Indiana Law Review


Indiana Nonprofit Corporation Act

Paul J. Galanti*

Introduction

The new Indiana Nonprofit Corporation Act (INCA) 1 was the most

significant development in Indiana corporation law during the survey

period. The INCA supersedes the Indiana Not-for-Profit Corporation
Act of 1971 (1971 Act). 2 This Article will compare the INCA with the
1971 Act, the Revised Model Nonprofit Corporation Act (Model Act)3

promulgated by the Business Law Section of the American Bar Asso-
ciation, and the Indiana Business Corporation Law (IBCL).4

Although business, or for-profit corporations, have greater financial

impact on the economic status of Americans as investors, business owners,

workers, and consumers of goods and services, nonprofit organizations

may play a more important role in our lives. 5 Nonprofit organizations
include churches, political organizations and parties, fraternal organi-

zations, trade associations, labor unions, condominium associations,

neighborhood civic leagues,6 a substantial majority of large American

hospitals, and any number of worthwhile charities. Many of these non-
profit organizations are incorporated.

Corporation law underwent many reforms during the 1980s. The
ABA Business Law Section promulgated the Revised Model Business
Corporation Act (RMBCA) in 1984.7 The RMBCA was the basis for

* Professor of Law, Indiana University School of Law—Indianapolis. A.B., 1960,
Bowdoin College; J.D., 1963, University of Chicago.

1. Ind. Code §§ 23-17-1-1 to -30-4 (Supp. 1991).
2. Ind. Code §§ 23-7-1.1-1 to -66 (repealed 1991).
3. Model Nonprofit Corp. Act §§ 1.01 - 17.07 (1988). The Model Act was

promulgated in 1987. See generally Lizabeth A. Moody, The Who, What, and How of
the Revised Model Nonprofit Corporation Act, 16 N. Ky. L. Rev. 251 (1989). Professor
Moody chaired the Subcommittee on the Model Nonprofit Corporation Act during most
of the final drafting stage.

4. Ind. Code §§ 23-1-17-1 to -54-3 (1988).
5. See Howard L. Oleck, Mixtures of Profit and Nonprofit Corporation Purposes

and Operations, 16 N. Ky. L. Rev. 225, 227-30 (1989) [hereinafter Oleck, Mixtures]. The
terms "nonprofit" and "not-for-profit" are synonymous, although nonprofit is more
commonly used today.

6. Americans are great joiners. Professor Oleck quotes Alexis de Tocqueville's

observation that Americans are "forever forming associations" for "trade, political, literary

and religious interests." Id. at 228 n.17 (quoting Alexis de Tocqueville, Democracy in
America (1966)).

7. See Model Business Corp. Act Ann. (1985). See generally 17 Paul J. Galanti,
Indiana Practice — Business Organizations § 8.1 (1991).



1000 INDIANA LAW REVIEW [Vol. 25:999

the IBCL, but the two statutes differ in many significant respects. 8 This
wave of business corporation law reform, coupled with developments
relating to nonprofit corporations, prompted the promulgation of the

Model Act in 1987.9 The introduction to the Model Act notes the
deficiencies of its predecessor, the 1964 Model Nonprofit Corporation
Act. Among other things, the 1964 statute did not: (1) contain standards
of care or loyalty for directors and officers of nonprofit corporations;

(2) provide statutory immunity or protection for directors who acted
properly in managing the affairs of the corporation when their stew-
ardship was challenged; (3) provide conflict of interest rules; and (4)
deal with such significant matters as derivative suits, transfers and pur-

chases of memberships, or the resignation or termination of member-
ships.

10 The earlier statute was also silent on such significant matters as
nonprofit corporations controlled by "delegates," and it did not deal

adequately with self-perpetuating boards of directors or the delegation

of authority by directors."

The same observations could be applied to the 1971 Act. Although

the statute was updated from time to time, 12 Indiana nonprofit organi-

zations, like those in most states, needed a modern, flexible, state of

the art statute representing current thinking about the law of nonprofit

corporations. The INCA is such a statute. However, the statute is not
immune from criticism, and in some respects, it disserves persons who
are "members" of Indiana nonprofit corporations or who are benefited
or served by one such organization.

I. Drafting the INCA

There was a clear need to make the laws regulating nonprofit cor-
porations more flexible with respect to the rights, duties, and obligations
of both members and managers. To some degree, the Model Act can
be criticized for unduly favoring the interests of the managers of nonprofit

corporations over the interests of members or those who are served by
or are the beneficiaries of such organizations. 13 However, the Model

Act's drafters struck a better balance between the interests of the various

constituencies than did the INCA's drafters.

8. See 17 Galanti, supra note 7, § 8.1, at 458-59.

9. See Michael G. Hone, Introduction to Revised Model Nonprofit Cor-
poration Act xiii, xix (1988).

10. Id.

11. Id. at xx.

12. See 20 Galanti, supra note 7, § 53.1. See generally John T. Baker, Regulation

of Not-For-Profit Corporations in Indiana, 18 Ind. L. Rev. 777 (1985).

13. See Oleck, Mixtures, supra note 5, at 234-38, 244-46.



1992] NONPROFIT CORPORATIONS 1001

The problem, to the extent there really is a problem, arises because

both statutes were drafted by "business lawyers." 14 This statement is

not meant to disparage "business lawyers," but to question the wisdom

of having lawyers responsible for the current generation of business

corporation statutes also responsible for the statutes regulating "non-

business" corporations. 15

The observation that in contemporary American culture purely for-

profit organizations might engage in nonprofit operations, and nonprofit

organizations often engage in profit-generating operations to supplement

donations or other sources of funds, might seem to justify having common
drafters of both types of corporation statutes or even having the same

statute apply to both business and nonprofit corporations. However,

recent business corporation statutes such as the IBCL free corporate
management from many traditional statutory constraints on conducting
business affairs, with a concomitant lessening of their accountability to

shareholders.
16 These statutes serve the needs of American businesses

engaged in fierce global competition. However, it is not clear that the

same approach is appropriate when applied to the relations between
managers of nonprofit corporations and the members, contributors,

SI

v

"1

14. The Model Act was drafted by a subcommittee of the ABA's Business Law
Section. The INCA was drafted by the Indiana Corporation Law Survey Commission
which is charged with considering recommendations concerning amendments to both the

IBCL and the INCA. See Ind. Code § 23-1-54-3 (1988). See generally 17 Galanti, supra
note 7, § 8.16.

15. See Oleck, Mixtures, supra note 5, at 243-44. See also Harry G. Henn &
Jeffery H. Boyd, Statutory Trends in the Law of Nonprofit Organizations: California
Here We Come!, 66 Cornell L. Rev. 1103, 1107 (1971). Professor Oleck in his treatise
on nonprofit organizations, asserted that a committee not dominated by "corporate, finance,

and business lawyers" might be the best source of a final draft of a nonprofit corporation

statute. Howard L. Oleck, Nonprofit Corporations, Organizations and Associations
1189-90 (4th ed. 1980). He renewed this call in his commentary on the Revised Model
Nonprofit Corporation Act. Oleck, Mixtures, supra note 5, at 243. He also posits that
proper planning of a nonprofit corporation statute would "envisage stern supervision by

public officials of nonprofit organizations, because of the certainty that privileged status

— which nonprofit organizations have — will attract unprincipled exploiters who want
the privileges but who do not intend to accept the concomitant burdens of public duty
and pro bono selflessness." Id. at 244. He favors a nonprofit corporation statute drafted
by a committee composed of theologians, anthropologists, psychologists, and persons from

other nonlegal disciplines, with corporation and business lawyers relegated to a supporting

tier. Id.

16. Moody, supra note 3, at 264-65, states that as a result of comments received
on the Exposure Draft of the Model Act, optional § 2.02(b)(5) was added to the statute.

This section allows provisions in the articles eliminating or limiting personal liability of

directors to a nonprofit corporation or its members. This provision derives from § 102(b)(7)

of the Delaware Corporation Act which allows similar provisions limiting liability of

directors of business corporations. Del. Code Ann. tit. 8, § 102(b)(7) (1991).



1002 INDIANA LAW REVIEW [Vol. 25:999

supporters, or beneficiaries of such organizations. In fact, the nature

of nonprofit corporations calls for more, rather than less, accountability

from their stewards. 17 Even if potential personal liability of directors

and officers justifies some relaxation of the standards for the managers

of nonprofit corporations, there is some question whether the standards
should be relaxed to the extent of modern nonprofit corporation statutes. 18

Professor Oleck and others have argued that the standards should

be raised, not lowered, and that business lawyers should not be the

final arbiters of the law pertaining to "altruistic, voluntaristic, pro bono

organizations—organizations whose purposes are supposed to be selfless,
spiritual, and in the public service." 19 In the past, such organizations

were subjected to different forms of regulation because of the funda-

mental differences between the goals and objectives of such organizations

and those of business enterprises.20 Nonprofit organizations were governed

by rules appropriate to moral, social, political, charitable, or cultural

purposes, rather than by rules appropriate for profit oriented enterprises.

Whatever merits this argument enjoys, it is, however, a minority view,

and business lawyers will continue to draft and revise nonprofit cor-

poration statutes for the foreseeable future.

