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Despite its unique facts, the recent decision in the controversial Spitzer v. Grasso litigation is likely to influence the basis on which state attorneys general exercise oversight over, and enforce obligations with respect to, nonprofit corporations and their officers and directors. No. 401620104 (N.Y. App. Div. 1st Dep’t May 8, 2007). This may particularly be the case as to executive compensation-related issues. However, the decision should not be read as somehow emasculating an attorney general’s fundamental authority with respect to nonprofit organizations in general and charitable corporations in particular. Rather, attorneys general can be expected to continue to maintain a high profile in this area. The underlying controversy arose from the attempt by Eliot Spitzer, then New York AG, now New York governor, to seek disgorgement of allegedly excessive compensation payments made by the New York Stock Exchange to Richard A. Grasso as its chief executive officer, at a time when the NYSE was a New York nonprofit (noncharitable) corporation. Spitzer had asserted six separate causes of action against Grasso in connection with the various compensation arrangements. Two of them were statutory, premised upon, and expressly recognized by, specific provisions of the New York Not-for-Profit Corporation Law (N-PCL). The remaining four merely referred to and relied upon various provisions of the N-PCL. The AG characterized them as “common law” causes of action, while Grasso described them as “hybrid” (because they alluded to the N-PCL and thus were not pure common law claims). The matter was before the appellate court on appeal of a decision by a New York supreme court � the trial-level court � to deny Grasso’s motion to dismiss those four causes of action. The crucial issue was whether the AG had the legal authority to assert against Grasso the four nonstatutory causes of action (i.e., whether the N-PCL, “by reasonable intendment,” forbade those causes of action). The court concluded that the AG lacked the basis to assert them, as they were not within the scope of his authority and were inconsistent with the legislative intent and core provisions of the N-PCL. Why the decision is significant While fundamentally unique in its facts, the significance of the decision transcends its notoriety, for several specific reasons. First, the case involved the same basic fiduciary duties and provisions of not-for-profit corporation laws applied under the laws of many states other than New York. Second, the oversight role of the state AG is crucial with respect to nonprofit corporations, given that such corporations lack the supervisory role normally played by shareholders of for-profit corporations. Third, the executive compensation practices of nonprofits are currently a matter of significant public debate and regulatory focus. The holding reflected the court’s view that the nonstatutory causes of action were fundamentally inconsistent with the policy choices made by the state Legislature in the N-PCL relating to duties and liabilities of officers and directors. The court considered it a “fundamental matter” that, while the state Legislature had expressly empowered a nonprofit corporation to give its officers and directors the ability to redress a broad range of improper conduct, in this case the NYSE had not used that statutory authority. In essence, the court characterized the AG’s perspective of his authority as enabling him to circumvent the substantive (and difficult) statutory standards for officer and director liability, while remaining free to obtain the full relief authorized by statute. Even the parens patriae doctrine (to bring suit in the best interest of the state) is “trumped” by contrary determinations about the public interest made by the Legislature. In a word, then, the court felt the AG was overreaching. Interested parties should pause, however, before rushing to extreme conclusions based on this decision, concerning the scope and power of an AG’s authority over not-for-profit corporations. Clearly, the court resoundingly rejected the AG’s interpretation of his own authority, which is somewhat ironic given the fundamental allegations asserted against Grasso and his executive style and specific actions. This case will likely lead other AGs to be more attuned to the scope and intent of the underlying nonprofit statute before instituting enforcement actions, particularly in connection with issues related to unreasonable compensation. Also, nonprofits may be more emboldened to challenge such actions when there are legitimate concerns with “hybrid” causes of action. Yet the power and oversight authority of the AG remains fundamentally intact with respect to nonprofits. Here, the AG may have been bloodied, but nonprofit public policy requires that he remain unbowed. The public nature of nonprofit assets, and the absence of a shareholder level of review of management and governance, requires vigorous state oversight of the nonprofit sector. This is particularly the case with respect to the oversight of charitable nonprofit corporations. This decision thus suggests, in a significant and dramatic way, the likelihood of different strategic options both for the “enforcer” of nonprofit corporation laws and for the subjects of that enforcement. Michael W. Peregrine and Ralph E. DeJong are partners in the Chicago office of McDermott, Will & Emery. As a member of the health department, Peregrine concentrates his practice in the representation of nonprofit corporations in connection with governance, corporate structure, executive compensation, tax and change-in-control matters. DeJong is a member of the health and employee benefits departments.

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