The Corporations Code is one of the governing bodies of law for incorporated common interest developments (“CIDs”) and incorporated non-CID associations. Generally, these CIDs and non-CID associations are structured as nonprofit mutual benefit corporations, governed by the Nonprofit Mutual Benefit Corporations part of the Corporations Code (Corporations Code §§7110-8910). However, for incorporated CIDs and non-CID associations formed prior to 1980 (and whose Articles of Incorporation still show it is subject to the General Nonprofit Law), further analysis is likely required to determine the governing part of the Corporations Code. This is exponentially important for incorporated non-CID associations, since the Davis-Stirling Act will not apply and the Corporations Code is the most relevant governing body of law.
History: Until December 31, 1979, the nonprofit division of the Corporations Code was one section and covered all nonprofit corporations generally. Effective January 1, 1980, the California Legislature restructured the meat of this general nonprofit division into three key parts: (1) Nonprofit Public Benefit Corporations, (2) Nonprofit Mutual Benefit Corporations, and (3) Nonprofit Religious Corporations.
Under these “new” laws, all preexisting nonprofit corporations formed under the General Nonprofit Law would become subject to one of the three parts in the new division on January 1, 1980. In order determine to which of the three new parts such nonprofit corporations would be subject, the Legislature built in a part of the Corporations Code called “Transition Provisions.” These provisions set the framework for the analysis.
Framework: Corporations Code §9912(a) breaks down this framework into six sequential (must be taken in order) steps. Essentially, those steps include:
- If the corporation is designated by statute as being subject to one of these parts, then that statute shall control.
- If the corporation was organized primarily or exclusively for religious purposes, it shall be subject to the nonprofit religious corporation law.
- Corporations receiving an exemption under Section 23701d of the Revenue and Taxation Code shall be subject to the nonprofit public benefit law.
NOTE: This exemption is available to corporations, community chests, or trusts, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competitions.
- Corporations whose assets are irrevocably dedicated to charitable or public purposes and whose governing documents dictate a distribution of assets to a person(s) carrying on a similar purpose(s) shall be subject to the nonprofit public benefit law.
- Corporations which permit distribution of assets to its members upon dissolution shall be subject to the nonprofit mutual benefit law.
- If none of the above steps apply, the corporation is subject to the nonprofit mutual benefit law.
For most incorporated CIDs and incorporated non-CIDs formed prior to 1980, the fourth and fifth steps will be the most relevant. After ruling out each step (1-3), the corporation should check its Articles of Incorporation and Bylaws to see how assets are to be distributed upon dissolution. More than likely, it will be to members (as opposed to being dedicated to charitable or public purposes under step 4). If the documents are silent on distribution of assets or dissolution entirely, it may not be clear.
Ultimately, for those pre-1980 nonprofit corporations where the analysis is not clear, or where there are concerns as to the existence of a statute which may govern under step 1, subsection (d) of §9912 expressly allows such corporations to petition the superior court to make the determination under the framework. Petitioning the court for declaratory relief comes with some likely significant legal costs and may not be feasible for some nonprofit corporations.
Amendment: Fortunately, there is an easier way to remove all uncertainty and clearly identify the part of the Corporations Code to which a pre-1980 nonprofit corporation will be subject. Corporations Code §9913 provides a nonprofit corporation can unilaterally (without membership approval) amend its Articles of Incorporation to elect to be governed by all of the provisions under a certain part (such as the nonprofit mutual benefit corporation part of the Corporations Code).
Deciding on the Governing Law: If an incorporated CID, or incorporated non-CID association, formed prior to 1980 (and whose Articles of Incorporation still show it is subject to the General Nonprofit Law) is interested in amending its Articles of Incorporation in accordance with Corporations Code §9913 above, it should first consult with legal counsel to ensure it elects the appropriate part of the Code consistent with the short- and long-term objectives of the corporation.
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