The Model Act's drafters decided early to track and parallel the

RMBCA as much as possible unless the nature of nonprofit corporations
or public policy reasons dictated otherwise. 21 Even a cursory glance at

the INCA shows that its drafters followed the same approach, except
that the INCA tracks the IBCL. This is important, because although
the RMBCA attempts to strike a fair balance between management

17. There is little support for the proposition that the directors of nonprofit

corporations should be held to the standard expected of "trustees," an argument rejected

by the court in Stern v. Lucy Webb Hayes National Training School for Deaconesses
and Missionaries, 381 F. Supp. 1003 (S.D.N.Y. 1974). However, many commentators have

urged that the directors of charitable or public benefit corporations should be held to a

higher fiduciary standard than the directors of nonprofit mutual benefit corporations such

as fraternities. See Baker, supra note 12, at 818-19. The recent controversy over the salary

and perquisites enjoyed by the president of the National United Way Organization,
unfortunately, gives considerable substance to this concern.

18. See Oleck, Mixtures, supra note 5, at 244-46. A major reason for incorporating
nonprofit organizations is to lessen or eliminate personal liability of members of the group

for acts furthering the purposes of the organization. See generally 20 Galanti, supra note

7, § 53.1; Baker, supra note 12, at 780.

19. See Oleck, Mixtures, supra note 5, at 243-44. See also Henn & Boyd, supra
note 15, at 1107.

20. See Oleck, Mixtures, supra note 5, at 225.

21. See Hone, supra note 9, at xx. The numbering of Model Act sections, in fact,

follow the analogous RMBCA provisions, even when the two statutes are substantively
different.



1992] NONPROFIT CORPORATIONS 1003

interests and shareholder interests, the IBCL is more solicitous of man-
agement, particularly in publicly-held corporations. 22 Wholesale adoption

of the IBCL philosophy therefore makes some substantive provisions of
the INCA problematic compared to the more balanced, comparable
provisions of the Model Act.

The IBCL does furnish an easy "model" or "form book" for
drafting an Indiana nonprofit corporation statute, and the similarity

between the two statutes simplifies the work of Indiana attorneys in

that they do not have to be familiar with two statutes with disparate

substantive provisions and structure. Ease of drafting should not, how-

ever, be a major consideration in fashioning an important statute. Fur-

thermore, Indiana attorneys can easily master two distinct corporation

statutes.

This criticism does not gainsay the wisdom of using a modern business

corporation statute such as the IBCL as a guide in drafting the "me-
chanical" aspects of a nonprofit corporation statute. Modern business
corporation statutes simplify the incorporation process,23 and there is

no reason that the process should be significantly more difficult for

nonprofit corporations. It is important, however, that the process differ

in one major respect. Both the Model Act24 and the INCA25 recognize
that not all nonprofit corporations are alike, and that they may require
individualized provisions in the articles of incorporation. These require-

ments force incorporators to consider and evaluate the nature and essence

of the nonprofit corporation being formed at the outset. 26

II. Comparative Analysis of the INCA

A. The Three Types of Nonprofit Corporation

Nonprofit corporations fall into three basic categories reflecting the

variety of activities in which such corporations engage. 27 There are public

benefit corporations, mutual benefit corporations, and religious corpo-

rations. 28 Public benefit corporations operate for public or charitable

22. See 17 Galanti, supra note 7, § 8.1.

23. See id. § 10.1.

24. Model Nonprofit Corp. Act § 2.02(a)(2) (1988). See id. § 2.02 official cmt.
See generally Hone, supra note 9, at xxi-xxxii.

25. Ind. Code § 23-17-3-2(a) (Supp. 1991).
26. See Hone, supra note 9, at xxxi-xxxii.
27. See id. at xxi-xxx. See also Moody, supra note 3, at 259-60, 266-67.

28. The statutes recognize one subcategory of nonprofit corporations by including
provisions relating to private foundations as defined in the Internal Revenue Code. Ind.

Code § 23-17-25-1 (Supp. 1991); Model Nonprofit Corp. Act § 1.50 (1988).



1004 INDIANA LAW REVIEW [Vol. 25:999

purposes and hold themselves out as "doing good works, benefiting
society or improving the human condition." 29 Mutual benefit corporations
benefit their members or groups of people they serve or represent. 30

Religious corporations are those operating primarily or exclusively for

religious purposes. 31 The Model Act and the INCA apply different rules
to the three types of corporations. Consequently, the articles of incor-

poration must specify whether the corporation will be a public benefit

corporation, a mutual benefit corporation, or a religious corporation. 32

Allowing the organizers of a nonprofit corporation to designate the

type of organization being formed is a major change from prior nonprofit

corporation law. 33 However, incorporators are not free to choose any

category they desire. For example, public benefit or religious corporations

cannot follow the rules for mutual benefit corporations and obtain tax-

exempt status. A mutual benefit corporation may make distributions to
its members upon dissolution,34 but a corporation cannot make distri-
butions to its members upon dissolution and obtain tax-exempt status
under Internal Revenue Code section 501(c)(3). 35

The INCA and the Model Act both define three types of corporations,
but their language differs. 36 In the INCA, a mutual benefit corporation
means a domestic corporation that is formed as a mutual benefit cor-

poration under the Act, designated as a mutual benefit corporation by

another law, or is not a public benefit corporation or religious cor-

poration. 37 The INCA defines a public benefit corporation as a domestic
corporation that: (1) is formed as a public benefit corporation under

the Act, designated a public benefit corporation by another law, is

recognized as tax exempt under section 501(c)(3) of the Internal Revenue

Code, or is otherwise organized for a public or charitable purpose; (2)
is restricted in the distribution of assets on dissolution to similar or

religious corporations; and (3) is not a religious corporation.
38 The INCA

29. See Hone, supra note 9, at xxiv-xxviii.

30. See id. at xxviii-xxix.

31. Religious corporations are regulated less than other nonprofit corporations

because of First Amendment issues. Ind. Code § 23-17-30-2 (Supp. 1991). See Hone,
supra note 9, at xxix-xxx.

32. Ind. Code § 23-17-3-2(2) (Supp. 1991); Model Nonprofit Corp. Act § 2.02(a)(2)
(1988).

33. Nonprofit corporation statutes generally tended to apply a uniform set of rules

to all nonprofit corporations. Hone, supra note 9, at xxi-xxii.

34. Ind. Code § 23-17-22-5(a)(7) (Supp. 1991); Model Nonprofit Corp. Act §
14.06(a)(7) (1988).

35. See I.R.C. § 501(c)(3) (1988 & Supp. I 1989).
36. Ind. Code §§ 23-17-2-19, -23, -25 (Supp. 1991); Model Nonprofit Corp. Act

§ 1.40(23), (28), (30) (1988).

37. Ind. Code § 23-17-2-19 (Supp. 1991).
38. Id. § 23-17-2-23.



1992] NONPROFIT CORPORATIONS 1005

defines a religious corporation as a domestic corporation formed as a

religious corporation under the statute, designated as a religious cor-

poration by another law, or organized primarily or exclusively for re-

ligious purposes. 39 The Model Act defines the three types of nonprofit

corporations in terms of whether they are formed as such40 or if in

existence on the effective date of the statute in an adopting state, they

are treated as such. 41

B. Management Accountability

Until recently, nonprofit corporation statutes did not establish stan-

dards of conduct for, or provide a means for ensuring the accountability

of, the managers of nonprofit corporations.42 Conversely, the statutes

did not provide adequate protection to managers against the expenses

attendant to litigation challenging their stewardship. As a result, the

Model Act establishes general standards of conduct for directors similar

to the standards for directors of business corporations under the RMBCA.43

The INCA also provides standards of conduct for the directors of
nonprofit corporations, but these standards are based on the provisions

of the IBCL, so they are more favorable to the directors than the

provisions of the Model Act.

Both statutes spell out the duties of directors.44 The Model Act

provides that directors are not liable to the corporation, any member,

or any other person for any action or inaction as a director, if the

director acted in compliance with the standards established by the statute.45

The INCA incorporates IBCL section 23- 1-35- 1(e)(2) to impose liability
on a director of a nonprofit corporation only if the director's "breach

or failure to perform constitutes willful misconduct or recklessness."46

The author, although recognizing the directors and officers liability crisis

of the 1980s, believes the IBCL sets too low a standard for the directors
of business corporations.47

39. Id. § 23-17-2-25.

40. Model Nonprofit Corp. Act § 1.40(23), (28), (30) (1988).
41. Id. § 17.07.

42. See Hone, supra note 9, at xxxv-xxxvii. Professor Moody states that more
attention was lavished on the Model Act provisions relating to directors than any other
chapter. Moody, supra note 3, at 274-76.

43. Model Business Corp. Act Ann. § 8.30 (1985).
44. Ind. Code § 23-17-13-1 (Supp. 1991); Model Nonprofit Corp. Act § 8.30

(1988).

45. Model Nonprofit Corp. Act § 8.30(d) (1988). The Model Act contains an
optional section permitting the articles of incorporation to limit or eliminate personal

liability of directors.

46. Ind. Code § 23- 17- 13- 1(d)(2) (Supp. 1991).
47. See 18 Galanti, supra note 7, § 25.2. See generally J. Steven Rawlings, Liability



1006 INDIANA LAW REVIEW [Vol. 25:999

To whatever extent this view is valid, the standard of the business
world is too lenient for many, if not most, nonprofit corporations. The

IBCL standard might be appropriate for the directors of mutual benefit
corporations in which the members maintain a degree of control over
the directors akin to that enjoyed in theory by corporate shareholders.

