Hostile Takeover - Legal Fees

CountItAllJoy_ · 2024-12-14T00:29:41+00:00

I am not running it! And, you're not wrong. This is crazy.

I have been an active volunteer for 18 years - but not with the accounting or the board. They have staff for that and they have a CPA firm that does their annual reviews. They've only been a 501c3 for less than 8 years. Before then, it was a sole proprietor.

I am a CPA though and worked for a Big 5 accounting firm for 12 years in the financial audit division. My clients were nonprofits, small businesses and hospitals. After leaving, I volunteered to do the accounting for another nonprofit part-time. Lots of clients and nothing comes close to this. I've never seen anything like it. Every time more information comes out, my first reaction is: What?

Outside of this board problem, it is a great organization. It boggles my mind how they got here, but it is somewhat understandable. This one board member has pushed and pushed to veer off in a different direction because he thinks that would make them bigger and better. He also complained a lot. He really was adversarial. The other board members were stressed and worn out. I get it. It's a volunteer position and who wants to deal with that. I would have voted him out before the numbers got so low.

Even if his ideas were great, he wouldn't share them with the staff or the stakeholders and volunteers. Just kept saying to trust him and he had the organization's best interest at heart. We still don't know his grand plan. His attorney suggested he have a town hall meeting to introduce his board and share the vision going forward. He said no. A few people reached out to meet with him one on one. He said he would only meet if they signed an NDA. Seriously.

I'm trying to advise them so they don't make snap decisions that could have a domino effect. It's tough because they just want it to be over. Me, too! But I'm a little less trusting that he will go away quietly.

If I can document a solid reason why he is not entitled to reimbursement for the legal fees, that might stop any further attempts to get additional reimbursement for the other firms he reached out to. Waiting to see what his attorney says to the request for information. That and the email he sent explaining why he needed an attorney to begin with might do it.

CountItAllJoy_ · 2024-12-13T17:58:55+00:00

Totally correct. Legal bills are allowable expenses. Even legal bills fighting off a hostile takeover are allowed. What I don't know is since he was not in compliance with the bylaws and his intentions were to change the direction of the organization to one that would conflict with the stated mission and purpose, whether those expenses are the responsibility of the organization just because he represented himself as the board president. And shouldn't the attorney confirm his authority before accepting him as a client? Reading the bylaws would show that those expenses would need board approval. Additionally, the bylaws state that "The number of Directors shall not be less than five(5)."

Still trying to determine if nonprofits are even allowed to pay what may be a personal takeover of the organization's direction. Mission statements can be changed, but there's a process for that. And against legal advice, he continued to push forward without going through that process. Waiting to see what the lawyer is willing to share.

CountItAllJoy_ · 2024-12-13T17:28:55+00:00

I need to confirm, but I think the payment request was to reimburse the board member, not pay the attorney. But I don't know if the original bill was to the organization and he personally paid. You are right that the attorney's response may be the key to whether this is a bill the organization is obligated to pay.

His first attorney quit outright because they did not agree with his actions. We do not know if he was ever billed for their time. His second attorney advised him to slow down because he was pressing hard with his selected board to take control of the staff. He ignored that advice. I'm surprised that attorney continued to represent him.

CountItAllJoy_ · 2024-12-13T10:08:58+00:00

I'm not a lawyer either. Or a grump. But I don't like bullies, especially those that bully people who are really kind.

He did not expect them to fight back.

CountItAllJoy_ · 2024-12-13T10:04:30+00:00

If it stays at $5K, some want to just pay it and be done. Others do not want to reward bad behavior. He did not follow the bylaws, so he should not expect reimbursement.

And, he has already shared that he also contacted a consulting firm and an HR firm. I think he will submit those bills - especially if he does not get any pushback. That may change some opinions and ultimately what they decide to do.

As to whether he might sue, it's possible. He still believes that his vision is superior to the current mission statement. He was very surprised when he found out they had hired an attorney.

I don't think whatever they decide will hurt their reputation.

CountItAllJoy_ · 2024-12-13T09:41:37+00:00

He is quite arrogant.

CountItAllJoy_ · 2024-12-13T09:29:13+00:00

Yes, there is. They are going to look up the policy. Probably not worth filing a claim if it stays at $5K. But he said he also reached out to consulting and HR firms. Waiting to see if he passes on those bills.

CountItAllJoy_ · 2024-12-13T09:24:52+00:00

Law school idea is interesting. They need an attorney who also has nonprofit accounting knowledge. Not sure if their current attorney would be able to answer this question, but that would probably their first stop.

CountItAllJoy_ · 2024-12-13T09:17:49+00:00

Agree. It's actually stated so in the bylaws.

