Nonprofit Coup d’Etat

Nonprofit Coup d'EtatWe are used to hearing about hostile takeovers of for-profit companies but a lesser known phenomenon is the hostile takeover of a nonprofit organization.

Nonprofit takeovers can occur anytime factions develop within a nonprofit. Sometimes incumbent board members are removed in favor of new board members with a different policy agenda. In other cases, a donor or charismatic leader convinces a majority of the board to take the organization in a drastic new direction.

Struggles for control of nonprofits are common and are reported in the media from time to time. One such case includes the well publicized struggles at the Sierra Club. In the Sierra Club dispute, a faction developed that supported an anti-immigration agenda offensive to many of the Sierra Club’s longtime supporters and allies. The anti-immigrant faction encouraged its supporters to send in their $25 dues payment so that they could gain the right to vote at the annual meeting. In the end, the incumbents were successful in fending off the takeover attack. The Sierra Club case was unusually high profile; however, similar scenarios regularly play out in nonprofit boardrooms across the country.

Nonprofits that, like the Sierra Club, have multiple voting members are especially vulnerable to hostile takeovers. This vulnerability is exacerbated when the membership admission requirements are minimal.

As non-stock corporations, non-profits generally cannot be “owned” in the sense of owning shares. However, there is always an element of control. Unless a nonprofit organization is privately funded and classified as a private foundation, the IRS will typically reject a private party’s attempt to exercise legal control over an exempt organization.

The only thing that can make a nonprofit truly unhijackable is broad participation by passionate stakeholders who are deeply engaged in an organization’s mission. Hildy Gottlieb and Dimitri Petropolis, two leading edge nonprofit thinkers, are conducting a fascinating governance experiment designed to do just that. They are founding a nonprofit known as “Creating the Future.” Hildy and Dimitri are essentially crowdsourcing all of the key decisions, including governance decisions, for Creating the Future in an attempt to build a large network of passionately engaged community stakeholders.

In addition to gaining the incredible wisdom of such a large and engaged group, I expect another potential benefit of their approach will be to thwart hostile takeovers. Presumably, an attempt by a faction to steer Creating the Future off course will meet with a  powerful  stakeholder backlash that will help the organization to self-correct.  Only time will tell if Hildy and Dimitri’s crowdsourcing experiment will be successful, but in the meantime, nonprofits boards and founders should consider whether their organizations are vulnerable to the nonprofit takeover phenomenon and consider whether there are changes in the organization’s structure, governance approach, or community engagement that could make it less so.

7 Responses to Nonprofit Coup d’Etat

  1. I have an idea and want to develop further but am unsure whether to do so as for-profit or non-profit when considering possible future buyouts by another company, should the idea prove very successful. Does it ever occur that a for-profit takes over a non-profit and if so, what are the most usual financial terms?

    As a possible example, let’s say a non-profit wants to establish an online platform. It then proves successful and a for-profit finds it attractive enough to buy out. Would it be better to have set up the original company as a for-profit instead of non-profit, in order to maximize the takeover terms?

  2. A nonprofit can sell to a for-profit but the proceeds must remain forever dedicated to charity. That is, if you want to personally realize the profit when the platform sells, don’t start your company as a for-profit.

  3. In our case the Professional Rodeo Cowboys assoc. was taken over by a few Contractors and Rodeo committees in 1987 for paying $200,000 in debt of the association. It is my understanding you can’t change the voting rights or privledge members or groups of members without their approval in a non profit. If this is true because the take over was done in 1987 is it past the time when members can challenge it?
    At that time there was a rule in the rule book that allowed 10 0/0 of the members to call a meeting and conduct business by proxie. The members did just that in 2007 but the board wouldn’t allow the meeting. They also passed another by law stopping the members from calling a meeting or voting by proxie. That seems to me like a violation of members rights according to Colo. law by changing members voting privilege or right’s. If that is an illegal by law can we get 10 0/0 of the members to call a meeting and conduct even though the by law was changed in 2006?