However, the standard is less appropriate, if not inappropriate, when
applied to public benefit corporations and religious corporations encom-

passing a substantial degree of public trust and confidence. Such cor-

porations may not have members who can police directors, and unlike
the Model Act, the INCA limits the attorney general's oversight powers.48

The INCA is also more liberal with respect to the liability of directors
for unlawful distributions than is the Model Act. The INCA tracks the
IBCL, which imposes liability on directors for unlawful distributions

only if their actions constitute wilful misconduct or recklessness. 49 Li-

ability under the Model Act is possible if a director voting for or

assenting to an unlawful distribution fails to discharge her duties in

compliance with the standards of the statute. 50 Liability under the INCA
for an unlawful distribution requires not only failure of the director to

satisfy her statutory duty, but also wilful misconduct or recklessness. 51

Both the INCA and the Model Act have extensive provisions relating
to officers of nonprofit corporations.

52 The role of officers of nonprofit

corporations might differ from the role of their counterparts in business

corporations. For example, it is not uncommon for the title "president"
of a nonprofit corporation to be bestowed on a major donor, while the

day-to-day activities of the organization are run by an employee des-

ignated executive director or some similar title. 53 The INCA differs from
the Model Act in two major respects. Following the IBCL pattern, the
drafters deleted the Model Act provisions setting standards for officers. 54

The IBCL drafters thought that officer standards were inconsistent with
the basic concept that officers are chosen by, report to, and are subject

of Officers and Directors: Extending the Safe Harbor to Nonprofit Corporate Statutory

Law, 16 N. Ky. L. Rev. 345 (1989); Daniel E. Tobergte, Regulating the Nonprofit

Corporation, 16 N. Ky. L. Rev. 325 (1989).

48. See infra notes 110-13 and accompanying text.

49. Ind. Code § 23-17-13-4 (Supp. 1991).
50. Model Nonprofit Corp. Act §§ 8.30(d), 8.33 (1988).
51. Ind. Code § 23-17-13-4(a) (Supp. 1991). A director held liable for an unlawful

distribution is entitled to contribution from other directors and from each person who
received the distribution whether or not the person knew the distribution was improper.

Id. § 23-17-13-4(b).

52. Ind. Code §§ 23-17-14-1 to -4 (Supp. 1991); Model Nonprofit Corp. Act

§§ 8.40-8.45 (1988).

53. See Model Nonprofit Corp. Act § 8.40 official cmt. (1988).
54. Id. § 8.42.



1992] NONPROFIT CORPORATIONS 1007

to the direction of the board of directors. 55 The drafters of the RMBCA56
and the Model Act57 found no such inconsistency and concluded that

having a statutory standard of conduct for officers would provide guid-

ance to nondirector officers exercising discretionary authority. The omis-

sion of the officer-conduct standard might be significant because the

Model Act expressly recognizes the right of officers of religious cor-

porations to rely on information and reports prepared by religious

authorities. 58 The conduct of officers of Indiana nonprofit corporations

will be judged by common-law agency and contract principles, 59 and it

is not clear how far courts will go in allowing reliance on such reports.
Hopefully, they will allow such reliance because it is unlikely that the

INCA drafters intended to tighten the standards imposed on officers of
nonprofit corporations by omitting statutory standards.

The INCA also deleted a Model Act provision whereby a contract
signed by certain officers is not invalid as to the corporation because

of lack of authority of the signing officers, absent actual knowledge as

to the lack of authority of the other party to the contract. 60 The Model

Act provision is a safe harbor, intended to protect third parties who
rely on the signatures of the specified officers acting on behalf of a

nonprofit corporation when authority of officers may be less than clear. 61

Under the INCA, third parties will have to rely on the common-law
concept of apparent authority when, in fact, there is no actual authority.

C. Officer Indemnification

The introductory comment to the indemnification provisions of the
Model Act states that such provisions "as in all modern corporation

enactments, are central to the Act." 62 There was considerable confusion

and uncertainty whether nonprofit corporations could or should indem-

nify officers and directors from personal liability. 63 Some courts went
so far as to hold that there was no right to indemnification in the

absence of statutory.authority. 64 The basic issue did not present a problem
in Indiana because the 1971 Act authorized not-for-profit corporations

55. Ind. Code § 23-1-36-2 official cmts. (1988).
56. See Model Business Corp. Act Ann. § 8.42 official cmt. (1985).
57. See Model Nonprofit Corp. Act § 8.42 official cmt. (1988).
58. Id. § 8.42(b)(3).

59. See Ind. Code § 23-1-36-2 official cmts. (1988).
60. Model Nonprofit Corp. Act § 8.45 (1988).
61. See id. § 8.45 official cmt.

62. See id. subch. E, introductory cmt., at 239.

63. Id.

64. Texas Soc'y v. Fort Bend Chapter, 590 S.W.2d 156 (Tex. Civ. App. 1979).



1008 INDIANA LAW REVIEW [Vol. 25:999

to indemnify directors, officers, and agents65 and to purchase director

and officer liability insurance.66 Initially, the indemnification provisions

of the 1971 Act were based on the comparable provisions of the Indiana

General Corporation Act, which preceded the IBCL. 67 They were amended
in 1989 to track the indemnification provisions of the IBCL. 68 This

pattern is continued in the INCA. Consequently, the indemnification
provisions of the INCA are broader than the indemnification provisions
of the Model Act, just as the indemnification provisions of the IBCL
are broader than those of the RMBCA.

In discussing the indemnification provisions of the Model Act, Pro-

fessor Hone notes that the problems that prompted broadened indem-
nification provisions in business corporation statutes now face nonprofit
corporations.69 However, the differences between business and nonprofit

corporations justify different statutory indemnification rights. The power

of shareholders of business corporations to sanction directors whose

conduct is wrongful or carried out in bad faith justifies broad indem-

nification provisions. By contrast, more stringent statutory constraints
must be imposed on corporate authority to indemnify directors and

officers for those nonprofit corporations without members. To allow
directors of nonprofit corporations total exoneration from the conse-

quences of improper conduct "would violate tenets of public morality

and trust." 70

The Model Act balances the necessary protection of corporate of-

ficials, the nonprofit corporation itself, and the public by giving man-

datory indemnification to directors in certain situations71 and by limiting

indemnification when the director or officer has breached a duty to the
corporation. 72 The Model Act requires court approval for indemnification

of directors in derivative actions and limits indemnification to the rea-

sonable expenses incurred. 73 The Model Act also requires court approval

for indemnification of a director found liable for having improperly

received a personal benefit. 74

65. Ind. Code § 23-7- 1.1 -4(b)(9) (repealed 1991).
66. Id. § 23-7-1. l-4(b)(10) (repealed 1991).

67. Id. § 23-l-2-2(b)(9), (10) (repealed 1991).

68. Id. §§ 23-7-1.1-69 to -77 (repealed). See generally 19 Galanti, supra note 7,

ch. 26.

69. See Model Nonprofit Corp. Act subch. E, introductory cmt., at 239-40
(1988).

70. Id. at 240.

71. Id. § 8.52.

72. Id. § 8.51(d).

73. Id. § 8.54.

74. Id. § 8.54(2). If the director is adjudged liable, indemnification is also limited

to reasonable expenses incurred.



1992] NONPROFIT CORPORATIONS 1009

The INCA followed the IBCL and eliminated these constraints. As
a result, court approval is not required for indemnification of a director

of a nonprofit corporation who has been held liable for receiving an
improper personal benefit. 75 A director who can satisfy disinterested
directors, a committee of directors, special legal counsel, or the cor-

poration's members that he, although liable, met the INCA's director
standards of conduct, is eligible for indemnification. 76 The INCA tracks
the Model Act in requiring a nonprofit corporation to notify members

in writing with or before the notice of the next annual meeting if it

indemnifies or advances expenses to a director in connection with "a

proceeding by or in the right of the corporation." 77 That requirement

might impose limits on liberal indemnification of directors of nonprofit

corporations with members, but has no impact on a nonprofit corporation

run by a self-perpetuating board of directors. This is a situation in which

simply adopting IBCL indemnification provisions disserves the public f,
interest.

~l»l

D. Conflicts of Interest

The Model Act also contains extensive conflict of interest provisions
applicable to directors of nonprofit corporations.78 The standards vary

depending on the type of corporation. Directors of mutual benefit cor-

porations are held to the RMBCA conflict of interest standard because
such corporations are most like business corporations. 79 A higher standard
than the business judgment rule was adopted for the directors of public

benefit corporations and religious corporations because the public per-

ceives that such corporations are trustworthy. 80 The drafters of the Model
Act noted that contributors to public benefit corporations expect that

their money will be used for the public good and not to benefit individual
directors. 81 The Model Act's higher standard for directors of public
benefit corporations ensures that this expectation is fulfilled.82

The drafters of the INCA rejected this distinction in setting standards
for directors. The INCA applies the conflict of interest standard of the
IBCL to the directors of all three types of nonprofit corporations. 83

75. See generally 18 Galanti, supra note 7, §§ 26.3, 26.5.

76. Ind. Code § 23-17-16-12 (Supp. 1991).
77. Id. § 23-17-27-7; Model Nonprofit Corp. Act § 16.21 (1988).
78. Model Nonprofit Corp. Act § 8.31 (1988).
79. Hone, supra note 9, at xxxvi (1988).
80. Id. at xxxvi-xxxvii.

81. Id. at xxvi.

82. Id.

83. Ind. Code § 23-17-13-2 (Supp. 1991). The actual wording of this section does
differ from the language of the comparable IBCL provision, Ind. Code § 23-1-35-2 (1988).
See generally 18 Galanti, supra note 7, § 25.5 (1991).



