The Consequences for Violating Articles & Bylaws

Consequences for Violating Articles & Bylaws

From time to time, themes emerge in our practice. Recently, a recurring question has been what happens if a nonprofit corporation does not comply with its Articles of Incorporation and Bylaws? While it’s true that the sky won’t fall and you won’t necessarily be arrested on the spot, there are a number of unsavory consequences that can flow from a decision to take action that is in conflict with the nonprofit’s articles or bylaws. 

Ultra Vires Acts

            Ultra vires is a Latin term conveying that acts outside the permissible scope of authority set forth in a corporation’s governing documents are unauthorized activities that cannot be ratified by its Board of Directors.

Although many states have effectively abolished this common law concept by granting corporations significant autonomy, ultra vires continue to be an important doctrine in the tax-exempt nonprofit context because such organizations are required to limit their powers to qualify for tax exemption. 

            For example, if a 501(c)(3) enters into a contract to endorse a political candidate that is outside the scope of its permissible activities, the contract may be voided by the nonprofit. 501(c)(3)s are generally prohibited from intervening in political campaigns, which includes endorsing candidates for political office.

Accordingly, endorsing a political candidate would likely fall outside the scope of the 501(c)(3)s permissible activities, as stated in their articles or bylaws, constituting an ultra vires act. The Board, acting for the nonprofit, would have no authority to ratify the contract. While there may be other arguments to enforce an ultra vires contract, acting ultra vires puts the nonprofit and its stakeholders at risk.

Breach of Fiduciary Duties 

            Officers and directors owe fiduciary duties to the corporation in which they serve. When directors or officers fail to follow the corporation’s governing documents, they open themselves up to liability for breaching their duties of care and obedience. Officers and directors may be held personally liable in the event a breach of duty occurs. 

Derivative Suits

            Most states permit a faction of directors or the corporation’s voting members to bring a derivative suit on the corporation’s behalf if they feel the nonprofit is being harmed by its board. Derivative suits are often tricky to execute as there are several formalities that must be satisfied prior to being eligible to file a suit. For example, in Arizona, a member must first make a demand to the board and permit the board a certain period of time to alter their course of action before the member has standing to sue.  

Exceptions to Insurance Coverage

            Many people mistakenly believe that directors’ and officers’ insurance will shield wrongdoers from liability for ultra vires acts. However, under most insurance policies, this is not the case.  Directors’ and officers’ insurance, even coupled with corporate indemnification, will not safeguard those who act outside the scope of their authority.

Conclusion

            In an ideal world, all board members and officers are fluent in their nonprofit’s governing documents, review them each year, and make updates regularly. However, we have seen time and time again that articles and bylaws are overlooked or put out of mind.

Many times, officers and directors are not even aware that they are violating the nonprofit’s articles or bylaws. If you believe that a nonprofit, or its directors and officers, is acting ultra vires, the best solution is to respectfully bring the violation to their attention and resolve it amicably so the nonprofit’s focus is not taken away from its charitable purposes. 


Kyler Mejia is an attorney (bar pending) with Caritas Law Group, P.C. Caritas Law Group, P.C. Kyler advises nonprofit and socially responsible businesses on corporate, tax, and fundraising regulations nationwide, as well as donors with regard to major gifts. To schedule a consultation, call 602-456-0071 or email us through our contact form

Share this post

7 thoughts on “The Consequences for Violating Articles & Bylaws”

  1. 34 years of membership past president for 4 times, the board now is illegal, current board was never voted in, breach of fudiciary duties constantly, embezzlement

    1. Depending on what state you are in, you may want to consider reporting these violations to the State AG. State regulators are sometimes much more active regulators than the IRS.

      Other than that, most states permit a group of directors or former directors to bring a derivative suit to enforce the corporation’s rights but that is an expensive and time consuming option. If you want to explore that option, you will need to work with a litigator in your state.

  2. I am part of a non profit board that has consistently operated outside the parameters of their own by laws.
    Is there a way to bring this to light and file a cease and desist or injunction to stop operations until new policies can be adapted by the current Board of Trustees.? They are wanting to hold an election however, their nomination procedures have not been within the parameters of membership qualifications and eligibilty.

  3. I am looking into what action can be take against a board of directors for failure abide by the by laws of the corporation.

  4. A 501(c)6 whose director did not disclose misuse of funds by a staff member to the board and did not fire but only encouraged that staff member to quit without an internal investigation. Who’s Director also has the ability to assign individual staff salaries which are not disclosed but approved as a lump sum amount for distribution without any oversight by the board or leadership and the lump sum expense does not equal the actual distribution of salaries that are reported on the 990, who has also created a inequitable distribution of funds among the staff members. Significantly underpaying female and minority staff. In addition to this is has assigned his duties which are assigned by the board and written in the bylaws to a staff member to do for them which is outlined in their employment contract. Then violates the employment contract with said employee by assigning additional duties (300+ hours of meetings he is required to oversee) under the contract to a salaried employee without fair or equitable compensation. Does this employee have any protections because they are a staff member and not an association member with member benefits or voting power within the organization itself? They should be protected under the whistleblower act but do they have any legal recourse to be compensated for the assigned duties that fall outside of the employees employment contract?

Leave a Comment

Your email address will not be published. Required fields are marked *

5 × 4 =

Scroll to Top
FREE DOWNLOAD

How to Start a Non-Profit Organization

Download our free guide to learn about the many elements needed to run a successful nonprofit organization, as well as how to avoid common pitfalls and mistakes.