7-127-202 (CNCA 7-23-106(1), -106(3); CBCA 7-107-202; RMNCA 7

The Colorado Revised Nonprofit Corporation
with Commentary by the Revision Committee[1]

1997 Committee Commentary

The following is quoted from the above book with highlighting added.

7-121-401 (CNCA 7-20-102; CBCA 7-101-401) General definitions.

"Member" is any person identified as such. A "person" is an individual or entity, so members may be minors, other business entities, or governmental entities.

A nonprofit corporation is not required to have "members." If it does have members, they are afforded basic protection and rights. People who have the right to vote for directors are "voting members" and may have the right to vote on other matters. See 7-127-202. The articles of incorporation must state whether the nonprofit corporation will have voting members (7-122-102(1)(e)) but is not required to state whether or not the nonprofit corporation will have members without voting rights. The term "members" includes "voting members" as defined in 7-121-401(39). Members who are not voting members may have common-law or other rights.

7-126-401 (No comparable CNCA provision; CBCA 7-107-402; RMNCA 6.30) Derivative suits.

This section is adapted from the CBCA. Actions by members are not as common in the nonprofit corporation environment as they are with respect to for profit corporations. Subsection (1) authorizes only directors and voting members having 5 percent or more of the voting power to commence a derivative action on behalf of the nonprofit corporation. The general assembly added the opening clause so there would be no doubt that this provision on derivative suits does not affect other proceedings against the nonprofit corporation.

Subsection (3) requires an effort, prior to bringing the action, to obtain action by the nonprofit corporation. The purpose of this requirement is to allow the directors of the nonprofit corporation the opportunity to investigate the claim and to act on behalf of the nonprofit corporation if they find that action is warranted. If a demand on the directors would be useless, the complainants may proceed without demand but must include justification therefore in the complaint. The section does not deal with a situation in which the directors of the nonprofit corporation conduct an investigation and determine not to bring a proceeding. The consequences of such action is left for judicial determination.

Subsection (4) provides the court with a basis to require the plaintiffs to provide security for the costs and expenses that may be incurred by the nonprofit corporation or by other named parties in the defense of the action. The amount of any bond required may be increased or decreased as the court determines from time to time during the course of the proceeding. If the court finally determines that the action was commenced without reasonable cause, the nonprofit corporation will have recourse against the bond in amounts as the court determines. The provision for security is an effort to balance the interests of complainants in bringing such actions against the interests of the nonprofit corporation in defending actions without merit.

A provision, like one found in the CBCA, providing discretion to the courts in assessing costs against the plaintiffs in actions commenced by voting members was deleted by the general assembly. A nonprofit corporation's remedy against a frivolous action is relegated to Rule 11 of Colorado Rules of Civil Procedure for sanctions for commencing an action without reasonable cause.

Subsection (5) prohibits a foreign nonprofit corporation from bringing an action as a voting member of the domestic nonprofit corporation unless the action is permitted by the laws of the state under which the foreign nonprofit corporation is incorporated. The purpose of this section is to protect domestic nonprofit corporations from actions brought by a foreign nonprofit corporation member in a situation in which the foreign nonprofit corporation member could not have brought the action in its own state.

See RMNCA Official Comment to 6.30.

7-127-202 (CNCA 7-23-106(1), -106(3); CBCA 7-107-202; RMNCA 7.21) Voting entitlement generally.

This section is adapted from the RMNCA, spelling out in more detail than the RMNCA the limitations and conditions that result from the distinction, that this Act draws, between "members" and "voting members."

Corresponding CBCA provisions relate to voting of corporate shares and hence are inapplicable to nonprofit corporations.

This section sets forth the Act's general philosophy regarding, and definitions and use, of the terms "member" and "voting member”. These concepts are key to an overall understanding of the provisions set forth in Articles 126 and 127 pertaining to members, membership, members meetings, and member voting.