1010 INDIANA LAW REVIEW [Vol. 25:999

Thus, any conflict of interest transaction is not void or voidable if: (1)
it is approved by a disinterested majority of directors when the cor-
poration has no members; (2) is approved by the members when the
corporation has members; or (3) when the transaction is fair and rea-
sonable to the corporation. 84 To avoid a situation which, at a minimum,
would create the appearance of impropriety, the Model Act provides an
option for a corporation to obtain judicial or attorney general approval

of a conflict of interest transaction for public benefit corporations and

religious corporations.85

The Model Act contains an optional provision intended to ensure

that a majority of the directors of public benefit corporations do not

have a built-in conflict of interest by limiting the number of directors

who are financially interested persons. 86 The drafters made the provision
optional because many committee members felt it would impose an
undue burden on such corporations without effectively preventing in-

tentional abuses.
87 The INCA's drafters did not adopt this provision.

E. Oversight Authority

The drafters of the Model Act realized that previous nonprofit

corporation statutes lacked effective oversight authority, particularly with

respect to public benefit corporations. 88 The directors of a nonprofit

corporation might be unwilling to sue a fellow director, and there might

not be adequate incentive for members of public benefit corporations,

if the corporation has members, to exercise whatever oversight powers

they possess to hold directors accountable for the expenditure of corporate

funds.

The response of the Model Act's drafters to this deficiency was to

give the attorney general of an adopting state broad oversight powers

over public benefit corporations. This provision, which represents a major

departure from prior nonprofit corporation statutes, protects the interests

of persons connected with public benefit corporations, such as financial

donors. 89

84. Ind. Code § 23-17-13-2 (Supp. 1991).
85. Model Nonprofit Corp. Act § 8.31(b)(2) (1988).
86. Id. § 8.13.

87. See id. § 8.13 official cmt. Professor Oleck was particularly distressed with

this provision because it legalize rather than prohibits conflicts of interest. Oleck, Mixtures,

supra note 5, at 246.

88. Model Nonprofit Corp. Act §§ 1.70, 6.30, 8.10 (1988). See Hone, supra
note 9, at xxvii.

89. See Model Nonprofit Corp. Act § 1.70 official cmt. (1988). See also Hone,
supra note 9, at xxvii.



1992] NONPROFIT CORPORATIONS 1011

The INCA's drafters rejected the Model Act's oversight approach

and provided only limited state oversight of nonprofit corporations by

the attorney general and the secretary of state. This decision is ques-

tionable. It can be asserted that granting the Indiana attorney general

oversight authority is an unwarranted expansion of prior Indiana law

as reflected in the 1971 Act.
90 However, to do so ignores the observation

that the absence of such authority from the previous generation of

statutes in part prompted the revision of the 1964 Model Act.

For example, if a court concludes that removal of a director is in

the best interest of the corporation, the Model Act gives the attorney

general the authority to seek judicial removal of directors of public

benefit corporations who have engaged in fraudulent or dishonest conduct
or who have grossly abused their authority or discretion. 91 The INCA
authorizes judicial removal of directors in an action brought by the

corporation or by ten percent of the members, 92 but does not authorize

the attorney general to bring such an action. Obviously, this is a major

loophole for directors of nonprofit corporations without members.

The INCA, unlike the Model Act, does not authorize the attorney
general of an adopting state to request court-ordered meetings of public

benefit corporations.93 The INCA also omits the Model Act's general
requirement that the attorney general be given notice of the commence-
ment of any proceeding by another person that the attorney general

could have brought. 94 Even more significant is the omission of the
attorney general's authority to bring an action against a director for

breach of a duty of care or loyalty.95

The Model Act limits the right of public benefit corporations to
merge unless the attorney general is notified. 96 Although the INCA confers
no general oversight power, it does require notification of the attorney

general when court approval of a merger is required. 97 Public benefit
corporations and religious corporations must give written notice to the

attorney general before they sell, lease, or otherwise dispose of all or

90. The drafter's intended to exclude "major policy changes or controversial pro-

visions" from the INCA. Constance J. Godvia, Overview of Indiana Nonprofit Act of
1991, Nonprofit Corporations 1991, at 3 (1991) (ICLEF). This is an ironic statement

from the chairperson of the Corporate Law Survey Commission considering how much
the INCA changes prior law.

91. Model Nonprofit Corp. Act § 8.10(a) (1988).
92. Ind. Code § 23-17-12-13 (Supp. 1991).
93. Model Nonprofit Corp. Act § 7.03(a) (1988).
94. Id. § 1.70.

95. Id. §§ 1.70, 3.04(c), 6.30(c).

96. Id. § 11.02(a).

97. Ind. Code § 23-17-19-2(a) (Supp. 1991).



Ill I

1012 INDIANA LAW REVIEW [Vol. 25:999

substantially all of their property. 98 They must also notify the attorney

general if they intend to dissolve."

In fact, the drafters of the INCA reduced the oversight of nonprofit
corporations compared to the 1971 Act. The 1971 Act gave the secretary
of state substantial oversight authority to at least ensure that the interests

of those affected by nonprofit corporations were protected. For example,

the 1989 changes to the director accountability provisions of the 1971

Act 100 were balanced by subjecting the nonprofit corporation itself to

remedial sanctions for defective director performance. 101 Section 23-7-

1.1-63 of the 1971 Act authorized the secretary of state to refuse to

file papers submitted by not-for-profit corporations when the secretary
of state decided that the corporation was: (1) not acting in good faith

as a not-for-profit corporation; (2) was violating provisions of the statute

or other laws; or (3) was engaging in conduct improperly beneficial to

persons, firms, or corporations. 102 The 1971 Act also authorized the

secretary of state to certify violations of the statute to the attorney

general who was to bring an action to dissolve the corporation. 103 The
INCA follows the Model Act 104 in that the attorney general can seek
judicial dissolution of nonprofit corporations in certain circumstances. 105

However, it is unclear how the attorney general will learn of questionable
conduct absent involvement by her office or by the secretary of state.

The INCA follows the Model Act and modern business corporation
statutes such as the IBCL by casting the secretary of state in a "min-
isterial" role with respect to filing documents. 106 The 1971 Act required

the secretary of state to determine if certain fundamental corporate

documents of not-for-profit corporations, such as articles of incorpo-

ration, "conformed to law" before issuing a certificate of incorpora-

tion.
107 Under the INCA, the secretary of state only determines if a

document submitted for filing complies with the statutory requirements

for filing. 108 This change might not actually reduce effective state oversight

authority over nonprofit corporations because it is unclear that examining

98. Model Nonprofit Corp. Act § 12.02(g) (1988). The INCA omits this re-
quirement.

99. Id. § 14.03.

100. Ind. Code § 23-7-1.1-10.5 (repealed 1991).
101. Id. § 23-7-1.1-66 (repealed 1991).

102. Id. § 23-7-1.1-63 (repealed 1991).

103. Id.

104. Model Nonprofit Corp. Act § 14.30 (1988).
105. Ind. Code § 23-17-24-l(a) (Supp. 1991).
106. Id. § 23-17-29-6. See Model Nonprofit Corp. Act § 1.25 official cmt. (1988).
107. Ind. Code § 23-7-1.1-19 (repealed 1991).
108. Ind. Code §§ 23-17-29-1, -6 (Supp. 1991).



1992] NONPROFIT CORPORATIONS 1013

the substance of documents before filing really protected the interests

of those involved in not-for-profit corporations. The requirement might

even have hindered the incorporation process. No objections can be
raised to other steps that facilitate incorporation of nonprofit corporations

by eliminating anachronistic requirements, such as having to specify the

duration of a corporation in the articles when almost all corporations

have perpetual duration. 109

There are other situations in which the oversight authority of the

attorney general or members of nonprofit corporations is more circum-

scribed under the INCA than under the Model Act. Under the Model
Act, the attorney general must be notified when a derivative action
concerning assets held in trust is filed against a mutual benefit corporation110

and of all derivative actions against public benefit corporations." 1 The

attorney general can intervene in such actions. 112 The INCA does not
impose this notification requirement. This omission may not be too
surprising because the INCA, unlike the Model Act, 113 does not expressly
authorize derivative suits.

F. Derivative Suits

The court in Kirtley v. McClelland114 recognized the right of a member
of an Indiana not-for-profit corporation organized under the 1971 Act

to bring a derivative action to remedy the defendant's breach of duty.

However, it is possible that the INCA's drafters intended to eliminate
this right.

115 The relevant provision of the Model Act 116 resolves most

issues pertaining to derivative suits by directors and members of nonprofit
corporations, and the IBCL also has express provisions relating to share-
holder derivative suits. 117 In fact, the IBCL provision limits shareholder
derivative suits more than the comparable RMBCA provision." 8 The
INCA's conscious omission of a provision comparable to that in the

109. Nonprofit corporations have perpetual duration unless otherwise limited in their

articles. Id. § 23-17-4-2.

110. Model Nonprofit Corp. Act § 6.30(0 (1988).
111. Id.

112. Id. § 1.70(b)(2).

113. Id. § 6.30.

114. 562 N.E.2d 27 (Ind. Ct. App. 1990).

115. Certainly, the drafters rejected Professor Baker's suggestion that at "a bare

minimum," the 1971 Act "should be amended to permit derivative actions my members
of nonprofits." Baker, supra note 12, at 829.

116. Model Nonprofit Corp. Act § 6.30 (1988).
117. Ind. Code §§ 23-1-32-1 to -5 (1988). See generally 19 Galanti, supra note 7,

§§ 38.4, 38.6.

