessons for nonprofit leaders, whether seeking to avoid contentious disputes, to foster membership and other stakeholder engagement, or to protect an organizations’ mission and assets. Here are seven key pointers.
1. Follow Applicable Legal Requirements.
Nonprofit corporations and their counsel must know and rigorously follow applicable law. The legal requirements for nonprofit mergers are not onerous; they are largely beneficial to both parties and reasonable. Had the parties followed the straightforward requirements of the law related to nonprofit mergers, perhaps the NWCTU/CWHL merger could have been legally upheld.
2. Inform and Educate Stakeholders.
Informing and educating stakeholders is critical to any major corporate action. If an organization has members, this requirement can be time-consuming given the number of individuals involved. Nevertheless, properly educating stakeholders both ensures compliance with statutory notice requirements and creates “buy-in” before and after the transaction, likely minimizing complaints and dissident voices.
3. Be Transparent.
There is no justification for ever hiding information from stakeholders. If a person or entity advocating for a merger is less than fully transparent and accommodating to those seeking information and asking questions, it should be an immediate red flag to everyone concerned. Full transparency and appropriate time to consider and ask questions should be components of every major corporate transaction.
4. Avoid, Address, and Resolve Conflicts of Interest.
Conflicts of interest appear often and, if handled properly, need not taint corporate transactions. They may be legally permissible or impermissible, depending on the specific situation. But essential to any such matter is (a) determining what lies in the nonprofit’s best interests as fair, and (b) who is deciding such question – and such persons should be free from competing loyalties.
Conflicts should always be disclosed and proactively addressed. Doing so allows the parties and their counsel to take appropriate steps to evaluate the conflict, remove the conflicted person if necessary, and ensure that consideration of organizational best interests is not tainted by a conflict.
Note too that conflicts of interest need not be purely financial. In NWCTU’s case, the conflicted leader did not stand to gain financially from the proposed merger, at least in the short term. However, she had conflicted loyalties that were both (a) practical, preventing her from properly advising NWCTU members and (b) legal, since she was indisputably serving on the board of both merger partners. Such deficiencies could have been surmounted, if the merger were otherwise “fair” – that is, in each organization’s best interests (financially, in terms of membership, when considering potential liabilities, etc.).
Whether a transaction is “fair” and otherwise in an organization’s best interests can be evaluated based on the following two questions: 1) whether the financial terms are fair, and 2) whether the process in reaching any such decision is fair. In NWCTU’s case, CWHL would have received all NWCTU’s property and other assets for nothing, making the price seem quite unfair on its face. Similarly, the process surrounding the merger was manifestly unfair to NWCTU members. With critical information withheld and the plan of merger not being distributed until the vote was in progress, NWCTU members had essentially no time to review the complicated merger transaction. Apparent efforts to prevent meaningful discussion and questions from being sufficiently answered were additionally egregious facts demonstrating the merger’s unfairness.
5. Prepare, Prepare, Prepare.
As the saying goes, “fail to plan . . . plan to fail.” Proper preparation is always advisable. With respect to the proposed NWCTU/CWHL merger, certain leaders created a false sense of urgency and fostered a rushed atmosphere that ultimately led to a legally deficient and otherwise highly problematic merger vote. Such result could have been avoided had the parties and their counsel prepared carefully and in advance. It should have been clear what the members would be voting on well before the Convention where the vote would occur. Further, those affected by the merger should have been fully advised of the merger’s actual effects which – in this case -- included the forced extinction of NWCTU as a separate entity and the associated rights of all members.
Note further that a critical ingredient for merger success is often a good cultural fit between the two proposed merger partners. Sufficient time to determine whether a good fit exists should be part of any merger process, with ample opportunity to decline to proceed with a merger. The responsibility for fostering such productive dialogue should rest on each organization’s leaders, to promote discussion among all leaders and – if members are involved – among the membership too. That did not happen in NWCTU’s case.
6. Document Decisions, Actions, and Compliance.
Documentation is also essential, both to ensure that the proper procedures and legal requirements are followed and for proof of compliance in the event any step in the process is challenged. All paperwork should be prepared well in advance and authorized signatories identified. Who is authorized to sign an agreement or approve an action is not always obvious, and careful attention should be paid to how an agreement must be approved and who must sign.
7. Consider When a Merger Truly is Best for All
Some nonprofit mergers may be possible and even beneficial, but not without careful attentiveness to applicable legal requirements and avoidance of pitfalls as noted above. Overall, prudent and responsible nonprofit leaders should well understand the goals involved, the potential risks and rewards, the due diligence needed upon appropriate evaluation, the accompanying procedural steps, what will happen post-merger, and available alternatives.
One example of potentially successful mergers could be two churches, with one organization going strong and the other organization anemic but with valuable real estate or other notable assets. The two churches may decide to combine congregations, with the resulting (“surviving”) church carrying on and honoring the other church’s legacy. Another example could be two social service organizations with very similar missions and grant opportunities. Their respective leadership may decide that they could function better together, and so they combine efforts – and legal structure – after appropriate due diligence, leadership engagement, and consideration of other potential options.
Nonprofit leaders considering corporate transitions should evaluate how they advance the respective nonprofits’ missions and interests, including financial aspects, membership or other stakeholder engagement, and necessary approvals. Then proceed with the required paperwork, including the required “plan of merger,” articles of merger filed with state authorities, and other legal compliance measures.
Final Takeaways
Nonprofits often start with a strong bond between board members and leaders to achieve a unified goal, where all are on the same path and with the same vision and mission. However, and especially over a long time period, a nonprofit’s control and direction may transition from its initial focus. Such evolution may be good – or not. Much depends on the specific circumstances, leadership wishes, and related opportunities, especially since the current nonprofit leaders are entrusted with fiduciary responsibilities of diligence, loyalty, and obedience to the corporate mission.
So long as proper governance and internal approvals are carefully and properly evaluated, such change is legally allowable. Keep in mind, however, that if a relatively small number of people seek to make large shifts in the nonprofit’s resources, control, and activities – whether through a proposed merger or otherwise – without obtaining broader buy-in, problems may emerge on the horizon. Caution is especially warranted if red flags arise such as potential loss of substantial assets, elimination of members, or a rushed approval process. Consequently, it is essential to proceed with due attention to appliable legal requirements, concerns expressed (or potentially expressed) by stakeholders, accompanying documentation and notice to those entrusted with voting power, and any conflict of interest issues too.
In the end, the biggest legal flaw in the proposed NWCTU merger was lack of timely and accurate communication about the merger’s nature and effects. That defect was enough for the judge in this litigation to rule favorably for NWCTU’s corporate preservation and against the merger - but only after years of contentious acrimony and expense. No nonprofit leader wants litigation. It is therefore vitally important to avoid these nonprofit corporate pitfalls and dangers when considering a major corporate transaction like a merger.
