Six Major Revisions to the Michigan Nonprofit Corporation Act: Should your Condominium Association Revise its Articles of Incorporation and Bylaws?

In Michigan, two primary statutes govern the affairs of a condominium association: the Condominium Act and the Nonprofit Corporation Act.  The last major revisions to the Nonprofit Corporation Act took place in 2008 through Public Act 9 of 2008, which permitted voting by electronic means, amongst other things.  Effective January 15, 2015, Governor Rick Snyder signed into law Michigan Senate Bill 623 [now Public Act 557 of 2014] which made significant changes to the Nonprofit Corporation Act.  This article addresses six major changes to the Nonprofit Corporation Act that could impact your condominium association. [1]

Participation by Electronic Means: Required Unless Prohibited

By far, the biggest change for condominium associations involves participation by Co-owners in membership meetings by electronic means, i.e. telephone or conference call, Skype, Go-To-Meeting, FaceTime, etc.  Under the 2008 Amendments to the Nonprofit Corporation Act, participation in membership meetings was allowed by electronic means only if the articles of incorporation or bylaws specifically permitted such participation.

Under the newly revised MCL 450.2405, unless the articles of incorporation or bylaws specifically prohibit participation in membership meetings by electronic means, the new default position is that a Co-owner may participate in membership meetings by telephone, conference call, Skype, Go-To-Meeting, FaceTime or other means of remote communication.  This is an important change for all condominium associations in Michigan.

Given the new changes, any association that wishes to prohibit electronic participation in membership meetings will need to amend its articles of incorporation or bylaws.  There are certainly some associations who prefer in-person participation, but that decision is left to the discretion of the condominium association.  On the other hand, if an association does not wish to restrict participation by electronic means, the Board of Directors will still need to 1) review and revise its notice procedures for member meetings to allow Co-owners to participate through electronic means, 2) determine if and how votes from electronic means will be taken and 3) determine how votes from electronic means will be verified.  This leads to the second most important change with the new law: voting.

Voting By Electronic Means or at a Polling Place Now Available

In the new MCL 450.2408 and MCL 450.2409, associations have the flexibility to conduct voting for annual and special meetings by electronic transmission or at a polling place (if such voting is permitted in the articles of incorporation or bylaws).  Thus, with the recent changes, an action may be approved by 1) an in-person meeting, 2) signing a written consent, 3) electronic means such as e-mail or an online survey 4) through an in-person polling place with printed ballots or 5) through a written ballot provided to Co-owners and returned not less than 20 days and no more than 90 days after the date the ballot is provided.  Therefore, associations should determine whether e-mail, an on-line webpage or printed ballots are permissible voting mechanisms and, if so, whether the articles of incorporation or bylaws need to be amended to accommodate such options.

Additional Limitations on Director and Officer Liability Now Available

In 1986, the Nonprofit Corporation Act was amended to allow a condominium association the ability, in its articles of incorporation, to limit the personal liability of a director or officer of the corporation, its shareholders or its members for money damages for a breach of the person’s fiduciary duty.  In order for the director or officer to obtain the benefits of the provision, the association had to determine that a specific fiduciary duty was involved.  However, the new MCL 450.2209 allows an association the ability to eliminate director or officer liability for any action taken or any failure to take action [not just limited to the person’s fiduciary duty].  Note: the new statute lists five specific exceptions to these limitations of liability.  Thus, the amended MCL 450.2209 greatly broadens the protections for directors and officers.  Given that directors and officers of condominium associations are volunteers, associations should consider whether such additional protections are desired or appropriate.

Nonexecutive Committees

Previously, the Board of Directors for the condominium association could designate “executive committees” consisting of one or more of the Directors of the association.  Under the amended MCL 450.527, unless otherwise prohibited in the articles of incorporation or bylaws, the Board of Directors—or an individual designated in the bylaws or by the Board—can appoint one or more “nonexecutive committees”.  Importantly, in nonexecutive committees, some or all of the committee members could be directors, officers, members, or shareholders of the association and some or all could be individuals who were not directors, officers, members, or shareholders.