118. The IBCL litigation committee provision is more liberal than its RMBCA
counterpart. See generally 19 Galanti, supra note 7, § 38.19.



II!!
I

«i

1014 INDIANA LAW REVIEW [Vol. 25:999

IBCL authorizing litigation committees to terminate groundless derivative
actions and, therefore, protect corporate management, makes sense only
if the drafters intended to overrule Kirtley.

The extensive director and officer indemnification provisions of the
INCA119 are based on the IBCL. 120 However, with respect to mandatory
director indemnification, the INCA omits the reference to proceedings
"by or in the right of the corporation" (meaning derivative suits). The
IBCL also omits such language. 121 The drafters of the INCA omitted
Model Act section 8.51(d) and (e), 122 which contains such language. The
IBCL's drafters omitted comparable provisions contained in the RMBCA. 123

The Model Act and the RMBCA provisions therefore require directors
to obtain court-approved indemnification in certain shareholder derivative

suits.
124 The IBCL approach liberalizes the mandatory indemnification

rights of directors of business corporations without casting doubt on

the long recognized right of shareholders to bring derivative actions.

One cannot be so sanguine with respect to the INCA. Perhaps the
INCA's drafters felt that omitting the language requiring court approval
of indemnification payments liberalizes the indemnification rights of

directors of nonprofit corporations, as in the IBCL, and that a statutory

provision on derivative actions was unnecessary in light of Kirtley.

However, this is a problematic stance. Even the Model Act's drafters

thought it wise to include statutory authority for such suits, and the

right of members of nonprofit corporations to bring derivative actions
is not as well established.

The evidence that the drafters intended to cast doubts on the viability

of Kirtley is not conclusive. The INCA requires a nonprofit corporation
to notify members if it indemnifies or advances expenses to a director

in connection with "a proceeding by or in the right of the corporation," 125

and this provision, at least by implication, supports derivative actions

by members of nonprofit corporations. Of course, the INCA's drafters
might have simply included the IBCL's indemnification language without

considering its possible impact on the right of members and directors

of nonprofit corporations to bring derivative actions. Hopefully, Indiana

119. Ind. Code §§ 23-17-16-1 to -15 (Supp. 1991). See supra notes 75-87 and
accompanying text.

120. Ind. Code §§ 23-1-37-1 to -15 (1988). See generally 19 Galanti, supra note

7, § 26.1.

121. See Ind. Code § 23-1-37-8 official cmt. (1988).
122. Model Nonprofit Corp. Act § 8.51(d), (e) (1988).
123. Model Business Corp. Act Ann. § 8.51(d), (e) (1985).
124. See Ind. Code § 23-1-37-8 official cmt. (1988).
125. Ind. Code § 23-17-27-7 (Supp. 1991). It is possible that this Model Act provision

was inadvertently left in the INCA.



1992] NONPROFIT CORPORATIONS 1015

courts will continue to recognize derivative actions by members of non-

profit corporations. Otherwise, the INCA's drafters did not just reject

Professor Baker's suggestion concerning derivative actions,
126 but in fact

took away a valuable right given to members of nonprofit corporations

by case law. This right is extremely important in holding the managers

of nonprofit corporations accountable for their conduct.

G. Rights of Nonprofit Corporation Members

The INCA defines a member to mean a person who, on more than
one occasion, has the right to vote for the election of a director under

the articles of incorporation or bylaws. 127 A person is not a member
merely because of any rights she may have as a delegate, director, or
designator of director. 128 The INCA differs from the 1971 Act in this
respect. Under the 1971 Act, trustees or directors were members, along

with those persons who signified their intent to be members, met the
requirements of membership, and were accepted as members of the
corporation. 129 A nonprofit corporation may operate through a self-
perpetuating board of directors 130 or through delegates. 131

Unlike prior law, the INCA and the Model Act recognize that not
all nonprofit corporations will, or necessarily should, have "members"
as that word is commonly used. 132 The Model Act's drafters noted that
public benefit corporations may or may not have members depending
on the nature of their activities and costs. 133 Whether religious corpo-

rations have members generally depends on the nature of the religion:
congregational religions are likely to have members, whereas hierarchical

religions are not.
134 Because most people benefited by mutual benefit

corporations are entitled to vote for directors, they are "members" as
defined in the statute. 135

126. See supra note 115.

127. Ind. Code § 23-17-2-17(a) (Supp. 1991).
128. Id. § 23- 17-2- 17(b).

129. Ind. Code § 23-7-1. l-2(g) (repealed 1991).
130. Ind. Code §§ 23-17-7-3, 23-17-12-4 (Supp. 1991).
131. Id. §§ 23-17-9-1, -2. Some nonprofit corporations, such as professional as-

sociations, hold representative assemblies or conventions at which delegates decide orga-

nizational and policy matters. Delegates may be, or have the authority of, members, but
they are not members simply because they are delegates. Id. §§ 23-17-2-8, -17(b)(1).
Delegates also may have the powers of directors. See Model Nonprofit Corp. Act §
6.40 official cmt. (1988).

132. Hone, supra note 9, at xxxii-xxxiii.

133. Id. at xxxiii.

134. Id.

135. Id.



I

1016 INDIANA LAW REVIEW [Vol. 25:999

For all three forms of nonprofit corporation, the articles of incor-

poration must specify whether the corporation will have members. 136 If

it does, the statutes specify the rights enjoyed by the statutory members.

The INCA contains extensive provisions regulating the rights, duties,
and responsibilities of the members of nonprofit corporations. 137 The
INCA provisions basically track the comparable provisions of the Model
Act. 138 There are, however, several significant changes from the 1971

Act. The 1971 Act required that nonprofit corporations issue membership
certificates to every member. 139 The INCA eliminates this requirement;
however, it does not prohibit membership certificates, and nonprofit

corporations with members customarily issue certificates even though not
mandated by statute. 140 The Model Act is also silent on membership

certificates. The 1964 version of the Model Act authorized, but did not
require, that nonprofit corporations issue certificates evidencing mem-
bership. 141

Nonprofit corporations with members sometimes have problems with

meetings and voting by members. Both the Model Act and INCA address
these problems, although the two statutes differ in some respects. For
example, the INCA authorizes members to participate in annual or special
meetings by means of telecommunication devices such as conference

telephone calls, whereas the Model Act is silent. 142 Both statutes allow

proxy voting by members, 143 but the Model Act limits the validity of a
proxy to three years. 144 Both statutes provide that proxies are revocable,

but the INCA omits Model Act provisions specifying conduct that au-
tomatically revokes a proxy appointment by a member. 145

136. Ind. Code § 23-17-3-2(5) (Supp. 1991); Model Nonprofit Corp. Act § 2.02(a)(5)
(1988).

137. Ind. Code §§ 23-17-7-1 to -11-9 (Supp. 1991). Both statutes make it clear that
as such, a member of a nonprofit corporation is not personally liable for the acts, debts,
liabilities, or obligations of the corporation other than dues, assessments, or fees. The

statutes also require a creditor to have obtained a final judgment against the corporation

before proceeding against a member. Ind. Code §§ 23-17-7-6 to -8 (Supp. 1991); Model
Nonprofit Corp. Act §§ 6.12 to -.14 (1988).

138. Model Nonprofit Corp. Act §§ 6.01 - 6.22 (1988).
139. Ind. Code § 23-7-1.1-7 (repealed 1991). The certificate was signed by the

president or a vice president of the corporation and the secretary or an assistant secretary.

The certificate designated the class of the member if the corporation had more than one
class of members.

140. See 20 Galanti, supra note 7, § 53.28.

141. Model Nonprofit Corp. Act § 11 (1964).
142. Ind. Code § 23-17-10-l(g) (Supp. 1991). The articles or bylaws must authorize

this method.

143. Id. § 23-17-11-6; Model Nonprofit Corp. Act § 7.24 (1988).
144. Model Nonprofit Corp. Act § 7.24(b) (1988).
145. Id. § 7.24(e).



1992] NONPROFIT CORPORATIONS 1017

Many nonprofit corporations have low quorum requirements because
of anticipated low membership turnout at meetings. The INCA provides
that a quorum of members is ten percent of the members unless the

statute, articles, or bylaws provides otherwise.
146 Thus, one person may

be sufficient for a quorum. To prevent a few members from taking
over an annual or regular meeting, the statute provides that only those

matters described in the meeting notice may be voted on at an annual
or regular meeting of members, unless one-third or more of the voting

power is present in person or by proxy. 147

The INCA and the Model Act significantly change prior law by
authorizing a court to set temporary rules allowing a nonprofit cor-

poration to hold meetings of members, directors, or delegates when it
otherwise would be impossible or impractical to do so. For example,

in the event of an unrealistically high quorum requirement or the absence
of office holders, the provisions would enable the nonprofit corporation

to conduct necessary functions. 148

Both statutes provide for cumulative voting for electing directors, 149

and authorize the articles of incorporation or bylaws to provide for

election on the basis of organizational unit, by region or geographic

unit, preferential voting, or any other reasonable method. 150 As the

drafters of the Model Act note, the method must be authorized in the

articles or bylaws, and directors cannot be elected on an ad hoc basis. 151

The INCA specifically provides that members may advance or loan
money to the corporation, but places limits on what can be received by
the member in return. 152 The INCA allows the repayment of loans or
advances as an exception to the prohibited distributions. 153 There are no

comparable provisions in the Model Act. The INCA also allows nonprofit
corporation distributions to members or affiliates that are governmental
entities or to another domestic or foreign nonprofit entity provided

certain financial conditions are satisfied. 154 These distributions can ap-

parently be made to members of public benefit corporations and religious

146. Ind. Code § 23-17-1 l-4(a) (Supp. 1991).
147. Id. § 23-17-1 l-4(d).

148. Id. § 23-17-30-4; Model Nonprofit Corp. Act § 1.60 (1988).
149. Ind. Code § 23-17-11-7 (Supp. 1991); Model Nonprofit Corp. Act § 7.25

(1988).

