Nonprofit Takeovers: Regulating the Market for Mission Control

I. INTRODUCTION A corporation that has long pursued a particular set of policies and programs is undergoing a struggle for control of its activities and, ultimately, its funds. Although in the past, incumbent board members have been reelected with little or no opposition, this year's election is different. Newcomers are running for the board on a platform that argues the incumbent board has not been sufficiently aggressive. Further, the newcomers claim that, if elected, they will improve the corporation by changing its methods and refocusing its mission, thereby achieving greater success. The newcomers also have been gaining voting power, buying up rights to vote in the upcoming elections. In response, the incumbents rush to portray the newcomers as dangerous insurgents who threaten the august reputation of the corporation, as well as its future prosperity. The parties ultimately end up in litigation over the methods the newcomers may use to garner control and those the incumbents may use to defend against the newcomers. In resolving these issues, the court intones a standard quite protective of the incumbents' position. In reading this plot sketch, one might guess the particulars of this story relate to a transaction in the familiar for-profit market for corporate control. The board of a blue-chip for-profit corporate giant is accused of stagnation in a proxy contest, tender offer, or both, and seeks refuge for its defenses within the relatively generous standards articulated in the Delaware courts' takeover defense jurisprudence. It may come as more of a surprise, however, that this story also provides the contours of a struggle for control that can and has occurred within nonprofit institutions. Furthermore, upon closer inspection, one observes that courts have been even more deferential in sheltering the defensive actions of incumbent nonprofit directors than they have of their for-profit counterparts. This Article relates the tales of two such recent takeover attempts at the Sierra Club ("the Club") and the Royal Society for the Prevention of Cruelty to Animals (RSPCA or "the Society"). These examples demonstrate how nonprofit takeover attempts can be mounted. They also offer a glimpse at the courts' extremely deferential response to nonprofit incumbents facing takeovers. Ultimately, this Article argues that this stance is at odds with both the basic structures of governance these nonprofits have chosen and with some of the fundamental notions of how charity benefits our society. Part II begins by offering initial insights into the concerns that takeover activity raises, both within targeted nonprofits and for society at large. After identifying these concerns, it then takes a step back to place nonprofit takeovers within the context of the various transactions by which nonprofit organizations can experience changes in control. This treatment reveals that the nonprofit transactional menu has somewhat different offerings than its forprofit analogue, particularly in the hostile transaction category. Mergers and purchases mediated through fiduciaries are available, as in for-profits. However, at least in those nonprofits with member-elected boards, changes in control also can be achieved by persuading existing members to vote in a new control group and often by the purchase of sufficient new memberships to outvote any opposition to an insurgency. Existing literature has considered friendly control transactions in the nonprofit sector but has not yet grappled with the theory and implications of hostile attempts at nonprofit takeovers, as this Article does. Cataloguing the range of transactions available to shift control of nonprofits sets the stage for an examination of these efforts in action, as well as an analysis and critique of fiduciaries' and courts' reactions to them. Part III presents two recent real-world examples of nonprofit takeover attempts. These case studies offer a view of takeover activity at different stages and using distinct techniques. …