The purpose of nonexecutive committees is to assist the Board of Director’s affairs and to provide for the creation of one or more subcommittees of any nonexecutive committee, if desirable.  By definition, a nonexecutive committee would not be an executive committee and could not execute the Board’s power or authority in the management of the association’s business and affairs.  A nonexecutive committee could, however, perform under the Board of Director’s direction any functions described in the bylaws or as determined by the Board of Directors.

If a nonexecutive committee is approved, the approval must state 1) the purpose of the committee appointed, 2) the terms and qualifications of committee members and 3) the ways in which committee members are selected and removed.  Whether condominium associations are interested in permitting nonexecutive committees is a case-by-case determination given the size, interest and/or needs of the condominium association.

Inspection of Records: New Restrictions Now Available

Under the old MCL 450.2487, a Co-owner could inspect certain records of the association for any proper purposes at a reasonable time and place including the following: 1) the balance sheet at the end of the preceding fiscal year; 2) the statement of income for that fiscal year; and 3) if prepared by the corporation, its statement of source and application of funds for that fiscal year.  In addition, a Co-owner, upon at least 10 days’ written demand, could examine for any proper purpose, in person or by agent or attorney, during usual business hours, the minutes of stockholders’ or members’ meetings and record of shareholders or members.

The new amendments clarify the procedures by which a Co-owner may request the inspection of certain records and what information the Co-owner is not permitted to inspect.  Specifically, the amended MCL 450.2487 provides that if a corporation’s articles of incorporation, bylaws or a resolution by the Board of Directors so states, then no right to inspection exists when doing so would 1) impair the privacy or free association rights of shareholders or members, 2) impair the lawful purposes of the corporation or 3) when opening lists of donors would not be in the best interests of the corporation.  Prohibiting the inspection of certain condominium records is something every condominium association Board of Directors should consider.

Mergers and Dissolutions: New Options for Twenty Co-owners or More

Not often does a condominium association concern itself with mergers or the dissolution of the condominium association.  However, the procedures for implementing a merger or the dissolution of the association have changed with the new amendments.  Previously, a plan of merger or dissolution could be approved if a majority of the Co-owners entitled to vote approved such a measure at an in-person meeting or by proxy.  Now, MCL 450.2703a allows approval of a plan of merger and MCL 450.2804 allows for dissolution of the condominium association both by a majority of affirmative votes from Co-owners present at the meeting, but only if a minimum of twenty (20) Co-owners entitled to vote are present.  Both new statutes permit a greater number of votes if provided for in the articles of incorporation or bylaws.  Every condominium should consider whether the size of their condominium should require a greater number of Co-owners present to effectuate either a merger or the dissolution of the association.

Conclusion

Given the numerous changes to the Nonprofit Corporation Act, condominium associations in Michigan would be wise to review or amend their articles of incorporation and bylaws to adopt the new changes.  The new amendments provide greater flexibility to condominium associations regarding participation at meetings, voting, director and officer liability, the existence of nonexecutive committees, the inspection of records, mergers and dissolution.  Please feel free to contact our office with any questions regarding the changes to the Nonprofit Corporation Act or any additional issues regarding your Michigan nonprofit condominium association, in general.

Joe Wloszek is an attorney with the law firm of Cummings, McClorey, Davis & Acho, P.L.C. where he focuses his practice on dispute avoidance, condominium law, commercial litigation, commercial real estate, large contractual disputes, and title litigation. He has extensive litigation and trial experience in state and federal courts involving commercial litigation issues and real estate matters. He can be reached at (734) 261-2400 or jwloszek@cmda-law.com.

[1] While the recent changes to the Nonprofit Corporation Act also affect other community associations including homeowner’s associations, this article focuses on condominiums.  However, please feel free to contact our office if you have any other nonprofit corporation or community association legal needs.