STAND. COM. REP. NO. 220
RE: S.B. No. 893
Honorable Ronald D. Kouchi
President of the Senate
Twenty-Ninth State Legislature
Regular Session of 2017
State of Hawaii
Your Committee on Commerce, Consumer Protection, and Health, to which was referred S.B. No. 893 entitled:
"A BILL FOR AN ACT RELATING TO NONPROFIT CORPORATIONS,"
begs leave to report as follows:
The purpose and intent of this measure is to:
(1) Restore procedures that allow nonprofit corporations to convert into and out of domestic nonprofit corporations;
(2) Impose a duty of loyalty on directors and officers of nonprofit corporations;
(3) Prohibit a director from voting on any matter in which the director has a conflict; and
(4) Increase the length of time that the Attorney General has to review proposed dissolutions of public benefit corporations.
Your Committee received testimony in support of this measure from the Department of the Attorney General, Hawai‘i Alliance of Nonprofit Organizations, and one individual. Your Committee received comments on this measure from the Aloha Society of Association Executives.
Your Committee finds that Act 37, Session Laws of Hawaii 2012 (Act 37), repealed a provision in the Hawaii Revised Statutes that allowed a domestic nonprofit corporation to convert to a foreign corporation or any other business entity. In hindsight, Act 37 went too far, as it effectively prevented domestic nonprofit corporations from converting to foreign nonprofit corporations. This measure restores the provision that allows nonprofit corporations to convert into and out of domestic nonprofit corporations, establishes the procedure for conversion, and specifies the effects of a conversion.
Your Committee further finds that although directors of nonprofit corporations have a duty of loyalty at common law, existing statute does not expressly recognize such a duty of loyalty. This measure establishes a duty of loyalty for directors and officers of nonprofit corporations. This measure also requires the recusal from voting of any director that has a direct or indirect conflict of interest.
Your Committee has heard the concerns raised in testimony regarding the recusal from voting on any matter in which a director has a conflict. According to testimony received by your Committee, there may be situations where either the vote of a director is needed or the conflict of interest is so minor that a disclosure, rather than a prohibition, is needed. Your Committee requested the assistance of the Department of the Attorney General (Department) to clarify the conflict of interest concerns raised in testimony and, if needed, suggest language that would address these concerns.
Upon further consideration, the Department informed your Committee that the concerns regarding conflict of interest are already addressed in the existing statute, so additional language addressing these concerns is therefore unnecessary. The Department noted to your Committee that the disclosure and voting process for directors, as contained in this measure, is not compulsory, but rather a "safe harbor" procedure for a board to approve a transaction. As corporate matters may be approved by the votes of non-conflicted directors, a conflicted director's vote is not necessary, nor does it count, when the safe harbor procedure is followed. The Department also noted that existing statute makes it clear that when a majority of directors who have no interest in a transaction vote to approve that transaction, there is a quorum present. Quorum is not defeated by using the safe harbor procedure, and as such, a conflicted director's vote or presence is not needed to meet quorum requirements.
Your Committee has amended this measure by:
(1) Inserting an effective date of July 1, 2050, to encourage further discussion; and
(2) Making technical, nonsubstantive amendments for the purposes of clarity and consistency.
As affirmed by the record of votes of the members of your Committee on Commerce, Consumer Protection, and Health that is attached to this report, your Committee is in accord with the intent and purpose of S.B. No. 893, as amended herein, and recommends that it pass Second Reading in the form attached hereto as S.B. No. 893, S.D. 1, and be referred to your Committee on Judiciary and Labor.
Respectfully submitted on behalf of the members of the Committee on Commerce, Consumer Protection, and Health,
ROSALYN H. BAKER, Chair