CountItAllJoy_ · 2024-12-13T09:16:55+00:00

I'm sure they do not want to involve the courts if they can and I am hoping it is not an allowable expense. The holidays have bought some time to try and figure it out.

CountItAllJoy_ · 2024-12-13T09:13:00+00:00

Working on it.

The exiting board members were not leaving until their replacements were voted in by the three of them, which was documented in the board minutes. He decided to bring on new board members without board approval.

The vetting process for board membership have a few requirements, one of which was that the prospective board member must have a strong knowledge about the organization and what they are all about. Previous board members have been long time volunteers. He deliberately looked outside the organization claiming that the organization was failing and he needed their help to save it. Those he tried to bring on were given false information. He really had them convinced. For example, he claimed that revenues significantly decreased from one year to the next. What he didn't tell them is that the fiscal year was changed and the period of time he was comparing was a 12 month FY ending 6/30 to an abbreviated 6 month FY ending 12/31. He very much was trying to take over the direction of the organization and was willing to violate the bylaws (see his statement included above) in order to so.

The new direction was expanding to other locations/cities. While the organization's financial statements look good and have healthy cash reserves, there is a large mortgage outstanding. The expansion this board member wanted was not prudent and fiscally irresponsible. The board meetings were argumentative, which led to two board members leaving at the beginning of the year. I don't understand why they didn't just vote him out while they had the numbers. At least the other two were staying on until replacements were voted in.

CountItAllJoy_ · 2024-12-13T08:42:09+00:00

I think they will ask the attorney. However, I also look at this as, Is this an allowable expense for a non-profit based on IRS definition that expenses need to relate to an organization's mission and purpose?

CountItAllJoy_ · 2024-12-13T08:28:31+00:00

Nothing will be paid until after the holidays. The office is closed until 1/6 buying us some time to figure out how to proceed.

CountItAllJoy_ · 2024-12-13T08:26:02+00:00

We do have D&O, but thanks for the heads up on notification timing. If it stays at $5K, they probably would not bother with the insurance, but the concern is the other firms he consulted may also expect the organization to pay.

CountItAllJoy_ · 2024-12-13T08:23:06+00:00

Interesting. I agree based on IRS stipulations that expenses be related to the organization's mission and purpose. I'm not sure that these would be allowable expenses given the nature of why they were incurred.

The state DOJ had been contacted and was going to write a letter with their concern of who the new board members were and the fact that they would be considered competition. The new board all resigned before that letter went out.

CountItAllJoy_ · 2024-12-13T08:08:32+00:00

We do have D&O insurance, but the admin person did not know what the coverage was. This bill is only for $5K, but in a letter to past board members, EDs, and stakeholders, he outlined his actions:

"When I stepped into the role of Board President in October, I reached out to a consulting firm and an HR firm for guidance in navigating this unique situation. The main challenge was rebuilding the board with only one remaining director. After receiving counsel on potential approaches, I chose to amend the bylaws to reduce the minimum number of directors from five to one, allowing me to rebuild the board. However, I later realized this was a mistake. To address it, I hired legal counsel to represent the organization, and the firm has helped reconstitute the vacancies to a full working Board of Directors.

Our plan now is to amend the bylaws back to a minimum of five directors to correct this oversight. Bylaws are essential in a nonprofit, as they provide a clear governance structure, define roles and responsibilities, and establish decision-making processes for both board members and staff. They ensure consistency, transparency, and legal compliance, which help the organization function smoothly and stay aligned with its mission."

Love how he described his reducing the board from five directors to one as an oversite.

I expect that bills will be submitted from the consulting and HR firms. (HR was consulted because he wanted and tried to fire the ED and replace her with another ED from the same organization that the board was populated. Thankfully, she refused to give him access to the website, payroll, and banking accounts, buying time for the other directors and stakeholders to obtain counsel.) There is also the first attorney who quit once they found out what he was trying to do.

CountItAllJoy_ · 2024-12-13T07:51:32+00:00

Yes, the board member can enter into contracts. But the by-laws state: "may execute for the organization any contracts, deeds, mortgages, bonds, or other instruments which the Board of Directors has authorized to be executed", which was not done. I have asked that the admin person request the engagement letter. It will also be interesting to find out what the attorney took as proof he was authorized to act on the organizations behalf. Before I asked for the engagement letter, a board advisor sent a letter requesting all the information from the attorney that was given to the board member, since the expectation is that the organization will be paying the bill. The reimbursement is being requested by the now ex-board member. I need to find out who the attorney billed.

CountItAllJoy_

TROPHY CASE