Proposed Bylaw change and discussion

ALEXANDER HALPERN LLC
ATTORNEYS AT LAW ________________________________________
1790 Thirtieth Street, Suite 280, Boulder, Colorado 80301
Tel: (303) 449-6180 Fax: (303) 449-6181
lsilberstein@halpernllc.com

Date: November 21, 2017

To: Tango Colorado, Inc. Board of Directors

From: Liz Silberstein, Attorney

Re: Proposed Amendment to Bylaws

The directors of Tango Colorado, Inc. engaged me to review a proposed amendment to Section 2.3 of the organization’s bylaws submitted by member, John Gardner, and recommend a response.

Current Language of Article II, Section 2.3

The Corporation may encourage members to take lessons to improve their dancing; provided, however, the organization shall not be affiliated with any specific studio or professional dance teacher (defined as a business, entity or individual person who teaches dancing for money). All teachers and students from any or all studios are welcome to attend dances and hold membership in the Corporation.

Analysis of Section 2.3

Section 2.3 is located in the purposes section of the bylaws in Article II, thus it helps inform the direction, values and activities of Tango Colorado. First, it states that the corporation may engage in the activity of encouraging members to take lessons and increase their skills and understanding of tango. Second, the provision establishes that Tango Colorado “shall not be affiliated with any specific studio or professional dance teacher.” An affiliation generally created by an on-going contractual and/or structural relationship. According to the provision, the relationship must also be “specific” meaning that the organization may not create an alliance with one particular teacher or studio so that the organization’s identity and financial activities are significantly intertwined. Director and President, Michele Delgado, believes the original intent of this clause was to ensure that Tango Colorado, Inc. does not repeat past mistakes and once again engage in an exclusive financial relationship with one individual teacher. This concern is well-founded because, as a non-profit, the organization may not operate in order to benefit an individual. If the IRS found that any part of Tango Colorado’s net earnings inured to the benefit of private individuals or shareholders, the organization could lose exempt status. Last, the provision provides that one of the purposes of the organization is to create an inclusive environment where all teachers and dancers are welcome to participate in Tango Colorado’s membership and activities.
Mr. Gardner’s Concerns Regarding Conflicts of Interest

Mr. Gardner expressed the following concerns regarding Section 2.3 and potential conflicts of interest:

The current wording does not sufficiently clarify the organization’s position regarding affiliation with dance instructors and dance studios. While our organization welcomes all dancers, it is our duty to safeguard against conflict of interest on all levels. No discussion or specific instructions are found in our bylaws regarding members that are also paid dance instructors. Currently members that are also professional dance teachers can hold positions on the Board of Directors. That allows paid professionals an opportunity to control or influence the direction that our organization takes to their advantage both financially as well as philosophically.

Mr. Gardner’s Proposed Amendment

Section 2.3 The Corporation shall not be affiliated with any specific studio or professional dance teacher (defined as a business, entity or individual who teaches dancing for money). No business, entity or individual who teaches dancing for money shall hold a position on the Board of Directors. Persons who teach dancing for money can be members and occupy an appointed position or volunteer position. These positions will be outside of the Board of Directors and will have no vote in matters decided by the board.

Analysis of Mr. Gardner’s Concerns and Proposed Amendment to Section 2.3

I agree with Mr. Gardner that the language regarding affiliation between the organization and “specific” teachers and studios could be clearer. Prohibiting an “affiliation with any specific professional dance teacher or studio” could be misinterpreted to include any relationships between the organization and teachers or studios. It appears that Mr. Gardner interprets the clause to mean that an affiliation between a paid teacher or studio and the organization would include a teacher or studio engaging in a director position. However, a director also serving as a teacher probably does not automatically create “an affiliation” as contemplated by this provision given that the concern about affiliations is based on not creating exclusive financial relationships with teachers or studios. In order to clarify the provision, I propose that it limit relationships that appear to be exclusive and those that could potentially violate IRS private benefit rules. However, this is a separate topic from conflicts of interest. Please see my recommendations in the section below entitled “Proposed Alterations to Mr. Gardner’s Amendment.”

Mr. Gardner is correct that a non-profit should expressly address its directors’ duties to avoid conflicts of interest. Additionally, he is correct that a director of Tango Colorado who is also a business, entity, or individual person teaching for money with Tango Colorado could create a prohibited “conflicting interest transaction” if the transaction is not appropriately authorized. However, in order to address a “conflicting interest transaction” under Colorado law, Tango Colorado need not absolutely prohibit compensated teachers or studios from serving as directors. Instead, these transactions may be authorized by disinterested directors or eligible voting members. In fact, according to the Colorado Revised Nonprofit Act, no conflicting interest transaction, as defined by C.R.S. 7-128-501(1), may be set aside or voided if the transactions are properly authorized.

