THE ATTORNEY GENERAL IS RESPONSIBLE FOR THE REGULATION OF NONPROFIT ORGANIZATIONS

The California Attorney General is responsible for the regulation of nonprofit organizations for public policy reasons.  The Attorney General represents all the public beneficiaries of charity, who cannot sue in their own right.  Therefore, all charities must register with the Attorney General and the Attorney General’s Registry of Charitable Trusts maintains public files and financial reports for all charities registered in California.  The Attorney General has the power to oversee the operations of Public Benefit Corporations. The Attorney General’s Charitable Trust Section has investigative audit powers and may bring civil actions to recover diverted charitable assets.  The Attorney General investigates and audits charities to determine if directors have mismanaged, defrauded, or wrongfully diverted funds from the charity. In doing so, the Attorney General accepts anonymous complaints and may file legal actions against the Public Benefit Corporation on behalf of the public.  The funds recovered by the Attorney General are returned to charity.  

If a charity has two-million dollars ($2,000,000.00 USD) or more in gross revenue, which does not include government grants and contracts with government entities for which the government entity required an accounting for the funds received, the Attorney General will require the charity to do the following: (1) Prepare annual financial statements using generally accepted accounting principles and audited by an independent certified accountant; (2) Make those statements available upon demand by the Attorney General and the public; and (3) If the charity is a corporation, the board of directors must appoint an independent audit committee.  

The Attorney General will frequently investigate the following: (1) Self-dealing transactions by directors of the Public Benefit Corporation; (2) Loans by a Public Benefit Corporation to a director or officer; (3) Losses of charitable assets from speculative investments; (4) Excessive salaries, benefits, travel, entertainment, legal, or other professional fees paid by a Public Benefit Corporation; (5) Sales of charitable assets or conversion of a Public Benefit Corporation to a for-profit corporation at a price that is unfair to the charity; (6) Illegal use of charitable funds; (7) Diversion of charitable funds from the intended charitable purpose; or (8) False or misleading solicitations of charitable donations. 

Certain transactions must be noticed and consented to by the Attorney General.  For example, a Public Benefit Corporation must give advance written notice to the Attorney General of its dissolution, merger, or a sale or transfer of all or a substantial amount of the Public Benefit Corporation’s assets.  The Attorney General must give consent or a Court must approve the distribution of the Public Benefit Corporation’s assets upon dissolution. Pursuant to California Corporations Code section 6615, the Certificate of Dissolution filed with the Secretary of State must include a certificate from the Attorney General waiving any objections to the proposed distribution of assets or confirming that there are no assets.  

Moreover, a Public Benefit Corporation must obtain prior written consent from the Attorney General before making a loan to a director or officer.  As an alternative, the Court may approve the transaction. Residential loans to directors or officers do not require Court approval or Attorney General consent.   

In addition, the directors must obtain prior written consent from the Attorney General before amending the Articles of Incorporation to convert the organization to a for-profit business or a Mutual Benefit Corporation.  Prior consent from the Attorney General is also required when there is a merger of the organization with a for-profit business or Mutual Benefit Corporation. In such a case, all the assets of the organization must first be distributed to another charity with a similar purpose.  If prior consent from the Attorney General is not obtained, the Public Benefit Corporation may only merge with another Public Benefit Corporation or a religious corporation.  

The required documents that must be submitted to the Attorney General in order to obtain approval and consent of voluntary dissolution, merger, sale of assets, or a conversion include: (1) Letter signed by the nonprofit’s attorney or a director detailing the proposed action; (2) Copy of the election to dissolve, agreement of merger, or board resolution giving authorization to the proposed action; (3) Copy of the corporation’s current financial statement; (4) Copy of the corporation’s Articles of Incorporation and of any other corporation that is involved in the proposed action plan; and (5) Independent appraisal or evidence supporting a fair transaction including price and terms if required by the Attorney General.  In the case of a conversion to a for-profit business or Mutual Benefit Corporation, additional required documents included: (6) Certification that all charitable assets will be transferred to another charity as a condition to consent by the Attorney General; and (7) Distribution Plan Statement for the assets to be transferred to another charity or Payment Plan Statement for the directors or purchasers to pay the fair market value of the corporation to another charity.  

Directors may give advance written notice to the Attorney General of any self-dealing transactions, which would then shorten the statute of limitations to bring a civil action.  The required documents that should be submitted to the Attorney General in order to obtain approval include: (1) Letter signed by the nonprofit’s attorney or a director detailing the transaction, including the financial interest of the interested director and all material facts; (2) Copy of the corporation’s current financial statement; (3) Copy of the Articles of Incorporation and any amendments; (4) Copy of the Bylaws and any amendments; (5) Copy of all minutes relevant to the transaction; and (6) Letter signed by the interested director detailing the director’s financial interest in the transaction, all material facts, and all relevant facts disclosed by the interested director to the Board.  

Any charitable corporation that is formed outside of the State of California but is conducting business or holding property within the State, must still register with the Attorney General.  The foreign corporation must also satisfy the California Secretary of State’s requirements in order to conduct business in the State. This includes maintaining an agent for service of process within the State.  

CONTACT A BUSINESS LAWYER AT THE STERLING FIRM TO REGISTER YOUR NONPROFIT!

The Attorney General is responsible for the regulation of nonprofit organizations.  Want to know more about the regulation of nonprofit organizations? Contact a business attorney at The Sterling Firm. We have an attorney experienced in registering nonprofits with the Attorney General. We can help! Call now to speak with an attorney!