150. Ind. Code § 23-17-11-7 (Supp. 1991); Model Nonprofit Corp. Act § 7.26
(1988).

151. Model Nonprofit Corp. Act § 7.26 official cmt. (1988).
152. Ind. Code § 23-17-7-9 (Supp. 1991).
153. Id. § 23- 17-21 -2(d).

154. Id. § 23-17-21-2(c). After the distribution, the corporation must be able to pay

its debts as they become due in the usual course of the corporation's activities, and its

total assets must at least equal its total liabilities.



1018 INDIANA LAW REVIEW [Vol. 25:999

corporations as well as to members of mutual benefit corporations. There
are no comparable provisions in the Model Act.

Both the Model Act and the INCA contain extensive provisions
relating to record keeping by nonprofit corporations and the right of

members to inspect membership lists. 155 Again, the two statutes differ
in significant respects. The Model Act permits members of nonprofit
corporations to inspect and copy membership lists. 156 To prevent abuse,
the Model Act places limits on the use of membership lists, but protects

members by giving them access to membership lists in struggles for
corporate control or internal policy disputes. 157 The INCA's member
inspection rights 158 are based on the Model Act, but the inspection rights

enjoyed by members of Indiana nonprofit corporations are less than
those enjoyed by members of nonprofit corporations in states that follow
the Model Act more closely. Again, the difference can be attributed to
the IBCL because the member inspection rights under the INCA parallel
the shareholder inspection rights provisions of the IBCL. 159

For example, the Model Act provides that a membership list prepared

for a meeting must be made available beginning two business days after
notice of the meeting is given, 160 whereas it does not have to be made
available until five business days before the meeting under the INCA. 161

Both statutes require a written demand before a member, a member's
agent, or a member's attorney is entitled to inspect and copy a mem-
bership list, but only the Indiana statute requires that the attorney's

authority be in writing. 162 A claim by an "attorney at law" that he or
she is a member's "agent" and that oral authorization is sufficient will

not succeed because it would negate what appears to be a conscious

decision of the drafters of the INCA to raise a hurdle to inspection
and copying of membership lists by members of the bar. However, it

155. Ind. Code §§ 23-17-27-1 to -8 (Supp. 1991); Model Nonprofit Corp. Act

§§ 16.01-16.22 (1988).

156. Ind. Code §§ 23-17-1 l-l(b), -27-2(b) (Supp. 1991); Model Nonprofit Corp.
Act §§ 7.20, 16.02(b) (1988).

157. See Hone, supra note 9, at xxxvii.

158. Ind. Code §§ 23-17-1 l-l(b), -27-2 (Supp. 1991).
159. See generally 19 Galanti, supra note 7, § 33.10.

160. Model Nonprofit Corp. Act § 7.20(b) (1988).
161. Ind. Code § 23-17-1 l-l(b) (Supp. 1991).
162. Id. § 23-17-1 l-l(b)(3); Model Nonprofit Corp. Act §§ 7.20 (b) (1988). The

IBCL also requires that an agent seeking to examine a shareholder list be authorized in
writing. Ind. Code § 23-l-30-l(b) (1988). The drafters of the INCA probably intended
the same for the INCA, and the wording of the general inspection provision of the INCA
seems to indicate that an agent has to be authorized in writing. Ind. Code § 23-17-27-

3(a) (Supp. 1991). However, Indiana Code § 23-17-1 l-l(b) does not expressly require this.

Of course, a cautious member of a nonprofit corporation will give written authority to

an agent, as well as to an attorney, to be on the safe side.



1992] NONPROFIT CORPORATIONS 1019

will only be an obstacle to those lawyers who have not read the INCA.
Hopefully, most Indiana practitioners will ensure that their authority is

in writing. Of course, the hurdle might be more of an obstacle to
attorneys from other states who might be representing nonresident mem-
bers of Indiana nonprofit corporations.

Both the INCA and the Model Act provide for court-ordered in-
spection and copying of membership lists prepared for membership

meetings. 163 However, unlike the Model Act, 164 the INCA does not
authorize a court to "summarily" order the inspection of a list. The

drafters of the IBCL also deleted summary authority from the comparable
shareholder list provision of that statute. 165

A major difference between the two statutes is the impact of a
refusal or failure to make available the list of members. The INCA
provides that the unavailability of the list does not affect the validity

of an action taken at a meeting. 166 The Model Act permits a court to

invalidate a meeting after considering the equities if the corporation

wrongfully refuses a member's request to inspect a membership list when

the member has made a written demand to inspect and copy the list
before the meeting. 167

In effect, the INCA's approach means that a member, challenging
the stewardship of those in control of a nonprofit corporation, will have

no practical remedy if he is refused access to a membership list. It is

unlikely that an action could be filed, and a court could order inspection

and copying, other than summarily, in the five days between the date

the list was supposed to be available and the meeting date. The drafters

of the INCA also deleted the provision of the Model Act authorizing
a court to order a corporation that has wrongfully denied access to a

membership list to pay the member's costs, including reasonable counsel

fees, incurred in obtaining the order. 168

The articles of incorporation or bylaws of a religious corporation
may limit or abolish a member's right to inspect and copy records under
the INCA. 169 It also permits the articles of incorporation of a public
benefit corporation to limit or abolish the inspection rights of members
if the corporation provides a reasonable means of mailing the com-

163. Ind. Code § 23-17-1 l-l(d) (Supp. 1991); Model Nonprofit Corp. Act §
7.20(d) (1988).

164. Model Nonprofit Corp. Act § 7.20(d) (1988).
165. See Ind. Code § 23-1-30-1 official cmt. (1988).
166. Ind. Code § 23-17-1 l-l(e) (Supp. 1991).
167. Model Nonprofit Corp. Act § 7.20(e) (1988).
168. Id. § 7.20(d).

169. Ind. Code §§ 23-17-1 l-l(g), -27-2(e) (Supp. 1991); Model Nonprofit Corp.
Act §§ 7.20(f), 16.02(e) (1988).



1020 INDIANA LAW REVIEW [Vol. 25:999

munications of a member concerning the corporation, at that member's
expense, to other members. 170 There is no comparable provision in the

Model Act. The alternative authorized by the INCA not only denies a
member effective access to other members in a battle for control, but
also gives those in control of the nonprofit corporation information

concerning issues being raised by a disgruntled member. One can only
wonder if the drafters of the INCA feared a massive onslaught of hostile
takeover attempts of Indiana nonprofit corporations.

The INCA also expressly subjects a member's right to inspect and
copy a membership list prepared for a meeting to the requirements of

the general inspection right provisions of the statute. 171 The statute grants
general inspection rights to members of nonprofit corporations. 172 A
member exercising those rights must describe with reasonable particularity
the purpose for the inspection and which records are sought. 173 The
Model Act provides that the demand requirements of the general in-
spection rights provision does not apply to inspection of membership

lists prepared in connection with a meeting. 174

Both statutes limit the use of a membership list obtained under the

general inspection rights provisions of the statutes. Although the INCA
makes the limitation express with respect to lists obtained in connection

with a meeting, the limitation is only implicit in the Model Act. 175

H. Corporate Purposes

The INCA differs from the 1971 Act with respect to the purposes
of nonprofit corporations. The 1971 Act specified that a not-for-profit
corporation could be organized for any lawful purposes consistent with

the statute. 176 The 1964 version of the Model Act included a nonexclusive

list of examples of corporate purposes. 177 The current Model Act resolves

the "corporate purposes" debate by providing that every corporation

has the purpose of engaging in any lawful activity unless a more limited

170. Ind. Code §§ 23-17-1 l-l(h), -27-2(0(2) (Supp. 1991).
171. Id. § 23-17-1 l-l(b).

172. Id. § 23-17-27-2.

173. Id. § 23-17-27-2(c)(2).

174. Model Nonprofit Corp. Act § 16.02(d)(1) (1988). The INCA seems to suffer
from a slight circularity problem in this respect. Indiana Code § 23-17-1 l-l(b) subjects

the right to inspect and copy a membership list prepared for a meeting to § 23-17-27-

2(c), but § 23-17-27-2(d)(l) provides that § 23-17-27-2 does not affect the rights of a

member to inspect records under § 23-17-11-1.