There is ambiguity in the CNCA regarding the proper role of members in a nonprofit corporation. The CNCA generally entitles "each member ... to one vote on each matter submitted to a vote of members," unless otherwise limited, enlarged, or denied, but does not clarify whether members are in fact entitled to vote or how their entitlement to vote is to be determined. Under one interpretation, members have no inherent rights in the absence of specific provisions in the articles of incorporation or bylaws, and as a result, virtually all of the decision making authority resides in the board of directors.

Nonprofit corporations have traditionally classified as members a wide variety of persons or groups who may not necessarily have been given any voting rights, including, for example, financial contributors and even segments of the general public. While under the RMNCA, nonprofit corporations are free to continue calling such persons "members," they are not considered to be members as defined under the RMNCA. The drafters of this Act considered thus limiting the definition of members would likely cause confusion in working with the statute. Accordingly, to avoid such confusion, this Act, which adopts essentially the RMNCA conceptual model, has coined the term "voting member" to refer to what the RMNCA defines as a "member."

To summarize, this Act sets forth the following fundamental presumptions and procedures pertaining to members and member voting:

(1) The articles of incorporation are required to state whether or not the nonprofit corporation will have voting members (7-122-102(1)(e)).

(2) A nonprofit corporation is not required to have members (7-126-101), and members as such are not thereby entitled to vote.

(3) "Voting member" under 7-121-401(40) means any person or persons who on more than one occasion, pursuant to a provision of a nonprofit corporation's articles of incorporation or bylaws, have a right to vote for the election of a director or directors.

(4) A "member" under 7-121-401 (23) is any person or persons identified as such in the articles of incorporation or bylaws, with the term "member" including a "voting member."

(5) Unless otherwise provided in the articles of incorporation or bylaws, only voting members have the right to vote on any matter submitted to the vote of members (this section, 7-127-202(1)(a)).

(6) Unless otherwise provided in the articles of incorporation or bylaws, all references to votes of or voting by the members will mean voting by voting members (this section, 7-127-202(1)(b)).

(7) If the articles of incorporation state that there will be voting members, and unless otherwise provided in the articles of incorporation or bylaws, voting members will be permitted to vote on all matters required or permitted under the Act to be submitted to a vote of the members (this section, 7-127-202(1)(c).

Subsection (3) deals with single memberships held by two or more persons, a situation that is unique to nonprofit corporations. Absent a contrary bylaw provision, if one person votes, that vote binds other holders. If more than one vote, the vote is split pro rata.

See RMNCA Official Comment to 7.21.

7-137-101 (CNCA 7-20-105; CBCA 7-117-101; RMNCA 17.01) Application to existing corporations.

This section makes clear that the Act applies, with certain modifications noted in this section, to "existing corporate entities," which are defined as those corporations that are in existence on the day before the effective date of the Act and that were incorporated under articles 20 to 29 of Title 7 or had elected to accept such articles.

Unless and until the articles of incorporation of an existing corporate entity are amended or restated after the effective date of the Act, they need not be amended or restated to comply with the Act.

Under 7-126-202(1), unless otherwise provided in the articles of incorporation or bylaws, no member of a nonprofit corporation may transfer a membership or any right arising therefrom. In the case of an existing corporate entity, unless the articles of incorporation or bylaws prohibit the transferability of membership interests, transferability may be established by a preponderance of the evidence taking into account any representation made by and the practice of such corporate entity, other transactions involving such interests and other facts bearing on the existence of the rights to transfer such interests.

Under 7-122-102(1)(e) and Article 126, a nonprofit corporation may have voting members only if so provided in its articles of incorporation. In the case of an existing corporate entity, this section provides that, unless changed by an amendment to its articles of incorporation, members, or classes of members shall be deemed to be voting members for purposes of the Act if such members or classes of members on the day before the effective date of the Act had the right by reason of a provision of its articles of incorporation or bylaws, or by a custom, practice or tradition, to vote for the election of a director or directors.