C.R.S. 7-128-501(1) defines a conflicting interest transaction as follows:

A contract, transaction, or other financial relationship between a nonprofit corporation and a director of the nonprofit corporation, or between the nonprofit corporation and a party related to a director, or between the nonprofit corporation and an entity in which a director of the nonprofit corporation is a director or officer or has a financial interest.

Under, 7-128-501(3), a conflicting interest transaction may not be set aside if it is approved and ratified as follows:

(3) No conflicting interest transaction shall be void or voidable or be enjoined, set aside, or give rise to an award of damages or other sanctions in a proceeding by a member or by or in the right of the nonprofit corporation, solely because the conflicting interest transaction involves a director of the nonprofit corporation or a party related to a director or an entity in which a director of the nonprofit corporation is a director or officer or has a financial interest or solely because the director is present at or participates in the meeting of the nonprofit corporation’s board of directors or of the committee of the board of directors that authorizes, approves, or ratifies the conflicting interest transaction or solely because the director’s vote is counted for such purpose if:

(a) The material facts as to the director’s relationship or interest and as to the conflicting interest transaction are disclosed or are known to the board of directors or the committee, and the board of directors or committee in good faith authorizes, approves, or ratifies the conflicting interest transaction by the affirmative vote of a majority of the disinterested directors, even though the disinterested directors are less than a quorum; or

(b) The material facts as to the director’s relationship or interest and as to the conflicting interest transaction are disclosed or are known to the members entitled to vote thereon, and the conflicting interest transaction is specifically authorized, approved, or ratified in good faith by a vote of the members entitled to vote thereon;

Mr. Gardner is correct that the bylaws do not currently provide a specific method for addressing conflicts of interest. However, Tango Colorado’s Fiscal Policy provides a method for handling conflicts of interest:

SECTION 9.1 – CONFLICT OF INTEREST POLICY Tango Colorado will not enter into contracts or transactions with any individual or other corporation, partnership, association, or other organization in which its directors are directors, officers, or have financial interest (there is potential conflict of interest) without prior approval by an affirmative vote of a majority of disinterested directors.

This language complies with the statute except that it does not clearly address a director’s duty to disclose the material facts of the relationship or ensure that the material facts are known. However, I understand that the directors have been strictly adhering to this policy and disclosing material facts of the relationships during board meetings or ensuring that the material facts are already known. For example, material facts of all teaching arrangements are disclosed and discussed during board meetings and the three directors who are also teachers do not vote on any matters they might have a financial interest in. Even though the policy is not currently complete, Tango Colorado’s board is adhering to the statute through its method of authorizing conflicting interest transactions.

Despite Tango Colorado’s current compliance, I recommend that Tango Colorado’s board of directors adopt a separate and more robust Conflicts of Interest Policy. Though not required, it is emerging as a best practice for non-profits and is encouraged by the IRS. I recommend that in order to satisfy Mr. Gardner’s important concerns, that the directors recommend revising the bylaws to state that the directors will adopt a Conflicts of Interest Policy that will adhere to C.R.S. 7-128-501 and other applicable state and federal laws. Alternatively, the directors could propose to modify the amendment by inserting language from the statute directly into the bylaws in addition to creating a separate Conflicts of Interest Policy. Please the next section for my specific recommendations.

Mr. Gardner’s purpose and language for addressing conflicts of interest is too narrow. Mr. Gardner’s primary concern is prohibiting compensated teachers from serving as directors. However, the Conflicts of Interest Policy will need to address all potential conflicts of interest rather than focus on one particular class of conflicts. D.J.s, caterers, venue owners, performers, musicians, directors on other boards, and related parties of directors could all create conflicting interest transactions if they serve as directors. Rather than barring all such individuals from serving as directors, the Conflicts of Interest Policy will offer a reasonable and legally sound method to address these potential conflicts and avoid them as much as possible.

Additionally, it is important to note that Mr. Gardner has altered Section 2.3 to address a conflict of interest concern over the original intention of the section: to establish that a purpose of the organization is to welcome all dancers and teachers, encourage participation in tango education, and limit the organization’s ability to engage in exclusive relationships with paid teachers or studios. Prohibiting paid teachers and studios from serving as directors does not appear to be a purpose of the organization. Thus, if Mr. Gardner’s amendment were to be adopted, I recommend that it be moved into Article IV. Members should be alerted to the fact that Mr. Gardner’s amendment has removed all language regarding encouraging dance lessons and welcoming all teachers and dancers. It may be helpful to ask Mr. Gardner to explain his reasoning for removing the additional language. Members should also know that removing such language from the bylaws could create damaging repercussions. For example, Tango Colorado would need to report these amendments to grant-making organizations, which value broad inclusivity, and risk losing grants.

Lastly, in addition to his concerns regarding financial transactions, Mr. Gardner expressed the concern that paid teachers who are also directors take advantage of the organization “philosophically.” I believe that any concern regarding the philosophical approach of a potential director is resolved through the election process. Members may vote for a director based on that director’s philosophical approach.