175. Ind. Code § 23-17-1 l-l(b) (Supp. 1991). See Model Nonprofit Corp. Act §
7.20 official comment (1988).

176. Ind. Code § 23-7-1.1-3 (repealed 1991).
177. See Hone, supra note 9, at xx-xxi.



1992] NONPROFIT CORPORATIONS 1021

purpose is set forth in the articles of incorporation. 178 The INCA follows
this approach. 179 Unlike the Model Act, but like the IBCL, the INCA
provides that a corporation engaging in an activity subject to regulation

under another Indiana statute may incorporate under the statute unless
provisions for incorporation exist under the other statute. 180

The INCA authorizes challenges to a corporation's power to act in
certain circumstances, but this authority differs from the Model Act in

two major respects. Both statutes authorize the attorney general to bring

an action to enjoin an act when no third party brings suit. 181 The INCA,

on its face, goes further by authorizing a declaratory judgment action

challenging a nonprofit corporation's power to act. 182 However, the Model

Act authorizes a challenge to a corporation's power to act in a proceeding

against an incumbent or former director, officer, employee, or agent of

the corporation. It is possible for a nonprofit corporation to be liable

to a third party on an ultra vires contract, and the Model Act allows

an action for damages against the person or persons responsible for the

ultra vires activity.
183 The INCA does not authorize such an action. The

decision to omit this action against corporate personnel generally will

not be significant because of the infrequency of ultra vires conduct,

although ultra vires actions might be more common with nonprofit
corporations than business corporations. The omission is significant as

evidence of the drafters' intent to eliminate, or at least seriously curtail,

the right of members of nonprofit corporations to bring derivative actions.

/. Effect on Existing Corporations

The 1971 Act did not automatically apply to existing corporations.
Rather, the statute permitted not-for-profit corporations, which could

be formed under the 1971 Act, but were organized under other Indiana

laws, to elect to become subject to the statute by filing articles of

acceptance or by amending the articles of incorporation or similar gov-

178. Model Nonprofit Corp. Act § 3.01(a) (1988).
179. Ind. Code § 23-17-4-l(a) (Supp. 1991).
180. Id. § 23- 17-4- 1(b). The Model Act provides for incorporation under its provisions

only if incorporation is not prohibited under other statute. Model Nonprofit Corp. Act
§ 3.01(b) (1988).

181. Ind. Code § 23-17-4-4(b) (Supp. 1991); Model Nonprofit Corp. Act § 3.04(b)
(1988). The INCA's drafters consciously omitted the Model Act's provision allowing

members to challenge ultra vires acts in a derivative proceeding.

182. Ind. Code § 23-17-4-4(b) (Supp. 1991). It is not clear if the requirement that
a third person not have acquired rights before injunctive relief is available also applies

to declaratory judgment actions. Allowing declaratory judgment actions even when a third
person has acquired rights is justifiable in order to resolve any issues of a nonprofit

corporation's power to act.

183. Model Nonprofit Corp. Act § 3.04(c) (1988).



1022 INDIANA LAW REVIEW [Vol. 25:999

erning instrument to declare that the corporation was to governed by

the statute.
184 The Model Act contemplates that the statute will apply

to existing nonprofit corporations if the statute under which the cor-

poration was incorporated includes a clause reserving the power to amend
or repeal the statute. The Model Act also contains an optional provision
that allows nonprofit corporations to decide whether to be governed by

the provisions of the Model Act or the statute under which they were

organized. 185 The drafters of the Model Act observed that most not-for-

profit acts adopted in this century have a reserved powers clause, but

that some nonprofit corporations could have been formed under statutes
without such clauses or could be religious corporations formed under

special statutes.
186

The application of the INCA to new and existing nonprofit cor-
porations differs. The INCA applies to all nonprofit corporations or-
ganized after its effective date of August 1, 1991 J 87 It also permits

nonprofit corporations existing on July 31, 1991, to "opt in" to the
new statute by corporate action. 188 However, unlike the Model Act, the
INCA does not give nonprofit corporations the choice of being governed
by the laws under which they were organized. Rather, the new statute
will apply to all corporations in existence on July 31, 1993, organized

under or subject to the 1971 Act or its predecessor, the General Not-

for-Profit Act of 1935. 189 This approach is similar to the ICBL's approach

to existing business corporations. 190 There is a potential problem here

in that the 1971 Act did not contain a reserved powers clause. 191 Thus,

it is conceivable that a court would refuse to apply the INCA to existing
nonprofit corporations if, for example, the new statute is less favorable
to the interests of members than was the 1971 Act. The INCA applies
to foreign nonprofit corporations desiring to transact business in Indiana

after July 31, 1993. 192 A foreign nonprofit corporation authorized to
transact business in Indiana on that date is not required to obtain a

new certificate. 193

184. Ind. Code § 23-7-1.1-37 (repealed 1991).
185. Model Nonprofit Corp. Act § 17.01(b) (1988).
186. Id. § 17.01 official cmt.

187. Ind. Code §§ 23-17-1-1, -2 (Supp. 1991).
188. Id. § 23-17-l-l(b).

189. Id. § 23-17-l-l(b).

190. Id. § 23-1-17-3.

191. Unlike the Model Act, the INCA does not contain a reserved powers clause.
However, a "universal" reserved powers clause was added to the Indiana Code in 1986.

See Ind. Code § 1-1-5-2 (1988). See generally 17 Galanti, supra note 7, § 8.3.

192. Ind. Code § 23-17-1-4 (Supp. 1991).
193. Id.



1992] NONPROFIT CORPORATIONS 1023

J. Amendment of Articles and Bylaws

The provisions of the Model Act and the INCA relating to amending
articles of incorporation are similar. 194 These provisions are more detailed

than the comparable provisions in the 1971 Act 195 in that the current

statute distinguishes among the three types of nonprofit corporations.
Both the Model Act and the INCA allow provisions giving third persons
the right to approve articles of incorporation and bylaw amendments. 196

The INCA adopts the optional Model Act provision authorizing public
benefit corporations and mutual benefit corporations to terminate all

members or any class of members by amending the articles of incor-

poration. 197 In effect the INCA allows "going-private" transactions.
The INCA and Model Act provisions regulating bylaw amendments

of nonprofit corporations are also more detailed than those of the prior

generation of statutes for the same reason. 198 However, the members of

Indiana nonprofit corporations have fewer rights with respect to bylaw

amendments than those provided by the Model Act. The INCA provides
that the board of directors may amend or repeal the bylaws of a nonprofit
corporation unless the articles of incorporation, the bylaws, or the statute

provide otherwise. 199 The articles of incorporation may require that a
specified person other than the board of directors approve in writing a

bylaw amendment.200 The incorporators have the power to amend or
repeal the bylaws until the directors have been chosen. 201 This power to

amend or repeal bylaws is subject to the class voting rules in certain

194. Id. §§ 23-17-17-1 to -11; Model Nonprofit Corp. Act §§ 10.01-10.08 (1988).
195. Ind. Code §§ 23-7-1.1-23 to -28 (repealed 1991).
196. Ind. Code § 23-17-17-1 (Supp. 1991); Model Nonprofit Corp. Act § 10.30

(1988).

197. Ind. Code § 23-17-17-2 (Supp. 1991). Directors must meet their fiduciary
obligations if they decide that the corporation should have a self-perpetuating board of

directors by eliminating members. Model Nonprofit Corp. Act § 10.31 official cmt.
(1988)

198. Ind. Code §§ 23-17-18-1, -2 (Supp. 1991); Model Nonprofit Corp. Act §§
10.20-10.22 (1988).

199. Ind. Code § 23-17-18-l(a) (Supp. 1991). Indiana Code § 23-17-18-l(b)(l) requires
notice of a directors meeting at which bylaw amendments are to be approved. This

probably means notice to the directors and not to the members. The provision requires

that notice be in accordance with § 23-17-15-2(c). The reference probably should be to

§ 23-17-15-3(c), which relates to calling and giving notice of director meetings. Indiana

Code § 23-17-15-2(c) relates to the effect of a consent of directors to action taken without
a meeting. The comparable cross-reference in the Model Act is to the call and notice
provision. Model Nonprofit Corp. Act §§ 8.22(c), 10.20 (1988).

200. Ind. Code § 23-17-17-1 (Supp. 1991); Model Nonprofit Corp. Act § 10.30
(1988).

201. Ind. Code § 23-17-18-l(a) (Supp. 1991); Model Nonprofit Corp. Act § 10.20
(1988).



1024 INDIANA LAW REVIEW [Vol. 25:999

circumstances, in which members are entitled to vote on bylaw amend-

ments. 202

The drafters of the Model Act note that bylaws of a nonprofit
corporation setting forth the rights and duties of members are analogous
to the provisions in the articles of incorporation of business corporations

relating to preference shares. 203 Consequently, for nonprofit corporations

with members, the Model Act not only permits members to initiate
bylaw amendments, but also requires member approval of all bylaw
changes. 204

The drafters of INCA departed significantly from this structure by
vesting the authority to amend bylaws in the directors and by permitting
member-initiated bylaw amendments only if the articles of incorporation

or bylaws give members this right. 205 Members are only required to
approve bylaw amendments adopted by the directors when the amendment
will change the members' rights. 206 This approach is similar to the bylaw

provisions of the IBCL. The IBCL eliminated the inherent power of
shareholders to amend or repeal bylaws of business corporations that
the RMBCA recognizes. 207 Bylaw flexibility resulting from the directors'
right to amend bylaws may be desirable in the for-profit sector, but the
wisdom of circumscribing the rights of members of nonprofit corporations

with respect to bylaws is far from clear.

