OCTOBER 04, 2020
Laws governing trusts and not-for-profit corporations vary from state to state. Choosing a home for your foundation can be important in protecting donor intent.
Delaware is generally the preferred jurisdiction for corporations, including nonprofit corporations, and is the legal home to many foundations that fund exclusively in other states. Delaware provides many advantages:
- The Delaware General Corporation Law (DGCL) is a modern, current, and internationally recognized and copied corporation statute which is updated frequently to take into account new business and court developments.
- Delaware offers a well-developed body of case law interpreting the DGCL, which offers certainty in planning.
- The Delaware Court of Chancery is considered by many to be the nation’s leading business-entity court, where judges expert in corporate and governance matters deal with issues regularly and efficiently.
- Delaware offers a user-friendly Division of Corporation office permitting, among other things, prompt certification of filings of corporate documents.
Delaware governs its nonprofit corporations under the same state rules as for-profit corporations. The Delaware corporate law is considered very flexible, and is even more accommodating for nonstock corporations. There are provisions in the Delaware law which allow nonstock corporations to choose how to organize their internal governance, including placing restrictions on the power of the board.
A primary principle in Delaware corporate law is that the board of directors has the ultimate authority to manage and direct the affairs of the corporation. Most corporations find it desirable for the board to have such broad power to make substantial changes to the corporation over time. For nonprofit corporations this means that the board can generally change the corporation’s programs and activities and even its ultimate purposes and mission.
To protect donor intent, however, it may be desirable to restrict the board’s power over the corporation, particularly where a founding donor of a private foundation wishes to ensure that his or her foundation will continue to adhere to certain values, or support a particular giving area or geographical location, even if a distant future board might wish to deviate from that original donor intention. In Delaware the corporate board’s power over the corporation can be restricted or modified so long as those provisions are included in the certificate of incorporation.
This flexibility can be used by Delaware nonstock corporations to include provisions in their certificate of incorporation that require, for instance, that the corporate purposes never be modified—or if they are modified, they are approved by a supermajority of the board. It could even require that some other person or entity maintain special rights to approve certain changes as a “member” of the corporation.
A provision could, for instance, mandate that “any amendment to the purposes of the corporation stated in Article __ shall require the approval of at least 80 percent of the board of directors of the corporation.” For a family philanthropy the provision might read, “Any amendment to the purposes of the corporation stated in Article __ shall require the approval of the Family Members of the corporation.” Or a provision could simply say that the purposes may never be amended.
The states of Florida, Tennessee, and Texas can be attractive because they have enacted provisions into law that support philanthropic freedom and that restrict the state from attempting to direct foundations’ charitable missions or demanding demographic information about foundation trustees, staff, and grantees. Other important questions of state law include the scope of trustee indemnification, and provisions permitting a foundation to move to a new jurisdiction, allowing it to take advantage of another state’s laws. As a donor, you should work closely with your attorney to determine where to incorporate. In any case, a foundation’s “home state” will generally require it to register with the state’s charities bureau.