Proposed Alterations to Mr. Gardner’s Amendment

In order to address Mr. Gardner’s concerns regarding conflicts of interest while maintaining the original intent of Section 2.3 and complying with the law, I recommend that the amendment to the bylaws be altered in the following manner:

Section 2.3 All teachers and students from any or all studios are welcome to attend dances and hold membership in the Corporation. The Corporation may encourage members to take lessons to improve their dancing. However, the Corporation shall not create financial relationships with any one studio or professional dance teacher (defined as a business, entity or individual person who teaches dancing for money) at the exclusion of contracting with other studios or professional dance teachers or cause the Corporation to violate private benefit or private inurement requirements under 26 U.S.C 501(c)(3).

In addition, I recommend that you insert one of the following provisions in order to address conflicts of interest:

Option 1:

Section 4.4 Conflicts of Interest. The Board of Directors shall develop and adhere to a Conflicts of Interest Policy that will comply with C.R.S. 7-128-501 and other applicable state and federal laws.

(Renumber subsequent sections of Article IV.)

Option 2:

Please note that I do not believe the additional language is necessary, but the board might consider it as an alternative amendment.

Section 4.4 Conflicts of Interest. The Board of Directors shall develop and adhere to a Conflicts of Interest Policy that will comply with C.R.S. 7-128-501 and other applicable state and federal laws.

A director may teach dancing for money only if the director complies with C.R.S. 7-128-501(3) with regards to conflicting interest transactions. Specifically, if a Director teaching dancing for money creates a conflicting interest transaction under C.R.S. 7-128-501(1), in accordance with C.R.S. 7-128-501(3) the conflicting interest transaction shall not be void or voidable or be enjoined, set aside, or give rise to an award of damages or other sanctions in a proceeding by a member or by or in the right of the nonprofit corporation, solely because the conflicting interest transaction involves a director of the nonprofit corporation or a party related to a director or an entity in which a director of the nonprofit corporation is a director or officer or has a financial interest or solely because the director is present at or participates in the meeting of the nonprofit corporation’s board of directors or of the committee of the board of directors that authorizes, approves, or ratifies the conflicting interest transaction or solely because the director’s vote is counted for such purpose if:

(a) The material facts as to the director’s relationship or interest and as to the conflicting interest transaction are disclosed or are known to the board of directors or the committee, and the board of directors or committee in good faith authorizes, approves, or ratifies the conflicting interest transaction by the affirmative vote of a majority of the disinterested directors, even though the disinterested directors are less than a quorum; or

(b) The material facts as to the director’s relationship or interest and as to the conflicting interest transaction are disclosed or are known to the members entitled to vote thereon, and the conflicting interest transaction is specifically authorized, approved, or ratified in good faith by a vote of the members entitled to vote thereon.

(Renumber subsequent sections of Article IV.)

Additionally, I recommend that the Conflicts of Interest Policy include a provision requiring candidates to the board of directors to disclose material facts of potential conflicting interest transactions to the members before elections.

Mr. Gardner’s Request for a Vote on his Amendment prior to Director Elections

Mr. Gardner has requested that members vote on his bylaw amendment before elections take place during the upcoming meeting according to Article XII. He states in his email: “I respectfully request per ARTICLE XII Amendments (see paste below) that this proposed amendment be presented to the membership for a vote at our annual meeting prior to our annual board member elections.” According to the bylaws, the President of Tango Colorado may set the agenda and I recommend that the vote on the bylaw amendment occur after the elections in order to postpone the amendments potential effect on the election.

First, there is no requirement anywhere in the bylaws, including Article XII, that a bylaw amendment proposal precede elections during an annual member meeting. Instead, the bylaws defer to the procedural rules established by the most recent edition of The Modern Rules of Order. Article III, Section 3.6. According to the 3rd edition of The Modern Rules of Order, the Chair, who is the elected chief financial officer, is the central authority for the conduct and procedure of the meeting and sets the agenda in consultation with the Secretary. Article V, Section 5.4 of the bylaws states that the President is the chief executive officer. Thus, according to the bylaws, Tango Colorado Inc.’s President must decide the order of the agenda. However, given that Michele Delgado is both the President and a teacher, I recommend that the Vice-President create the agenda in her stead. Section 5.6 of Article V empowers the Vice-President to “assume the office of the president in the event of the absence or disability of the president.”

Second, postponing the effect of Mr. Gardner’s amendment would likely create a fairer election and is appropriate for the circumstances. Though this does not appear to be Mr. Gardner’s intention, Mr. Gardner’s amendment would effectively exclude several potential opponents, including three current directors, from competing with him or others in the election. Additionally, given that there is no immediate legal need to prohibit all compensated teachers from becoming directors, it is not necessary to rush such an important decision. Postponing the effect of such an amendment would allow time for Tango Colorado members to prepare for the drastic change and for teachers to evaluate their roles within the Tango Colorado organization and community.

Please let me know if you have any questions or concerns.

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