In an earlier article we discussed the method of credit proofing a charity's assets by incorporating separate corporations to hold different types of assets and operate discrete activities.
A key element in organizing into separate corporations is to ensure that independence and authority are maintained while, at the same, providing a degree of control by the parent corporation. The by-laws of the corporations holding the charity's assets are the documents under which the balance between "control" and independence is established.
Control of the subsidiary corporation is established by having the parent corporation be the sole voting member of the subsidiary. With this provision, the parent corporation, by casting one vote (usually by the Chair of its Board of Directors) for the subsidiary’s Board of Directors, decides who will serve as its directors.
There are various ways to recruit and select directors. One effective and efficient way is for the parent corporation to have a leadership recruitment committee (that serves as a nominating committee) to identify and recruit supporters of the charity who have specific skills, experience and interest in serving on the board of the subsidiary. Once elected, the subsidiary corporation directors serve as independent fiduciaries and remain accountable to the parent corporation by virtue of their being elected by the sole voting member/parent corporation.
The parent corporation can also review major decisions of the subsidiary to ensure that the activities of the subsidiary remain aligned with the aims of the parent. This can be achieved by providing that fundamental decisions (as defined in the by-law of the subsidiary) are approved over two separate meetings of the Board of Directors. The parent corporation then has the opportunity to review the matter decided by the Board and, if there are concerns, can discuss them with the subsidiary Board before the matter is considered at a second meeting. If the concerns cannot be resolved to the satisfaction of the parent corporation, it can change the directors of the subsidiary through the replacement process set out in the by-law.
Mark S. Anshan provides legal, business, strategic and organizational advice to nonprofits and charities at Drache Aptowitzer LLP. He was instrumental in the conception and launch of URJ Camp George, the first summer camp in Canada for children from Reform Synagogues, and served as Director and Treasurer for the Micah Homes Non-Profit Housing Corporation during its planning and construction of Plaut Manor, a housing project for disadvantaged single-parent families.
Contact him by email or at 416.900.5572 ext. 15.