The INCA does not totally deprive members of the right to vote
on bylaw amendments, and members of nonprofit corporations can vote

on bylaw amendments in certain cases. 208 These voting rights exist even

when the articles of incorporation and bylaws provide otherwise. 209 The

right depends on the type or nature of the nonprofit corporation. The

members of a class of a religious corporation may vote as a separate

202. Ind. Code § 23-17-18-2 (Supp. 1991); Model Nonprofit Corp. Act § 10.22
(1988).

203. Model Nonprofit Corp. Act § 10.21 official cmt. (1988).
204. Id. § 10.21(a).

205. Ind. Code § 23-17-18-1 (Supp. 1991).
206. Id. § 23-17-18-2.

207. See Ind. Code § 23-1-39-1 official cmt. (1988). See generally 19 Galanti,
supra note 7, § 39.15 (1991).

208. The members of a class in a public benefit corporation may vote as a separate
voting group on a proposed amendment to the bylaws if the amendment would affect

the class's voting rights differently from those of another class. The members of a class

in a mutual benefit corporation may vote as a separate voting group on a proposed
amendment to the bylaws that substantially affects the rights, privileges, preferences,

restrictions, or conditions of the class. Members of a class of a religious corporation may
vote as a separate voting group on a proposed amendment to the bylaws only if a class

vote is provided for in the articles of incorporation or the bylaws. Ind. Code § 23-17-

18-2 (Supp. 1991).

209. Id. § 23-17-18-2(e).



1992] NONPROFIT CORPORATIONS 1025

voting group on a proposed amendment to the bylaws only if a class

vote is provided for in the articles of incorporation or bylaws. 210

The Model Act provides that if a class of members is to be divided

into two or more classes as a result of a bylaw amendment, the amend-

ment must be approved by the members of each class that would be

created by the amendment.2 " The Model Act also specifies that an

amendment be approved by the members of the class by the lesser of
two thirds of the vote cast or a majority of the votes castable by the

class.
212

The INCA provides that if a class of members is to be divided into
at least two classes by an amendment and a class vote is required to
approve an amendment to the bylaws, an amendment must be approved
only by a majority of the votes cast by the members of each class that

would be created by the amendment.213 The provision gives less protection

to the members of a class in this situation than does the Model Act

because a majority of the votes cast can be substantially less than a

majority of the class. A small group of members may be able to cause
a major change to the structure of a nonprofit corporation. This also

is possible under the Model Act, but the risks are reduced by the

requirement that at least two-thirds of the votes cast approve the amend-

ment.

K. Emergency Powers

The Model Act and the INCA both grant emergency powers to the
board of directors of nonprofit corporations.214 This authority was not

common under the previous generation of nonprofit corporations. How-
ever, the definition of emergency is broader under the INCA than under
the Model Act. The INCA uses the IBCL definition of emergency, that
is, an extraordinary event that prevents a quorum from assembling. 215

The Model Act defines an emergency in terms of a "catastrophic"
event. 216 The purpose of the IBCL language was to allow the board of

210. Id. § 23-17-18-2(c).

211. Model Nonprofit Corp. Act § 10.22(d) (1988).
212. Id. § 10.22(e).

213. Ind. Code § 23-17-18-2(d) (Supp. 1991). Presumably, a simple majority of the
votes cast will also suffice to approve any other bylaw amendment that requires member
approval, although the statute is silent on this point.

214. Id. § 23-17-4-3; Model Nonprofit Corp. Act § 3.03 (1988). For example, in
an emergency, lines of succession can be modified to accommodate the incapacity of any

director, officer, employee, or agent, and the corporation can relocate its principal office,

designate alternative principal offices or regional offices, or authorize an officer to do

so.

215. Ind. Code § 23-17-4-3(d) (Supp. 1991).
216. Model Nonprofit Corp. Act § 3.03(d) (1988).



1026 INDIANA LAW REVIEW [Vol. 25:999

directors to react to any untoward event such as a hostile takeover

attempt. 217 The approach of the Model Act, and the comparable RMBCA
provision, 218 is to permit a corporation to act in the event directors are

killed in an event such as a plane crash or a war.219 Both statutes also

authorize a nonprofit corporation to adopt "emergency bylaws" unless

the articles of incorporation provide otherwise. 220 Again, the INCA
definition of emergency for triggering emergency bylaws is couched in

terms of an extraordinary event.221 Corporate action taken in good faith

during an emergency to further the ordinary affairs of a corporation

binds the corporation and may not be used to impose liability on a
corporate director, officer, employee, or agent. 222

L. Dissolution

The INCA contains detailed provisions relating to general dissolu-
tion, 223 judicial or involuntary dissolution, 224 and administrative
dissolution225 of nonprofit corporations. Again, these provisions are sim-

ilar to the comparable provisions of the IBCL. 226 The INCA gives less
protection to the interests of claimants against a dissolved nonprofit

corporation than does the Model Act. 227

Distribution of assets when business corporations dissolve rarely
presents problems even in the absence of provisions in the articles or

bylaws relating to such matters. However, the nature and goals of

nonprofit corporations require special handling of corporate assets upon

dissolution. 228 It was uncertain under statutes such as the 1971 Act who
would receive assets of a dissolved nonprofit corporation if the articles

217. Ind. Code § 23-l-22-3(d) (1988). See generally 17 Galanti, supra note 7, §
10.22.

218. Model Business Corp. Act Ann. § 3.03(d) (1985).
219. See id. § 3.03 official cmt.

220. Ind. Code § 23-17-3-9 (Supp. 1991); Model Nonprofit Corp. Act § 2.07
(1988).

221. Ind. Code § 23-17-3-9(d) (Supp. 1991).
222. Id. § 23-17-4-3(c)(2); Model Nonprofit Corp. Act § 3.03(c)(2) (1988).
223. Ind. Code §§ 23-17-22-1 to -7 (Supp. 1991).
224. Id. §§ 23-17-24-1 to -4.

225. Id.

226. See generally 20 Galanti, supra note 7, §§ 44.1-44.30.

227. For example, a claimant has five years under the Model Act to bring an action

if a nonprofit corporation has published notice of dissolution, while only two years is

allowed by the INCA. Ind. Code § 23-17-22-7(c) (Supp. 1991); Model Nonprofit Corp.
Act § 14.08 (c) (1988).

228. See Hone, supra note 9, at xxxiv. An existing nonprofit corporation might
have to amend its articles of incorporation to remain a public benefit corporation. Model
Nonprofit Corp. Act § 17.07 official cmt. (1988).



1992] NONPROFIT CORPORATIONS 1027

or bylaws did not specify a distribution plan. The INCA eliminates this
problem by requiring the articles to include provisions for the distribution

of corporate assets. 229 The articles of incorporation do not have to state

to whom assets will be distributed on dissolution as long as they provide
how to resolve the issue. 230

M. Foreign Corporations

Like the 1971 Act, the INCA contains provisions on how foreign
not-for-profit corporations are to procure certificates of admission from

the secretary of state before transacting business in Indiana. 231 The INCA
generally tracks the provisions of the IBCL regulating the admission of
foreign business corporations wishing to transact business in Indiana. 232

The INCA follows the contemporary approach of not attempting an
affirmative definition of what constitutes transacting business. Rather,

it defines the concept in negative terms, by specifying what activities

do not constitute transacting business.233

The prime sanction against a foreign nonprofit corporation that

transacts business without a certificate of authority is to deny the cor-

poration access to Indiana courts until it is qualified. 234 The INCA also
continues the sanction of the 1971 Act and subjects a foreign corporation

to a penalty not exceeding ten thousand dollars.235 The INCA eliminated
the minor criminal penalty against agents of unqualified foreign nonprofit

corporations. 236

A foreign nonprofit corporation with a valid certificate of authority
has the same rights and enjoys the same privileges as domestic nonprofit

corporations, and except as otherwise provided by the INCA, is subject
to the same duties, restrictions, penalties, and liabilities as domestic

nonprofit corporations. 237 The INCA expressly provides that the statute
does not authorize Indiana to regulate the organization or internal affairs

of qualified foreign corporations. 238 The Model Act is similar. 239

229. Ind. Code § 23-17-3-2(6) (Supp. 1991). The Model Act is similar. Model
Nonprofit Corp. Act § 2.02(a)(6) (1988).

230. Hone, supra note 9, at xxxiv. For example, the articles can specify the name
of the organization or organizations to receive the assets or state that a particular individual,

organization, or the board of directors will determine who will receive the assets.
231. Ind. Code §§ 23-7-1.1-48 to -60 (repealed 1991).
232. Ind. Code §§ 23-1-49-1 to -51-3 (1988).
233. Ind. Code § 23-17-26-l(b) (Supp. 1991).
234. Id. § 23-17-26-2.

235. Id. § 23-17-26-2(d). See Ind. Code § 23-7- 1.1 -60(a) (repealed 1991).
236. Ind. Code § 23-7- 1.1 -60(c) (repealed 1991). There are no reported decisions

imposing sanctions on a foreign not-for-profit corporation or its agents.

237. Ind. Code § 23-17-26-5 (Supp. 1991).
238. Id. § 23-7-26-5(c).

239. Model Nonprofit Corp. Act § 15.05(c) (1988).



1028 INDIANA LAW REVIEW [Vol. 25:999

III. Conclusion

By this time, the reader will have realized that the author views the
INCA with mixed emotions. I am on record as having qualms with the
tilt of the IBCL in favor of the interests of corporate management and
against the interests of shareholders of Indiana business corporations,

although I recognize that corporate managers do have rights and interests

that should be protected. 240 To whatever extent favoring management
of business corporations is justified in our global economy, it is not

clear that the same tilt is justified with nonprofit corporations. Obviously,

my concern is with the wholesale incorporation of IBCL substantive
provisions into the INCA. This Article points out some of the features
of the INCA that might be questionable or problematic. Whether or
not readers agree with this position, all can agree that the INCA is a
significant development and that Indiana nonprofit corporations are now
regulated by one of the most modern, flexible, state of the art nonprofit

corporation statutes found in any jurisdiction.

240. See 18 Galanti, supra note 7, § 25.2.